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Why the Compact's BBA is Best

This blog provides a nutshell explanation as to why the federal Balanced Budget Amendment at the heart of the Compact for a Balanced Budget is the best. This BBA is the “payload” for the Compact “vehicle.”

Every policy concept in the BBA poll tests at 81% to 61%, with supermajority approval from voters who identify themselves as Republicans or Independents, and simple majority approval from voters who identify themselves as Democrats. It has been vetted by fifteen think tanks and it is endorsed by George Will, George Leef of Forbes Magazine, Lawrence Reed of the Foundation for Economic Education, and Lt. Col./Cong. Allen B. West (ret.), among many others.

The Amendment is an effort to impose real limits on the federal government’s borrowing capacity with built-in incentives to reduce spending before raising revenue to address deficits. But it is also flexible, allowing for emergency borrowing and revenue increases if a sufficient consensus exists.

The bottom line is that it will completely change the mentality of Washington, which is used to a blank check. For the first time in history, Washington will be required to do what nearly every state legislature does: set priorities, make trade-offs and create a budget.

Compact for a Balanced Budget’s Balanced Budget Amendment: Section-by-Section

“Section 1. Total outlays of the government of the United States shall not exceed total receipts of the government of the United States at any point in time unless the excess of outlays over receipts is financed exclusively by debt issued in strict conformity with this article.”

Federal spending is limited to cash on hand with the sole exception of borrowing under the debt limit (specified in Section 2). This is a true “pay as you go” spending limit, which cannot be evaded by budgetary gamesmanship.

“Section 2. Outstanding debt shall not exceed authorized debt, which initially shall be an amount equal to 105 percent of the outstanding debt on the effective date of this article. Authorized debt shall not be increased above its aforesaid initial amount unless such increase is first approved by the legislatures of the several states as provided in Section 3.”

The federal government’s currently unlimited borrowing capacity is limited to 105% of the total outstanding debt. This means that if there is $20 trillion in outstanding federal debt on ratification, the federal government will have a revolving line of credit of $21 trillion. The extra $1 trillion allows for a debt cushion to handle cash flow volatility and current borrowing rates for 1 to 2 years. This is meant to furnish a transition period that focuses the mind in Washington on necessary priorities and trade-offs.

“Section 3. From time to time, Congress may increase authorized debt to an amount in excess of its initial amount set by Section 2 only if it first publicly refers to the legislatures of the several states an unconditional, single subject measure proposing the amount of such increase, in such form as provided by law, and the measure is thereafter publicly and unconditionally approved by a simple majority of the legislatures of the several states, in such form as provided respectively by state law; provided that no inducement requiring an expenditure or tax levy shall be demanded, offered or accepted as a quid pro quo for such approval. If such approval is not obtained within sixty (60) calendar days after referral then the measure shall be deemed disapproved and the authorized debt shall thereby remain unchanged.”

A referendum of state legislatures is required to approve any increase in the federal debt limit within sixty (60) days of a proposal from Congress. The provision provides flexibility for national emergencies and to accommodate reasonable plans for more debt, such as what might be developed during the 1 to 2 year transitional phase allowed by the initial debt limit. However, it does so by introducing the external discipline that is necessary to stop the abuse of debt (much like the amendment process itself). State legislators who are familiar with budgeting and state debt limits, who are closer to the American people, and who have no control over the underlying appropriations will be in a position to judge the wisdom of borrowing beyond the debt limit. National debt policy judgments will thereby become more impartial, more resistant to special interest influence, and more transparent as the public policy debate occurs in 50 state capitols. The provision also restores a portion of the power the states once held to check and balance Washington before the 17th Amendment removed them from a position of control over the U.S. Senate. Washington will have a new incentive to respect the states and to restrain the abuse of debt—to avoid going hat-in-hand to the states for permission to borrow. At the same time, to prevent corruption and the abuse of the referendum process, any proposal to increase the debt must be an unconditional, single subject measure, which is free from taxing or spending quid pro quos, or it will not be legally effective.

“Section 4. Whenever the outstanding debt exceeds 98 percent of the debt limit set by Section 2, the President shall enforce said limit by publicly designating specific expenditures for impoundment in an amount sufficient to ensure outstanding debt shall not exceed the authorized debt. Said impoundment shall become effective thirty (30) days thereafter, unless Congress first designates an alternate impoundment of the same or greater amount by concurrent resolution, which shall become immediately effective. The failure of the President to designate or enforce the required impoundment is an impeachable misdemeanor. Any purported issuance or incurrence of any debt in excess of the debt limit set by Section 2 is void.”

The President or Congress are required to enforce the debt limit by designating necessary spending delays when 98% of borrowing capacity is exhausted. For instance, if the debt limit were $21 trillion, the impoundment requirement would be triggered at $20.58 trillion, which would be roughly 10 months before hitting the debt limit at current borrowing rates. This provision requires transparency for spending priorities and trade-offs when borrowing hits a red zone, which is the starting point for real budget negotiations. If neither the President nor Congress acts, spending will be limited to tax cash flow (per Section 1) when the debt limit is reached. The President could be impeached for failing to act. Illegal debt is deemed void, which is the ultimate enforcement mechanism against violating the debt limit. This is because bond markets usually will not purchase void bonds.

“Section 5. No bill that provides for a new or increased general revenue tax shall become law unless approved by a two-thirds roll call vote of the whole number of each House of Congress. However, this requirement shall not apply to any bill that provides for a new end user sales tax which would completely replace every existing income tax levied by the government of the United States; or for the reduction or elimination of an exemption, deduction, or credit allowed under an existing general revenue tax.”

This provision requires a supermajority (two-thirds of each House) for new or increased income or sales taxes, while preserving the current rule of simple majority approval for new or increased taxes arising from: 1) the replacement of all income taxes with a non-VAT sales tax; 2) the elimination of tax loopholes; and 3) new or increased tariffs and fees (by virtue of the definitions in Section 6). In order to raise new revenues, Congress will either be required to seek a supermajority consensus or to run through a narrow gap defended by powerful special interests. This will cause spending reductions to look relatively more attractive as a means of closing deficits. Thus, deficits will tend to be closed by spending reductions before new revenue is sought, which polling data shows is what the American people want, including majorities of voters who identify themselves as Democrat. Also, by encouraging a shift to flatter or more voluntary consumption-oriented forms of taxation, new revenues will tend to be raised only through the adoption of tax policies that provide less favoritism and that do less damage to economic growth. This tax limit protects current generations from being sacrificed to future generations, just as the debt limit protects future generations from being sacrificed to current generations.

“Section 6. For purposes of this article, “debt” means any obligation backed by the full faith and credit of the government of the United States; “outstanding debt” means all debt held in any account and by any entity at a given point in time; “authorized debt” means the maximum total amount of debt that may be lawfully issued and outstanding at any single point in time under this article; “total outlays of the government of the United States” means all expenditures of the government of the United States from any source; “total receipts of the government of the United States” means all tax receipts and other income of the government of the United States, excluding proceeds from its issuance or incurrence of debt or any type of liability; “impoundment” means a proposal not to spend all or part of a sum of money appropriated by Congress; and “general revenue tax” means any income tax, sales tax, or value-added tax levied by the government of the United States excluding imposts and duties.”

These definitions maximize transparency and eliminate or strongly deter all known tactics used to circumvent constitutional debt limits. Abusive monetary policy, exotic borrowing vehicles, or financial games are prohibited or strongly deterred because total spending by every federal entity is limited by these definitions to cash-on-hand originating from taxes and other income (excluding proceeds from trust fund raiding or money printing) and full faith and credit borrowing.

“Section 7. This article is immediately operative upon ratification, self-enforcing, and Congress may enact conforming legislation to facilitate enforcement.”

This section ensures the amendment is effective as soon as it is ratified. It also allows Congress to fill any necessary procedural gaps, such as new Treasury Department budgetary controls, that will be necessary to enforce the amendment. For instance, Congress could pass a law requiring the Treasury to set aside a portion of the federal government’s authorized borrowing capacity specifically for designated national emergencies or to handle cash-flow volatility, and then parcel-out portions of that reserved borrowing capacity to agencies to help them manage the new “pay as you go” limit on spending.

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