Institutions and State Spending

October 19, 2011

U.S. fiscal policy is on an unsustainable path.  While reducing spending on particular budget items ought to be a priority, any cuts can be easily reversed.  However, a change in the rules that govern the political process -- the "institutions" that shape a budget -- can have a lasting effect on spending for years to come.  Potential institutional reforms can be assessed at the state level with little cost to the nation as a whole.  Looking to reforms that have been implemented across several states, it is clear that certain policies, if adopted more broadly, might prove instrumental in achieving long-term spending cuts and eventual savings at every level of government, say Matthew Mitchell and Nick Tuszynski of the Mercatus Center.

Consider:

  • By separating tax and spending committees, governments reduce the ability of politicians to steer funds toward personal projects, resulting in an average of $1,241 less per capita spending.
  • An item-reduction veto (currently in place in 12 states) allows the governor to reduce individual budget allocations and strikes a balance between the line-item veto and the standard take-it-or-leave-it executive-legislative relationship, lowering per capita expenditures on average by $471.
  • A centralized spending committee, as opposed to several subcommittees, concentrates responsibility for out-of-control deficits on a smaller, more-identifiable group and thereby incentivizes fiscal restraint, correlating with $199 less per capita spending in complying states.
  • Strict balanced budget requirements have been associated over time with lower spending and taxing commitments, averaging $184 to $189 less per capita spending for states that enforce them.
  • Regardless of the specific fraction, requiring a supermajority for tax increases correlates with effective states tax rates that are 8 to 23 percent lower and $103 to $151 less per capita spending.

Though these institutional adjustments were found to confer the greatest savings, several others were also found to be beneficial, including tax and expenditure limits, eliminating the automatic shutdown provision, and the traditional line-item veto for divided governments.  Regardless of which policy options seem most appealing, the potential for institutional reform ought to change the way that politicians approach the current budgeting crises.

Source: Matthew Mitchell and Nick Tuszynski, "Institutions and State Spending," Mercatus Center, October 2011.

For text:

http://mercatus.org/sites/default/files/publication/Institutions_and_state_spending_Mitchell.10.3.11.pdf

 

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