BALANCED BUDGET-TAX LIMITATION CONSTITUTIONAL AMENDMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001700170002-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 12
• Document Creation Date: December 20, 2016
• Sequence Number: 2
• Content Type: MEMORANDUM

THE WHITE HOUSE
April 19, 1982
MEMORANDUM FOR THE PRESIDENT
FROM: THE CABINET COUNCIL ON ECONOMIC AFFAIRS'
SUBJECT: Balanced Budget-Tax Limitation Constitutional
Amendment
At the March 17 Cabinet meeting you requested the Cabinet
Council on Economic Affairs to examine possible modifications
in S.J. Res. 58, the balanced budget-tax limitation constitu-
tional amendment, that could enhance the prospects fort chieving
its objectives.
The Cabinet Council has discussed several possible modifi-
cations in four principal areas:
1. Controlling outlays within a given fiscal year;
2. Exemptions for national emergencies;
3. The asymmetry between increasing taxes and permitting-
deficits; and
4. Additional implementation. tools.
in developing the administration's position on S.J. Res. 58
we must consider both the substantive merits of possible modifi-
s with
ti
on
cations in its provisions and tactical considera
respect to the legislative process and the views of its prin-
cipal congressional sponsors.
There is no immediate action forcing event. The Senate
Judiciary Committee reported the amendment out last July. But
Senate floor consideration is not yet scheduled.. No hearings
by the House Judiciary Committee are scheduled before May 5.
Moreover, since this issue is related to the current budget.
h the Congress, there are good reasons for nat
discussions wit
publicly taking a position on S.J. Res. 58 beyond our current
general support for a balanced budget amendment until after the
budget discussions have concluded.
An issue paper with the Cabinet Council's recommendations
on possible modifications in the four areas outlined above is
attached.
Donald T. Regan
Chair an Pro Tempore
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Cabinet Council on Economic Affairs
Issue Paper
Balanced Budget - Tax Limitation Constitutional Amendment.
I. Background _
There are two principal objectives behind efforts to add
various balanced budget and tax limitation amendments to the
Constitution:
o Limiting the rate of growth of federal spending ?
to the growth rate of the economy; and
Offsetting those incentives in the political process
which result in persistent budget deficits.
S.J. Res. 58, the balanced budget-tax limitation amendment
with the most political support at this time, would help achieve
both of these objectives. There are four potential difficulties
with S.J. Res. 58, however, that merit consideration:
1. The amendment may not prove compatible with the
business cycle "facts of life" which tend automatic-
ally to produce deficits during recessions and make
it more difficult to control outlays within a given
fiscal year;
2. The amendment provides no exemptions for periods of
national emergency except that Congress may waive the
amendment for any fiscal year in which a declaration
of war is in effect.
3. The tax limitation and balanced budget rules in the
.amendment?are asymmetrical, quite possibly resulting
in a bias toward higher taxes rather than lower
spending; and
4. The amendment lacks measures which prevent the Cong-
ress and future presidents from circumventing.the
objectives of its sponsors, either through spending
programs which make overruns inevitable, or through-
budget devices outside the scope of any settled
definition of "outlays-"
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II. Controlling Outlays Within a Given Fiscal YeaK
.maintaining discipline with regard to discretionary actions.
The purpose of the balanced budget amendment is to impise
discipline on the legislative and executive branches with egard.
to discretionary policy actions. Certain government outla s are
not discretionary and can vary substantially depending on co
nomic conditions which are difficult to forecast with pre sion..
There are a number of options for modifying S.J. Res.-.58 w ich
would permit some flexibility under such circumstances while .
Option --l:? Permit an ordinary majority of both Houses to
increase the outlay ceilin for interest payments
on the national debt in excess o that estimate
in the initial statement of outlays for a isca
ear.
Advantages:
0 Interest rate fluctuations are inherent in an economy
with competitive financial markets, and will inevitably
--result in different debt interest costs for a fiscal
year than originally estimated.,, Estimated debt Interest
costs for fiscal year 1992 have increased S16 billion
over the administration's initial estimates in March
1981.
Failing to provide flexibility for dealing with the
effect of interest rate fluctuations on total budget
outlays will complicate enforcing the amendment and
could result' in:
- more frequent tax increases;
- potentially disruptive spending cuts in the middle or
near the end of the fiscal year; or
- more frequent three-fifths votes to allow a budget
deficit.
Disadvantages:
An exemption for higher than forecast interest payments
might result in fewer years when revenues matched or
exceeded outlays.
o An interest rate exemption might result in congressional
and executive branch budget officials persistently'
underestimating federal debt interest costs in order to
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achieve a balanced budget statement before the fi cal
year begins. f I I
Option 2: Provide modest flexibility in any single ?fisra3)
ear settin aside a sma contin enc and
ve percent of planned outlays. I
Advantages: -
o A small. contingency fund would simplify implemen''ing the"
amendment. If the amendment were in force in fi"cal
year 1982, a five percent contingency fund would be
about $35 billion, more than sufficient to cover the $31
billion increase in outlays due to unexpected economic
conditions.
o In effect, this alternative requires a small planned
surplus. In the event that economic conditions are as
good or better than expected, this could lead to an
actual surplus.
Disadvantages
o In the event that the contingency fund is not necessary
to meet the outlay limit in a specific fiscal year,
there may be an incentive to spend this fund on low
priority activities. r ?
Option 3: Leave the amendment unchan ed, with a deficit in
any year requiring a three-fifths vote . of both
Houses.
Advantages:
o An administration proposal to reduce procedural con-
straints on deficit spending might be perceived as an
attempt to "water down." the amendment.
o An escape clause to allow deficit spending during a
fiscal year would result in actually achieving a
balanced budget less often.
Disadvantages:
o S.J. Res. 58 requires a super-majority (SO percent) of
the full membership of both Houses to agree in advance
to a deficit.
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o Failing to allow for business cycles and interes4 rate
fluctuations in the amendment might 4result in recurring ,
political crises, forcing the President and the ongress.
to choose in the face of a contracting economy b-tween: 6
raising taxes;
radically reducing spending until a recovery raises
receipts; or
- achieving congressional super-majorities to validate
recession deficits.
Recommendation: A majority of Cabinet Council members feel that
greater flexibility is needed than is currently
provided in the amendment for controlling out
lays within a given fiscal year, specifically
for outlays that do not result from discretion-
ary policy actions.
Most favor permitting An ordinary majority of
both houses to increase the outlay ceiling for
.interest payments on the national debt in excess
of that estimated in the initial statement of
outlays for a fiscal year. (Option 1)
Approve
Disapprove
III. Exemptions for National Emergencies
S.J. Res. 58 provides no exemptions for periods of national.
emergency, except that the Congress may waive the amendment for.-
any fiscal year in which a declaration of war is in effect. --T?4e.
resolutions of at least 18 of the 31 states which have called for
a constitutional convention to consider a balanced budget amendm-
ent include provisions for an exemption for national emergencies.
There are clearly a wide variety of events, not necessarily
entailing a declaration of war, which representatives from all
sides of the political spectrsm would agree pose "threats to
national security" or "national. emergencies." These would
include large and unexpected increases in military outlays, pos-
sibly involving mobilization and deployment of the armed forces,
in preparation for a possible war. These might also include
events requiring nonmilitary outlays, such as a series of massive
bank failures, a major natural disaster, or a major oil supply
interruption.
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In theory, spending for a national emergency could us4 Ily be
accommodated through spending decreases elsewhere in the tdget.
.If an emergency, such as a major armed conflict, is :suf. is ently .
costly, however, offsetting spending reductions ian other 1`:idget
categories is unlikely to prove feasible in practice. A1.0, if
an emergency occurs late in the fiscal year, spending redu'Etions '
in other categories, even if draconian on a percentage ba ls, arei
unlikely to yield the necessary absolute level of savings
In deciding whether to broaden the range of emergenci s which'.
allow Congress to waive the amendment beyond those involving a
declaration of war, the critical issue the administration must
resolve is how wide or narrow a range of events should qualify
for the exemption. The current exemption in the amendment for
periods in which war is declared possesses an important attri-
bute: it is clear when it does and does not-apply. Broadening
the exemption to apply to a wider range of events inevitably
results in considerable ambiguity.
Short of a declaration of war, whether a particular event
constitutes a threat to national security or..a national emergency.
becomes highly subjective. While the legislative history ac-
companying the amendment could, if so drafted, provide some
guidance regarding the magnitude of the event which was origi-
nally intended to qualify for the exemption, considerable
imprecision would remain. The courts, based on historical
practice; are unlikely to quarrel with a President's determin-
ation that an event qualifies for a .nation security or national
emergency waiver, and so the exemption will unavoidably reduce.
the constraints on federal spending and deficits which the
amendment is intended to establish. On the other hand, the
amendment will not prove effective in the long-run if it does not
provide sufficient flexibility to accommodate federal spending
that is genuinely urgent and unanticipated.
There are three primary options in deciding whether to
broaden the range of events resulting in a waiver of the balanced
budget amendment beyond those involving a declaration of war.
Option 1: Provide an exemption for unforeseen events osinq
an imminent t reat to the national security and
'involving the armed forces. The exemption would
allow an increase in spending no greater than t.e
costs incurred as a result of the specific
emergency.
Advantages:
o The United States has engaged in a number of armed con-
flicts not involving formal declarations of war, in-
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cluding those in Korea and Viet Nam. Declarations of
war are infrequent, and requiring them to waive the
balanced budget amendment could reduce the ability of
the President and the Concress to respond to world
events with the threat or actual use of armed force..
o Although armed conflicts can begin and escalate in a.
variety of ways, a formal declaration of war is likely
to follow rather than precede the mobilization and
deployment of military forces. Restricting the Presi-
dent's ability to deploy armed forces might actually
increase the chances of-an international event leading
to a war, since establishing a strong U.S. military
presence might act as a deterrent.
o Restricting the waiver to emergencies involving t. e
armed forces will help ensure that it is appliednly to
genuine threats to the national security, and tha it is
not used as a routine means for circumventjng tht
amendment's objectives.
Option 2: Broaden the range of events ualifyin for the
exemption to include unforeseen events posing aC
imminent threat to national security, but not
necessarily, involving the armed forces.
Advantages:
o A wide variety of events can pose a'threat to national
security without necessarily requiring the use of U.S.
armed forces. These can include domestic developments,
such as a financial crisis or a natural disaster, or
events overseas, such as an oil supply interruption.
o A broad range of emergencies abroad can require a U.S.
response, and higher budget outlays, without immediately
involving the use or prospective use of the armed.
forces. Requiring a three-fifths vote of the full mem-.
'?bership of both houses of Congress to increase spending
in these events would seriously limit the President's
ability.to develop and implement viable foreign.
policies.
Option 3: Leave S.J. Res. 5? unchanged, with a-waiver per-
mitted only a ter a ..ec_aration of war.
Advantages:
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o The amendment as currently written is not inflexible in
that it allows spending increases by a three-fifths vote
of the whole membership of both houses of Congress.
Genuine "national emergencies" would usually result in
Congressional waivers without the need for supplementary
procedures.
o It is impossible to devise clarifying language, either
in the amendment itself or in the legislative history,
which provides precise guidance as to what constitutes
"an imminent threat to rational security," either with
or without the use of armed force. A broad national
security exemption could reduce applicability-of the
amendment, and increase the.ambiguity regarding its
enforcement.
o The purpose of the balanced budget amendment is t
reduce federal spending and deficits. The broade the
range of the amendment's exemption, the more diff cult.
it is to achieve these goals.
Recommendation: A majority of Cabinet Council members fer:. that
greater flexibility is needed than is cur ently
provided in the amendment for dealing with
unforeseen outlays associated with immin,it
threats to national securityi. 9
In providing for this exemption, the Couircil is
evenly divided between option 1 and option 2.
Option 1 Option 2 Option -3
IV. Asymmetry Between Increasing Taxes and Permitting Deficits
S.J. Res. 58, as currently drafted, makes tax increases more
likely than spending cuts for balancing the budget over time.
Increasing planned tax receipts in excess of the national income
growth rate would require an ordinary majority of the whole mem-
bership in each House. Once tax receipts were increased, the
base for calculating allowable tax receipts for future years
would increase as well. This would pro-4ide a powerful incentive
for those desiring higher future levels of spending to support.
increased taxes. -
Allowing outlays to exceed receipts, with the resulting
deficit, however, would require three-fifths of the full member-
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ship of each House. When a deficit is permitted in one year, the
base for calculating allowable receipts.in subsequent years
remains unchanged and outlays in the future are not affected..
Thus, the asymmetry between the percentages required for
enacting tax increases and allowing deficits would probably
result in higher spending, in the long-run, than if both tax
increases and deficits required the same percentage in each
House.
The primary alternative for rectifying this asymmetry is to
require 60 percent of the whole membership of each House for
increasing taxes as well as for permitting a deficit. The
administration faces two basic options with regard to the voting
rules for deficits and tax increases:
Option 1:
Require 60
each House
permitting
Advantages:
result in both lower spending and lower taxes i
deficits and-enacting tax increases wou,&d prot.b
percent of the
for increasing
a icit.
whole
taxes
membership of
as well as or
Restoring symmetry between the voting rules for
long-run.
roposal to require a 60 percent tote for taxj n
o A
p
creases would signal that the President's eodor ng a
balanced budget amendment did not contradict hi belief
that balancing the budget should result in lowe
spending, not higher taxes.
option 2: Leave the voting rules for increasing taxes and
permitting deficits in S.J. Res. 58 unchanged.
Advantages:
le majority for tax increases would
sim
p
o Allowing a
prevent a 41 percent congressional minority from forcing
the government into both fiscal and constitutional
crises.: Requiring 60 percent for both deficits and tax
t
i
o
cult
increases might make the amendment more diff
enforce, and might result in higher total spending by
d
providing special interest coalitions with increase
bargaining power.
o The current language of S.J. Res. 58 reflects negoti-
ations and compromises between different elements of
balanced budget and tax limitation movements. Proposed
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changes in the amendment by the administration might
unravel this compromise, reducing the changes that the
amendment will pass both Houses of Congress and the 38
state legislatures needed for ratification.
Recommendation: A large majority of Cabinet Council members
support leaving the voting rules for increasing
taxes and permitting deficits in S.J. Res. 58..
unchanged. (Option 2)
Approve
V. Implementation Tools
Disapprove
A balanced budget requirement would increase pressures for
indirect. federal spending through novel budget devices.2,ut:ide
the scope of any settled definition of outlays. ?+rihle S.:. Res.
58 covers some conventional off-budget outlays, it would r t
cover federal loan guarantees and schemes to mandate fiscagl
outlays by private sector entities. ~..
A balanced budget amendment might also result in Coj ress
expanding appropriated entitlement programs. Under thes.pro-
grams., which include food stamps and unemployment compensation,
the Congress can appropriate a relatively small amount at the
beginning of a fiscal year, without reducing benefit eligibility o
with the almost certain knowledge that a supplemental appropria-
tion will prove necessary before the fiscal year has ended.
Establishing both off- and on-budget control measures can
occur through both-constitutional and statutory measures. The
most obvious constitutional measure is to provide the.President
with line item veto power.
A. Constitutional Implementation Measure -- Line Item Veto
The value of a balanced budget-tax limitation amendment de-
pends in the end.on the capacity to enforce it. Providing the
President with line item veto enforcement power would require
changing the Constitution. The arguments for and against the
administration supporting a line item veto as part of a?balanced
budget amendment are straightforward.
Option 1: Su port including a line item veto as part of a
balanced budget ccnstit_ut:ona_ amendment. But do
not make support for S.J. Res. 58 contingent on a
line item veto being included as part of the
amendment.
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Advantages:
o Providing the President with line item veto authority
would more clearly focus responsibility for the rate of
growth of federal spending.
o There is ample precedent and widespread acceptance of
the line item veto approach to controlling spending at
the state level. Presently, 43 state governors have
line item veto powers.
option 2: Endorse S.J. Res. 58 without supporting a line
Item veto.
Advantages:
Line item veto power could result in Congress shifting
more and more programs from appropriated account to
entitlement status, since entitlements do not rep Are
annual legislation; and therefore are "veto-proo A
shift from appropriated to entitlement arograma Auld
only serve to further reduce the controllability of
federal budget outlays.
o Some would view an administration p?oposal to inl
the line item veto as an attempt to'shif t power
legislative to the executive branch. -Negative c!
sional reaction might diminish the prospects for'
ing a balanced budget amendment altogether.
lude I
ram the
ngres-
enaC t- -
Recommendation: The Cabinet Council unanimously recommends
supporting option 1.
Approve
Disapprove
B. Statutory Implementation Measures
Establishing outlay control measures can occur through statu-
tory as well as constitutional changes.
The President could facilitate the development of statutory
implementation measures by recommendingrthat, following 'passage
of an amendment by the Congress and referral to the states for
ratification, the President and the Congress establish a bi-
partisan Budget Concepts Commission to consider statutory
measures for ensuring that the amendment's objectives are
achieved.
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The Commission would make its report after the amendment was
ratified by three-fourths of the state legislatures. its mandate
would include recommending legislation to ensure that the amend-
ment is not circumvented through off-budget techniques, spending
devices which make overruns inevitable, or mandating that non-
Federal Government entities perform certain functions.
Recommendation: The Cabinet Council unanimously recommends that
you support establishing a bipartisan Budget
Concepts Commission to consider statutory
measures for ensuring that the amendment's
objectives are achieved.
Approve Disapprove