Pay-as-you-go is a promising approach to fiscal responsibility

As Oklahoma’s tax debate unfolds, it has been encouraging to hear a rising chorus of influential voices insist that any tax plan must be revenue neutral. Given deep cuts that state agencies have absorbed in recent years and the long-term fiscal challenges the state faces in the years ahead, eroding our revenue base with one-sided  tax cuts would be hugely irresponsible and fiscally unsustainable. One promising approach to ensure that we do not bankrupt the state is for Oklahoma to adopt a pay-as-you-go, or PAYGO, requirement.

State Treasurer Ken Miller recently stated:

Budget writers should adopt a “pay-as-we-go” approach to reducing taxes. To responsibly finance tax cuts, policymakers should eliminate one dollar of spending or credits for every dollar cut in taxes.

This can be accomplished with fiscal discipline, better spending prioritization and a refined approach to budgeting.

Miller’s call for a pay-as-you-go approach was quickly endorsed by both the Oklahoman and Tulsa World.

As we discussed in this blog post last November, PAYGO would require policymakers to pay for the cost of any reduction in revenues or expansion of services.  Paying for these policy changes could take the form either of an offsetting revenue increase or cuts to other services. Regardless of how it is paid for, the goal is to maintain a responsible balance. The undesirable alternative is to cut taxes or increase services and then throw the whole budget into chaos because the money isn’t there.

Oklahoma’s recent history is full of examples where budget decisions have been made without regard to the long-term health of the state’s finances. Income tax cuts adopted during periods of strong growth have reduced revenue when the state needed it to maintain services during the recession and recovery. Actions to divert revenue from the general revenue fund to other uses such as scholarships, road repair, employee retirement, and tourism, while well-intentioned, have been taken with little understanding or appreciation of the impact on other state services. PAYGO would require such an understanding and would only allow such diversions if “paid for” by additional revenue or specific cuts in other programs. If, for example, the Legislature wanted to devote more funding to road repair, it could do so by increasing gas taxes or tolls or by cutting some other service (such as new road construction).

PAYGO was used effectively to return the federal budget to a surplus in the late 1990s but has never been implemented at the state level. A recent paper by the Center on Budget and Policy Priorities and an OK Policy issue brief set out what is needed to make PAYGO an enforceable budgeting principle. In addition to a PAYGO requirement, adopting multi-year forecasting and a current services budget, which would inform lawmakers and the public of the cost of maintaining today’s level of programs and benefits, would put us on a more sustainable fiscal course.

We hope that state leaders make sure that we do not cut taxes without paying for it this year, and that they also make PAYGO a binding requirement to guide the tough choices on the horizon.