Tax VOX

Too many state budgets have a "grasshopper" mentality, but perhaps the federal government can encourage them to be more ant-like in their money management, (Andy Nelson/The Christian Science Monitor/File)

A federal umbrella for state rainy days?

By Brian Galle, Guest blogger / 01.19.12

As state legislatures return for what promises to be yet another difficult budget year, they ought to be starting to refill their rainy day funds–those accounts that set aside money for future hard times. That’s a tough decision. After all, for the past three years, states have been raising taxes and cutting spending just to keep their budgets balanced. Why would any elected official want to do more of both?

But there are good reasons why they should and why, perhaps, the federal government should help encourage some prudent saving on the part of states. 

Here’s the problem: Ideally, states should try to stimulate their economies during recessions, or at least avoid raising taxes, eliminating public-sector jobs, or cutting other spending.  But balanced budget rules make recessions exactly the time when revenues crash and states must cut spending–just when residents need services the most. Rainy day funds can help prevent that death spiral. While most states do try to save in good times, most have drained their reserves over the past few years. Few states save enough to cover revenue shortfalls during recessions. 

It’s no surprise. Politicians prefer to spend money and keep taxes low to win reelection. Cutting spending and raising taxes to save for the future is rarely a winning political strategy.  And taxpayers may assume that they will retire somewhere else before the next recession, and prefer tax cuts over saving during good times. Besides, Americans are not very good about saving for the future.    

In a new paper, forthcoming in the Indiana Law Journal, Kirk Stark and I explain why national policymakers should care about the states’ rainy days and suggest some ways to help fill them.

Given its own fiscal mess, why should the federal government care about states? Because we live in an interconnected economy where state problems rapidly become national problems. Besides, national government should step in to prevent human suffering when local governments can’t.  For example, ARRA (the federal “stimulus” legislation) gave states additional money for Medicaid, education, and expanded unemployment programs. But there is a downside: If states come to expect federal “bailouts” whenever they get in fiscal trouble, they’ll almost certainly be less careful with their own funds. .

However, small amounts of federal money could encourage states to become more self-reliant.  For example, the federal government might exploit the fact that officials and voters all prefer goodies now and pain later. Why not offer states a relatively small bonus today, in exchange for their commitment to save later—a sort of “Save More Tomorrow” for states?  Enforcing that promise would be tricky, but so is managing any federal/state program. 

Information might also be a surprisingly useful tool as well. One reason politicians don’t keep their budget promises is because voters have trouble sorting out who’s naughty and who’s nice.  An independent federal agency could rate states on their preparation for fiscal emergencies, giving voters credible information to evaluate candidates. While the rating agencies do some of this, having a federal agency publicly scoring savings might encourage states to concentrate on building up their rainy day fund balances.

If states were characters from Aesop’s Fables, they’d be more grasshopper than ant. So think of it like this: With a little help from the federal government, maybe more states could find their inner ant.

Brian Galle is an assistant professor at Boston College Law School. From June to December, 2011, he was a visiting fellow at the Urban-Brookings Tax Policy Center.

The U.S. Capitol building is seen in this file photo. Members of Congress have returned from recess, and the unfinished business of the payroll tax cut battle and deficit reduction is waiting for them. (Carolyn Kaster/AP/File)

Congress is back, and more combative than ever

By Howard Gleckman, Guest blogger / 01.18.12

The least popular Congress in memory is back.  I, personally, am thrilled.

After a year in which lawmakers did almost nothing besides (barely) keeping the government running, this session promises hardly more.  Tax policy will be at the center of much of the partisan squabbling, but it is hard to imagine Congress achieving more than a temporary truce in its ongoing battle over last year’s unfinished business.

That skirmishing starts with the 2011 payroll tax cut which, after a bruising battle last December, Congress extended only to the end of February. It also includes about four dozen other temporary tax cuts that expired last December 31. On the spending side, lawmakers must resolve controversies over extended unemployment benefits and Medicare physician payments—the so-called “doc fix”– that also must be addressed by March. 

 But all that will just be a warm up for what promises to be an awful year-end when lame-duck lawmakers will face their own version of an ugly triple witching hour.

They’ll have to decide what to do about the expiring Bush-era tax cuts that were extended at the end of 2010 by President Obama and a Democratic Congress, as well as several of Obama’s own temporary tax cuts. And they need to extend the “patch” that protects 25 million households from the Alternative Minimum Tax.

There’s more: They’ll also have to figure out what to do about the automatic across-the-board spending cuts that are supposed to be the price of Congress’ failure last year to cut the deficit by $1.2 trillion. And Congress will have to vote yet again on a debt limit extension. All of this will likely happen in a lame-duck Congress that must negotiate with Obama, who either will have been reelected or will himself be on the way out the door. 

My best guess is that the payroll tax cut ( as well as unemployment benefits and the doc fix) will get extended through the end of the year with surprisingly little controversy. Here’s why: There is a good chance that Mitt Romney will be well on his way to winning the GOP presidential nomination by the end of January. And Romney will let congressional Republicans know that the payroll tax flap needs to go away for the duration of his campaign.

This will not make the House GOP rank-and-file—the Braveheart Caucus—very happy. But Hill Republicans suffered some pretty serious self-inflicted wounds late last year when they tried to explain why they were on the wrong side of what Democrats gleefully characterized “a tax increase on 160 million working Americans.” It is hard to imagine that, in the end, they’ll buck both Romney and their own leadership by resisting a 10-month extension.

That leaves the musical question: How will Congress pay for an extension of the payroll tax cut as well as extended unemployment benefits?

Democrats seem to have abandoned their millionaire surtax and may be reverting to Obama’s original idea—a mix of cats-and-dogs tax hikes and some modest spending reductions. In the end, that will be good enough for the GOP leadership that, like Romney, wants the payroll tax mess to disappear.         

And so it will—until after the election. Then, at the end of the year, the payroll tax, unemployment benefits, the doc fix, and the other temporary tax cuts will get tossed into the lame-duck fiscal salad along with the rest of the spoiled fruit that passes for policy these days. That’s when, after doing essentially nothing from February through December, Congress will have a food fight for the ages.

Republican presidential candidate Mitt Romney talks with media during a campaign stop at Cherokee Trike and More in Greer, S.C., Thursday, Jan. 12, 2012. The controversy over Romney's actions with Bain Capital have reignited the debate over private equity firms and how they are taxed. (Michael Justus/AP/Spartanburg Herald-Journal)

What Carlyle and Bain Capital can teach us about taxes

By Howard Gleckman, Guest blogger / 01.13.12

The on-again, off-again battle over how to tax the compensation of private equity managers may be on again, thanks to the confluence of two seemingly unrelated events.

The first is the controversy over the role of Bain Capital, the investment partnership whose founders included Republican presidential hopeful Mitt Romney. The second is the disclosure by another firm, The Carlyle Group, of how its top executives are compensated.

Both have heightened the focus on what these outfits do and how they are taxed. Bain and Romney, of course, have come under withering criticism from Newt Gingrich and Rick Perry who allege the firm’s investment strategy has led to reams of pink slips at companies it acquired.

That story is much more complicated than Romney’s opponents suggest. Nonetheless, it has lots of people thinking about what private equity does.  

Also this week, Carlyle disclosed its executive compensation in some detail, providing a rare glimpse into how investment firm managers are paid. Combined with the Bain flap, it will surely reopen the five-year old debate over the special tax treatment these partnerships receive through a mechanism known as carried interest or, in short, “the carry.”

The carry allows general partners in investment deals to receive compensation in the form of tax-advantaged capital gains, which are taxed at 15 percent, rather than as salary, which would be taxed as ordinary income with a top rate of 35 percent. This happens because the managers are paid with a fee (up to 2 percent) plus 20 percent or more of their investor’s profits. Those profits are taxed as capital gains even though the general partners may have little or no money of their own at risk in the deal.

Carlyle’s disclosure opens a small window into how this works. In 2011, its three founders were each paid about $140 million. But they received just $275,000 in salary and another $3.5 million in the form of a bonus (also taxable at ordinary income rates). But each also got $134 million—or 96 percent of their compensation–from investment profits. Much came from the carry and is taxable at 15 percent.

It is difficult to know exactly how much of that compensation was performance-based and how much came from fees. But if all of it were taxed as capital gains, and assuming the partners pay at the top ordinary income rate of 35 percent, they’d each save $27 million.         

The story gets more complicated thanks to the reason why Carlyle disclosed the compensation of its founders. It did not do so, it is fair to say, with enthusiasm. But disclosure is the price the firm’s owners must pay to go public, which is their intention.

That raises the high-stakes question of how to tax the proceeds from the sale of a partnership interest in one of these firms.  This would apply where the entire partnership dissolves, as Carlyle soon will. It may also apply when an individual partner in a firm, such as Romney, cashes out. The New York Times reports that Romney continues to receive a share of investment profits from Bain, although he retired almost 13 years ago.

Should these profits be taxed as capital gains, ordinary income, or some of each? Legislation kicking around Capitol Hill takes the last approach, although different bills use different formulas. Carlyle may want to go public under current law to avoid what could well be a higher tax bill if Congress ever cracks down on the carry.      

This week’s news may make that more likely, especially since lawmakers are scrambling to find revenue to pay for efforts to extend both last year’s payroll tax cut and four dozen other expiring tax breaks. On the other hand, Congress has been trying for five years to address what seems to be an obvious inequity in the law and has gotten nowhere.

A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this file photo. Tax-deferred 401(k) plans, commonly thought to mainly benefit high-wage workers, may have low-wage workers seeing more money than previously thought. (Issei Kato/Reuters/File)

Tax-deferred 401(k) plans good news for workers

By Howard Gleckman, Guest blogger / 01.11.12

Tax-deferred 401(k) plans may be a better deal for low-income workers than economists thought, according to new research by my Tax Policy Center colleague Eric Toder and Urban Institute senior research associate Karen Smith.

While high-income workers may get a bigger tax break from their 401(k)s, they also face a short-term trade-off. That’s because their employers tend to offset their contributions to these plans by paying them less in wages. But Eric and Karen found while lower-wage workers get less of a tax benefit than their higher-paid colleagues, their wages fall by much less for every dollar their employer contributes to their retirement plan.

Until now, economists assumed salaries of low-wage workers fully offset employer payments to their (k) plans. But Eric and Karen found that may not be true for lower-wage workers. Thus, while they enjoy both their employer’s contribution and a modest tax reduction, their employer doesn’t reduce their cash wages to fully offset those benefits. Bottom line: Total pre-tax compensation for low-wage workers who participate in 401(k)s increases while it remains about the same for those making more money, who get all their benefits from tax-savings.

To understand what’s happening, think about this phenomenon in two pieces. First, the tax break:  An employee’s contribution to her 401(k) plan is tax deferred. She pays no tax upfront on wages that she contributes, but  is taxed when she withdraws the money after she retires. Usually, though, she’ll be paying tax at a lower rate since her income in retirement is likely to be lower.

Most important, she gets to earn money tax-free within the retirement plan. And that can be a big benefit.

However, the ability to exclude both contributions and earnings from income is much more valuable to someone in the 35 percent bracket than to a co-worker in, say, the 15 percent bracket.

The second part of the story is what happens to wages. The traditional theory has been that a dollar of fringe benefits (such as a retirement plan or health insurance) reduces wages by a dollar, leaving total compensation unchanged.

But by matching workers’ earnings histories to their retirement plan contributions and other fringe benefits as well as other worker charateristics, Eric and Karen found that wages for low-income workers hold up much better than those of high-earners when their employers increase their contributions to (k) plans.

And sometimes, the difference is dramatic. For example, if an employer increases its contribution by $1 for workers already in a plan, that extra benefit replaces only 11 cents of wages for a low-income woman but 99 cents if she is in a high-income family.

Why the difference? Eric and Karen figure it’s because many low-income workers benefit less from a dollar their employer contributes to their retirement plan than from an extra dollar of cash wages and thus place less of a value on their 401(k). For instance, their own contributions reduce their ability to pay for ordinary living expenses, employer contributions cut their future Social Security benefits (since they don’t count in Social Security benefit calculations) and, because they are in relatively low tax brackets, they gain little from their ability to defer tax on their earnings.

Eric and Karen acknowledge their results are preliminary. But their results tell policymakers that encouraging people to contribute more to to their 401(k)s could increase the total compensation of low-wage workers. And that’s an important message.

In this photo taken Thursday, Jan. 5, 2012, Republican presidential candidate former Massachusetts Gov. Mitt Romney speaks in Salem, N.H. Romney's proposed tax agenda would benefit wealthy households the most and add hundreds of billions to the deficit. (Matt Rourke/AP)

Romney's tax plan: Big benefits for the wealthy, higher deficits

By Howard Gleckman, Guest blogger / 01.05.12

A new Tax Policy Center analysis finds that Mitt Romney’s tax plan would cut taxes for millions of households but bestow most of its benefits on those with the highest incomes. At the same time, it would significantly cut corporate taxes and add hundreds of billions of dollars to the deficit.

Compared to current law (assuming the Bush/Obama tax cuts expire as scheduled at the end of this year), Romney would cut taxes by $600 billion in 2015 alone. Relative to a world where those tax cuts remained in place, he would add about $180 billion to the deficit in that year.

In many ways, Romney’s tax plank is a fairly mainstream Republican offering. No major tax reform. Certainly no 9-9-9-like proposal to replace the current revenue system with a consumption levy. And while Romney is proposing huge tax cuts, they are more modest than those of his rivals. Newt Gingrich’s tax package, for instance, would add $1 trillion to the deficit in 2015.  Still, a $600 billion tax cut is worthy of note.

For individuals, Romney starts by making permanent both the 2001 and 2003 tax cuts and the “patch” that protects millions of middle- and upper middle-income households from the Alternative Minimum Tax. 

At the same time, he’d end President Obama’s 2009 stimulus tax reductions, including Obama’s more generous versions of the child tax credit and earned income credit—both aimed at helping low-income working families. He’d also repeal the tax increases included in the 2010 health reform law.

But Romney doesn’t stop there. He’d make capital gains, dividends, and interest income tax-free for those making less than $200,000  and repeal the estate tax (though he’d retain the gift tax).

He’d cut the corporate rate from 35 percent to 25 percent, make the research and experimentation tax credit permanent, and temporarily allow firms to continue to write-off the full cost of capital investment as soon as they acquire the property. Multinationals would get a temporary tax holiday for overseas profits they bring back to the U.S.

Compared to current law, about 44 percent of those making between $10,000 and $20,000 would get a tax cut that would average about $274. No one in that income group would pay more, but more than half would see no change in their tax bill.

Nearly all middle-income households would get a tax reduction. Among those making $50,000 to $75,000, the average tax cut would be about $1,800.

But much of the largess goes to those with the highest-incomes. Households making more than $1 million would get an average tax cut of almost $300,000, largely because, as owners of capital, they’d receive the bulk of the benefit of Romney’s very generous corporate tax reductions. While those making $1 million-plus pay about 20 percent of all federal taxes, they’d receive more than 28 percent of Romney’s tax cuts.

The story is a bit different if you start by assuming the Bush/Obama tax cuts are made permanent. Compared to that already-generous law, the average tax cut for all households shrinks from $3,500 to about $1,000 and a sizable number of low-income families would see their taxes go up. 

For instance, about 15 percent of those in the $10,000 to $20,000 income group would get an average tax cut of about $140, but 20 percent would get hit with an average tax increase of $1,000, mostly because Romney would bring back the less generous versions of those refundable child and earned income credits.

About one-third of those in $40,000 to $50,000 group would get a tax cut that would average about $400, but about one-six would face a tax increase of nearly twice as much.

Almost everyone who makes more than $1 million would get a tax cut averaging roughly $150,000. As a group, they’d receive nearly half the benefit of Romney’s tax plan. 

Romney says he’d rewrite the entire tax code–someday. But he doesn’t say how or when. Until he does, a Romney Administration’s revenue agenda would look a lot like President George W. Bush’s, just more so. 

Republican presidential candidate, former Pennsylvania Sen. Rick Santorum, joined by wife Karen, left, addresses supporters at his Iowa caucus victory party Tuesday, Jan. 3, 2012, in Johnston, Iowa. Santorum's proposed tax plan includes lower rates for corporations and tax cuts for families with dependent children. (Charlie Riedel/AP)

Rick Santorum's tax plan explained

By Howard Gleckman, Guest blogger / 01.04.12

With Rick Santorum surging in Iowa, it is a good time to take a look at his tax agenda. While his revenue plan has received almost no attention, it plays a  major role in his “faith, family and freedom” campaign. His playbook: lower rates for individuals and corporations, substantially cut taxes on capital, and increase the personal exemption for dependent children.

The Tax Policy Center has not yet formally modeled the former Pennsylvania senator’s tax platform. However, because it cuts rates significantly but does not eliminate tax preferences—and even expands a few—it would very likely add trillions of dollars to the federal deficit.  Looked at from that prism, it is not so different from the ideas raised by most of his GOP rivals.

Like other Republican tax planks, Santorum’s would benefit corporations and high-income individuals. No surprise there. But unlike his rivals, he’d also cut taxes for many families with children.

Santorum is no bleeding heart, however. Even as he’d cut their taxes, he’d shred direct government spending for programs aimed at assisting these same households. As part of his plan to cut federal spending by $5 trillion over five years, he’d immediately slash many domestic programs to 2008 levels, and freeze for five years spending for social programs such as Medicaid, housing subsidies, food stamps, education, and job training.

Interestingly, by using tax expenditures to support these families, Santorum would likely add significantly to the number of households that pay no income tax. This is anathema to current Republican orthodoxy, although not something that would trouble Milton Friedman.

Specifically, Santorum would:

• Replace the current individual rate structure with just two rates—10 and 28 percent
• Lower rates on capital gains and dividends to 12 percent
• Triple the personal exemption for dependent children and keep the refundable earned income and child tax credits
• Retain tax preferences for charitable giving, mortgage interest, health care, and retirement savings
• Repeal the Alternative Minimum Tax
• Cut the corporate rate in half to 17.5 percent. Manufacturers would pay no income tax
• Allow full expensing for capital investment
• Increase the R&D tax credit to 20 percent
• Allow multinationals to bring foreign earnings back to the U.S. at a 5.25 percent tax rate but at a zero rate if they used the funds to buy “manufacturer’s equipment”

Santorum’s plan cleverly melds the interests of social conservatives and business. This should play well in future GOP primaries. If he somehow gets the nomination, he’ll still have to explain the huge hole he’d blow in the budget. But I don’t suppose he’s much worried about that now.    

Republican presidential candidate and current Texas Gov. Rick Perry holds an individual income tax return form as he speaks during a campaign event in Ottumwa, Iowa, last week. Mr. Perry's plan to reform taxes was No. 4 in this year's worst moments in fiscal policy, but can you guess No. 1? (Joshua Lott/Reuters/File)

Taxes: 2011 Lump of Coal Award goes to ...

By Howard Gleckman, Guest blogger / 12.27.11

Welcome to Tax Vox’s fifth annual Lump of Coal Award recognizing 2011’s ten worst moments in fiscal policy. It is hard to imagine so much ugliness crammed into a mere 12 months. But after much thought and debate, the winners are:

10. The rating agency Standard & Poor’s for downgrading U.S. debt based upon a $2 trillion math error. Then, after the mistake was pointed out, claiming the numbers didn’t really matter. This from the same folks who for years could not smell the stench rising from piles of subprime mortgage debt.   

9. 9.9.9.   

8. President Obama’s newfound populism. Railing against a system of taxes that benefits millionaires and billionaires seems like pretty good Democratic politics. But Obama would be a lot more credible if he hadn’t helped extend the very law that makes it possible.  

7. The Virginia lawmaker who wants to give people an $8,000 tax deduction for shooting their remains into space. The Commonwealth is dying for economic development, I suppose.       

6. The Super Committee. John Kennedy paraphrased the Gospel of Luke when he said, “To those whom much is given, much is expected.” I suppose in the case of the unfortunate super committee, nothing was given. And they met expectations.   

5.  The payroll tax fiasco. Let’s see if I understand. Democrats finally found a tax cut they loved. Republicans finally found one they hated. Now Democrats insist on extending the 2011 payroll tax break for just two months while House Republicans want to keep it going for a full year. As they used to say at the ballpark, “You can’t tell the players without a program.”         

4. Rick Perry’s tax reform plan. Here are three reasons why it makes no sense: It adds trillions to the deficit. It is deeply regressive. And, um….

3. The European Union. A special international Lump of Coal Award goes to les politicians and bureaucrats who can’t seem to get out of their own way. If you need your cheese regulated, this is your crowd. If you want a functioning economic union, you may want to look elsewhere.

2. Newt Gingrich’s tax reform.  So what if it would add $1 trillion a year to the deficit, largely by giving those earning $1 million or more an average tax cut exceeding $600,000. As Gingrich himself would tell you, it is a remarkable, historic idea. Yes, it is.  

1. Congress. Perhaps not since 1861 has a Congress performed as poorly. In the end, lawmakers seem to have accomplished only two things: They (barely) kept the government running while driving public confidence in their ability to govern into the single digits. For governing on the principle of mutually assured destruction and building a record of historic failure in the face of real fiscal and economic challenges, the 2011 Lump of Coal Award goes to the entire U.S. Congress.

White House spokesman Jay Carney points to a payroll tax cut extension count down monitor in the briefing room of the White House in Washington December 19, 2011. A newer version of the payroll tax cut prevents high wage earners from getting a huge tax break. (Jason Reed/Reuters/File)

New payroll tax cut: Hard on the rich

By Roberton Williams, Guest blogger / 12.22.11

The fate of The Temporary Payroll Tax Cut Continuation Act of 2011 remains uncertain. But thanks to a carefully crafted technical change to the current payroll tax cut, the Senate version prevents a handful of very high wage earners from potentially enjoying a huge windfall from the two-month tax break.

The legislation would cut the payroll tax that funds Social Security from 6.2 percent of earnings to 4.2 percent, the same as this year. Over a year, the tax applies up to an earnings cap—$110,100—so the maximum tax savings would be $2,202. But the temporary extension would set a cap one-sixth that size, reflecting its two-month duration and reducing the maximum tax savings to $367.

Under the Senate bill, workers with annual earnings under the full year cap would get the same increase in their paychecks during January and February as they would in those two months if the cut lasted through 2012. But people who earn more will see their take-home pay go up exactly the maximum $367 during the two-month period. Without this provision, a CEO drawing a $6 million salary would get the full $2,202 tax savings in his first 2012 paycheck. The temporary Senate bill would give her only one-sixth as much. Call it the 16-Percent Solution.

The drafters of H.R. 3630 recognized that simply extending the 2011 tax cut with a two-month life could give much larger tax cuts to high earners, measured as a percentage of income. Very high earners can exceed the $110,100 tax cap in their first paycheck or two and thus could get the full annual tax savings in the two-month window before the temporary extension would expire. By limiting the tax cut to the first $18,350 of earnings, the Senate bill prevents that possibility. The limitation will have no effect over the full year if Congress eventually extends the tax cut through December but protects against the tax cut’s being highly regressive if it actually expires on March 1.

The hit on high earners is not much more than a curiosity—it affects only a tiny fraction of workers and those affected are the most likely to bank the tax savings rather than boost their spending and hence stimulate the economy. And if Congress does extend the cut for the full year, they’ll eventually get the full $2,202 savings.

But the tax cap in the bill does show the great concern for detail on the part of the congressional experts who drafted the tax legislation, even when Congress is in a rush to finish business and head off for the holidays.

This file photo shows the U.S. Capitol building in Washington. Burman argues that Congressional brinkmanship is bad policy. (Carolyn Kaster/AP/File)

Budget brinkmanship in Congress must end

By Len Burman, Guest blogger / 12.18.11

Sometime today, Congress will pass a bill to keep the government funded through September 2012. It will not reflect a careful and balanced assessment of the nation’s needs and priorities and how well government programs are meeting those needs. It will reflect the fact that government would shut down at midnight if legislators don’t act and the fact that our lawmakers really would like to go home for the holidays. CNN calls 2011 “a year for flirting with government shutdowns” and chronicles a year-long game of chicken played by our policy makers.

It should be a wake-up call. This is a really stupid way to make tax and spending decisions.

The ironic thing is that for the past 37 years, Congress has had a perfectly logical budget process, in theory. Here is a calendar of the way it’s supposed to work, courtesy of budget expert (and my coauthor) Marvin Phaup.

U.S. Budget Calendar

Imagine if Congress actually followed their timeline. Right after the president submits his budget plan to Congress, committees start working on their own plans for programs under their jurisdiction. They balance out competing priorities and within 6 weeks report to the House and Senate Budget Committees, which spend the next month or so hashing out the issues and putting together an overall plan—called a budget resolution—that will govern Congress’s work for the following two months. The budget resolution should be relatively easy to negotiate. It only requires a majority vote in each body, cannot be filibustered, and doesn’t require the president’s approval.  And, once passed, it’s a powerful tool for getting the actual tax and spending bills passed because as long as they meet the budget resolution’s parameters, they can’t be filibustered in the senate.  That is, unlike most legislation, they can pass with a simple majority.

In 5 of the last 12 years, Congress never got around to passing a budget resolution at all. Sometimes, it’s been partisan gridlock.  Sometimes even with one party in control of both houses (as in 2010), they couldn’t agree. The inevitable result of failure to pass a budget is that the rest of the process breaks down.  More often than not, we end up with a series of stopgap measures before Congress finally gives up and simply extends the previous year’s spending with minor tweaks. Some important priorities fail to get adequate funding. Programs that should be reformed or eliminated limp along. And the public watches the acrimony as each side blames the other for potential shutdown of the government if funding deadlines aren’t met.  No wonder Congress’s approval rating is heading toward single digits.

But here’s the good news. Congress does respond to incentives. Christmas seems to be a powerful one. We just need to create incentives to actually follow the very good process that Congress invented back in 1974.

Here is my proposal. If Congress fails to pass a budget resolution by April 15, every member would be docked $500 a day (including weekends and holidays) in pay until the resolution passes. (If that doesn’t work, we could up the ante by contributing significant money into the campaign war chest of members’ competitors in the next general election.) There could be similar penalties for failure to pass appropriations bills by the end of July.  And Congress should not be allowed to recess for the summer until they finish work on the budget.

The Tennessean reports that Congressman Jim Cooper (D-TN) and Senator Dean Heller (R-NV) have introduced the No Budget, No Pay Act, which would stop pay if Congress hasn’t passed budget and appropriations bills by the end of the fiscal year. According to the sponsors, “Congress has not passed a budget before Oct. 1 since 1997,” which is appalling. Cooper-Heller doesn’t go as far as I would, but it would be a start.