In the same way that baseline budgeting leads to inflated budgets and unnecessary spending, static scoring for legislation fails to achieve its desired objective because it fails to consider reactive human behavior.
How many times have we seen agencies, districts and departments having money left in their current year’s budget as they near the end of their fiscal year spend down the surplus to purchase items not currently needed so that their coming year’s budget would not be reduced to what is actually needed to operate? As a result, the automatic annual percentage increases are based on artificial baselines than on a zero based budget — one based on what is actually needed.
Static scoring fails to take into account the changes in human behavior when enacting legislation or policy. Three obvious examples come to mind:
1) During the fuel crisis of the late 70’s — gas rationing for odd- and even-numbered license plate numbers — we were encouraged to drive less and buy smaller, more fuel-efficient cars to conserve gas. We did. As a result of fewer gallons being sold, the state increased the per-gallon tax to offset the revenue loss from less gas being sold.
2) During this same period, President Carter asked us to turn up our air conditioning to 78-80 degrees in the summer and to set our heaters to 68 degrees and wear a sweater in the winter to save energy. We did. So PG&E increased our energy rates with the blessing of the Public Utilities Commission (PUC) to offset the reduction in their revenue due to decreased energy use.
3) The federal government substantially increased the tax on tobacco products to ostensibly discourage smoking and also to fund treatment for tobacco- related illnesses. Many people quit smoking while many others bought their cigarettes on the black market. The government’s answer to reduced revenue from tobacco taxes was to further increase the tax. For a government that supposedly “cares” for the least fortunate of us, the high cigarette tax, for the most part, hurts them the most.
Static scoring is the method used by Congress guided by the Congressional Budget Office (CBO) in its attempt to cut the income tax rate and to enact tax reform. The Senate has a budgetary requirement to keep from adding more than $1.5 trillion to the deficit over the next 10 years. In addition, it imposes sunset provisions on taxation items passed by a simple majority vote. It requires a super majority vote of 60 percent or greater to enact permanent tax legislation. This has led to the current brouhaha of: “how are we going to pay for tax cuts?"; “the middle class will have their taxes increase”; “the tax cuts will mostly benefit the rich,” and so on. The left’s ”fair share” mantra is specious when it pertains to deductions for state income taxes. The seven states with the highest income tax rates derive 51 percent of the benefits from the deductions while the other 43 states share the remaining 49 percent.
Dynamic scoring recognizes that people will react positively or negatively to legislation, according to its nature and will modify their behavior to suit their best interests. The original proposal included individual tax rates of 12 percent, 25 percent and 35 percent with a 20 percent corporate and pass through rate for small business, and a 10 percent repatriation rate for the trillions of dollars left in other countries caused a surge in the stock market and increased optimism for the economy.
The subsequent in-fighting in both houses and talk of phasing-in or postponing certain rate cuts has caused some angst in the market. One merely needs to look back to the Reagan era tax cuts and the tremendous increase in revenue to the treasury and longest peacetime sustained period of growth to see the positive results of dynamic scoring. President Reagan said, “If you want to discourage an activity, tax it.” “If you want to encourage it, subsidize it!” (lower taxes and less regulation). We saw the adverse effect of the former during the prior administration. To editorialize the popular line from the movie, The Field of Dreams, “If you build it (lower tax rates), they (increased revenues) will come!”
Angelo Haddad is a lifelong resident of Bakersfield. He holds a master of science of Financial Services degree and the Chartered Financial Consultant designation.