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Across the country, Democrats have vowed to fight efforts from congressional Republicans and the White House to repeal the Affordable Care Act—a task that grows more complicated by the day. Yet even if the law is repealed, with or without a replacement, progressives could still have recourse at the state level. A widely used form of treaty between states could allow them to bond together and set up their own multistate health-care programs to fill the gaps created by the federal government. In an age of retreating federal programs, interstate compacts could be a tool for progressive states to enact a regional or even nationwide agenda.

Large states would have little trouble replacing the ACA, often called Obamacare, with a state-run program on their own. California has the resources and population to run its state health-care exchange, Covered California, from Sacramento, and could even fund the Medicaid expansion it implemented under the ACA. To the north, less populous states like Oregon and Washington would struggle to do the same without comparably sized economies. But if they join together with California in an interstate compact, they could potentially reap the benefits of the economy of scale—saving on costs through the sheer size of the enrollment pool and bargaining power.

In 2018, the United Nations’ Intergovernmental Panel on Climate Change set a deadline: Snuff greenhouse gas emissions 45 percent by 2030 to keep warming from creeping past 1.5 degrees Celsius, the threshold beyond which lie the worst consequences of an overheated planet. Technologically, the scientists pointed out, we have the tools to make such a drastic clamp-down happen, but we’ve struggled to put them to work.

The past two years have provided an especially dire preview of what may come if we don’t. In 2019, wildfires flared in southern California and eastern Australia, destroying homes and habitats. And already 2020 has seen more fires Down Under, massive flooding in the Southeast, and Antarctic temps hitting close to 70 degrees Fahrenheit in February—accelerating melting and pushing up sea levels worldwide.

Although I do not necessarily agree with the Pollock majority’s characterization of the Direct Tax Clause, it is not unreasonable. Under the Articles of Confederation, the national government had no independent taxing power but relied on the states and foreign loans to sustain its operations. An intense object of debate leading up to the ratification of the Constitution, therefore, concerned the broad taxing power granted to the national government under Article I,56 and, more precisely, whether state and local governments could continue to raise revenue after the federal government chose to exercise its taxing power.57 After the Civil War, constitutional amendments repealed many of the pro-slavery provisions (e.g., the Fourteenth Amendment repealed the Three-Fifths Clause),58 but the Direct Tax Clause was left intact. For a textualist originalist court, since the Direct Tax Clause remains in the constitutional text, and since the Civil War ended the institution of slavery, a ready option is to interpret the Clause at a high level of generality. Read as a provision of federalism, the Direct Tax Clause is meant to preserve the taxing capacities of state and local governments, so that they can exercise their traditional taxing power concurrently with the federal government, and consequently spend in accordance with local priorities and preferences. Therefore, at least with respect to wealth taxation, we can easily reconcile the underlying rationale of Pollock with the functional rule of Hylton. If apportionment of a direct tax would produce, in Hylton’s words, “great inequality and injustice” among the states,59 it would necessarily impair the ability of some states to tax (though perhaps rewarding other states with increased ability to tax).60 To use the example that Justice Chase offered in Hylton: if the carriage tax is apportioned among the states, and state A faces an $80 tax per carriage while state B faces an $8 tax per carriage, the apportionment would clearly impair state A’s taxing capacity. An apportioned wealth tax would be even more detrimental to the ability of certain state and local governments to tax, for two reasons: first, wealth includes a much broader set of personal properties than carriages, so an apportioned wealth tax would more completely destroy the ability of certain (i.e., poor) states to tax—not only would the state be unable to tax carriages, it would also find other property taxes hard to collect; second, wealth, unlike ordinary consumer goods, is more unevenly distributed, especially for households with net worths above $50 million—New York likely has many more ultra-millionaires than West Virginia, even after adjusting for differences in population.61 The upshot is that the functional rule of Hylton concerns the unfair consequences of apportioning a direct tax not only to the taxpayers but also to the states and localities that rely on at least some inter-jurisdictional equity in the distribution of federal tax burdens. In short, both equitable treatment of similarly situated individual taxpayers and federalism animate the functional rule.

So, how wealthy are those who renounce? Unfortunately, even the IRS doesn’t have very good data on this. In August, a quantitative analysis of IRS renunciation data written by Paul R. Organ, a University of Michigan student, appeared on the IRS website. The author had access to internal IRS files listing all renunciations from 1998 to 2018. This would include all individuals listed in the Federal Register cross-referenced to those who filed form 8854 with the IRS. This is the most complete renunciation dataset studied to date. Net worth data on renouncers is only available starting in 2005, as prior to this there was no requirement to report net worth to the IRS following renunciation. Of the 35,790 expatriations from 2005-2018, only 1,950 (5.4%) reported net worth in excess of $2 million. It is interesting to note that 17,040 renouncers did not file form 8854 and a further 1,860 did not complete the net worth computation on their filed form 8854. That is, 52.8% of those who renounced did not report their net worth to the IRS. While the author does a valiant job of attempting to deal with this gap in the data, there really is no way to know the 47.2% reporting net worth are a representative sample of all renouncers. The author concludes that renouncers are relatively more wealthy than the US population as a whole, but that ultra-high net worth individuals are a very small portion of renouncers (50 out of 35,790 over 13 years). When drawing conclusions about the wealth of expatriates, it is important to consider that those who renounce are a self-selected group. In order to renounce US citizenship one needs to have a second citizenship and $2,350 to pay the administrative fee for a Certificate of Loss of Nationality (CLN). First off, what percentage of American families could scrape together $2,350 to renounce? The poorest Americans abroad are cut off from even the chance to renounce, so it’s no surprise that those who can afford the fee are wealthier than average. But this is a far cry from the Axios headline that “Wealthy people are renouncing American citizenship”. What else can we learn about renouncers? The report includes some very interesting analysis of previously unavailable renunciation data. Because the author can match renouncers to their prior tax filings, he is able to divide the sample into three groups – “Movers” who filed using a US address at least once before renouncing (and after 1998 when available tax return data starts), “Droppers” who only filed using a non-US address, and those who never filed or have no TIN. The data show that over half of renunciations are by “Droppers,” who would be long-term emigrants or Accidental Americans, and that this group drove the post-2011 increase in renunciations. There is also a significant minority of renunciations with either no TIN nor evidence of prior US tax compliance. Interestingly, the author shows that those with a positive US tax liability (after foreign tax credits) are marginally less likely to renounce. Clearly people are NOT renouncing to avoid paying US tax. In addition, older individuals are more likely to renounce. Both of these results are consistent with the idea that people are renouncing to simplify their lives and prepare for retirement. In sum, the report makes it clear that those who renounce are NOT wealthy US residents moving abroad and renouncing to avoid US taxes. They are emigrants and Accidental Americans who have been caught up in the uniquely American concept of citizenship as taxation. They are simplifying their lives and escaping the excessive compliance burden that is the US tax system.

Although states have not yet enacted interstate exit taxes, most states indirectly adopt the federal level exit tax discussed immediately above. The vast majority of states with a personal income tax incorporate the federal exit tax through the state’s general conformity to the Internal Revenue Code and by using federal gross or taxable income as a starting point for the state tax computation.74 Thus, in the relatively rare case that an individual is subject to the federal exit tax, they will generally also be subject to a de facto state exit tax because the income that is reflected on the federal return will also be reflected on the state return.

Perhaps the most important Commerce Clause inquiry post-Wynne is whether a tax regime achieves internal consistency.145 The internal consistency test assumes that every state has adopted an identical tax regime and looks to whether such a scenario would place interstate commerce at a disadvantage compared to intrastate commerce.146 Importantly, even if a tax regime would otherwise be internally inconsistent, a state can cure the constitutional defect with a credit mechanism.147 An exit tax should satisfy internal consistency if it includes in the tax base only the income and gain that accrued while the taxpayer was resident in the state and that was not properly sourced to another state. If every state adopted such a regime there would be no risk of double taxation. To ensure that the exit tax regime tailors its tax base in such a manner, the tax regime must implement a credit or exemption mechanism. As discussed further in Section IV.C, when determining the tax base, the regime should allow a credit for taxes paid on income properly sourced to other states, and should provide either a basis stepup or credit for exit taxes paid to prior states of residence.148 These principles should ensure that the exit tax base consists only of income and gain that accrued while the taxpayer was a resident of the departure state, thus satisfying internal consistency.

In addition to the United States Constitution, most state constitutions include some type of tax uniformity clause, which requires that a tax apply uniformly across each taxpayer classification. These uniformity clauses vary considerably across the states, and many apply only to property taxes. Importantly, though, some courts have characterized net income taxes as a type of property tax. If exit taxes proliferate, this characterization could take on additional importance as impacted taxpayers would likely assert uniformity clause challenges. State courts tend to interpret uniformity clauses broadly, and although taxpayers may also raise state and federal Equal Protection Clause challenges, taxpayers are more likely to be successful with a state uniformity challenge to exit taxes. The overarching uniformity and equal protection inquiries are whether the taxing jurisdiction properly determined each taxpayer class, and whether it applies the tax uniformly across that class. In the exit tax context, the taxpayer class would typically consist of individual residents of the state who are changing their residence to another state. Given the theoretical and practical justifications discussed throughout this Article, this taxpayer classification appears proper. The determinative inquiry, then, would be whether the tax applies uniformly across that class. An exit tax that exempts certain taxpayers, provides an income or wealth application threshold, or imposes progressive rates could violate the state uniformity clause if it applied. All these features are likely to be incorporated into an exit tax, so whether the state uniformity clause applies is an important determination. The few states that have broad uniformity clauses may want to design their exit taxes differently to achieve uniformity or limit them to reporting instead of tax imposition. For most states, however, the uniformity clause is unlikely to interfere with an exit tax, particularly if the exit tax regime is incorporated into the state’s existing personal income tax regime.

Progressivity is an important justification underlying national level exit taxes.51 The progressivity theory is tied to fairness—a more progressive tax regime improves the distribution of the tax burden.52 An exit tax naturally effectuates progressivity because it primarily impacts individuals with substantial wealth from capital appreciation. These individuals tend to be wealthier generally and they enjoy the benefit of deferred taxation until a realization event, the timing of which they control.53 An exit tax mitigates the inequity between individuals with income from capital appreciation as opposed to income from labor, the latter of whom generally cannot choose when to realize and thus pay tax on their income.54 A state exit tax can effectuate progressivity even further, especially if the tax has an exemption or application threshold so the tax applies only to residents with substantial income or wealth.55 If an individual can migrate out of a state and avoid paying income tax on the gain that accrued while in the state, it is unfair to the individual who does not—or does not have the financial means to—migrate out of the state.56 In addition, most states have progressive personal income tax rate structures and most states do not have preferential capital gains rates.57 Thus, the exit tax can be even more progressive at the subnational level than at the United States national level.

The recently introduced California wealth tax proposal essentially contains three components. The first, a wealth tax of 1% on household wealth over $50 million and 1.5% on wealth over $1 billion, would apply starting in 2024 and to those with over $50 million starting in 2026. It would be based on worldwide net worth, with some exceptions, and would apply to full-time, part-year, and temporary residents, subject to apportionment. The second component is an exit-tax structure that allows the wealth tax to be applied for several years after a taxpayer leaves California. Also included are provisions that enable certain taxpayers to defer payment by contracting to pay the tax in the future, even if they leave. The third component is an enabling amendment to the California constitution. While the California proposal is unlikely to pass, thanks in part to Gov. Gavin Newsom’s opposition, ultrawealthy taxpayers should be wary of what it portends. The California proposal doesn’t stand alone. Proposed legislation in Hawaii would impose a tax of 1% on state net worth exceeding $20 million, and proposed legislation in Washington would impose a tax of 1% on taxable worldwide wealth over $250 million. Other states, including New York, have taken steps toward taxing the ultrawealthy, though primarily through higher taxes on capital gain and other income. Late last year, Massachusetts imposed a surtax of 4% on income over $1 million through a ballot initiative—and this example is perhaps telling. The “Massachusetts millionaires’ tax” had been introduced and defeated multiple times before finally becoming law. The most recent wealth-tax proposals may not pass this year but, as in Massachusetts, it’s not the first time such proposals have been considered. They, too, may be part of a trend in which voters and politicians gradually become more comfortable with a targeted new tax. Adding to the pressure, some state budget deficits are growing, forcing them to make difficult decisions. In California, the projected deficit of $22.5 billion roughly coincides with the projected $21.6 billion of revenue offered by the wealth tax proposal. Then there’s the national rhetoric surrounding wealth inequality, with several politicians unsuccessfully calling for a national wealth tax. The political hurdles for a national wealth tax, however, are greater than they are in progressive states, making these states a natural testing ground. As for the potential for exit taxation, fears of losing revenue from wealthy taxpayers moving to lower-tax jurisdictions aren’t unfounded. They’re the main reason why the eight states mentioned above acted in concert. According to the US Census Bureau, such migration already has been occurring.

As we noted in our first article, the general consensus among economists and other commentators is that a carbon tax would (theoretically) be superior to a cap-and-trade regime. However, there is also a general consensus that a single state cannot (practically) impose a significant carbon tax because a single state cannot impose border tax adjustments. Border tax adjustments are crucial because a carbon tax in one state would make products in that state more expensive, particularly energy-intensive products such as concrete. Thus, if consumers or businesses could just import those products from other states, a carbon tax in one state would accomplish little except to harm that state’s domestic industries. That problem could be solved if a state could impose a surcharge on out-of-state imports to make up for the tax on domestic producers. But the general consensus is that this sort of surcharge would clearly violate the Constitution’s dormant commerce clause, effectively taking that solution off the table. Nevertheless, in this article and in the one that follows, we will argue against that general consensus.2 Specifically, we will explain how a well-designed state level carbon tax with border tax adjustments could pass constitutional muster. To be sure, this is both the worst of times and the best of times for a state to consider imposing a carbon tax. It is the worst of times because there is little prospect that a successful state carbon tax might, once so proven, then soon be adopted at the national level. Indeed, there is unlikely to be much — if any — pressure on the states to reduce their greenhouse gas emissions from the federal government. Yet it is also the best of times because the likely absence of federal action makes state action more important, both substantively and symbolically. In other words, because the federal government will not be riding to the rescue anytime soon, we must hope that the states’ laboratories of democracy are up to the task of saving the world.

Once one state made substantial progress with the base for a carbon tax, other states could copy the model and, ideally, coordinate their tax. There are some partial models for this. Many taxes, such as the sales tax and the corporate income tax, began with specific states taking the lead. And under federal pressure, the states eventually coordinated their corporate income taxes — at least somewhat. Also, the sales tax represents a major tax base that the states exploit and the federal government does not — in dramatic contrast to any other federal system we are aware of. Thus, the states adopting and coordinating a new and significant tax base would hardly be unprecedented and would not be, we believe, too difficult. Further, as we explained at the outset, such actions by the states can have significant impact. We believe the constitutional issues would be reduced as other states joined in the use of a carbon tax. Suppose that California is the first state to adopt a carbon tax. California does not use any coal for the production of energy.38 By taking carbon intensity into account, some California industries are going to be hurt relative to out-of state competitors, but on the whole a court might see that it is mostly out-of-state suppliers that have their output labeled high intensity. As explained above, we do not think that should render the system unconstitutional, but the argument is much easier to see if, say, Illinois, were also to impose a carbon tax and do so in a coordinated way with California. Illinois does produce energy from coal.39 Illinois’s participation thus makes matters particularly clear: The carbon tax does not, by design or in effect, help in-state industries.40 Rather, it is a tax on a global externality.

Economists have argued for national carbon pricing to effectively address carbon emissions. With the lack of action by the US government, questions arise about the impacts of state-level implementation of carbon pricing. By modelling the impacts of a carbon tax in Hawai’i, our study informs ongoing discussions of regional carbon pricing, with implications beyond the Hawai’i context. First, our state-level CGE model could be adapted to evaluate proposals in other states with carbon pricing policies before their legislatures. The structure of H-CGE has particular relevance for other states with large tourism sectors possessing some market power, e.g. Nevada, Louisiana, and Alaska. The model also has relevance to other island economies that, like Hawai‘i, generate all of their own electricity and, because they are part of larger political federations, have limited ability to impose border adjustment taxes. US-affiliated examples include Guam, the Northern Mariana Islands, Puerto Rico, and American Samoa. For sovereign island nations – such as Jamaica, Sri Lanka, Tonga, and Fiji, the H-CGE model could be modified to impose relevant trade adjustments. If Hawai‘i were to adopt a carbon tax at the level of the 2021 federal SCC, Hawai‘i’s cumulative emissions would decline by 10% over twenty years, over and above reductions from other policies already in place. In the absence of a national approach to address the global climate crisis, such state programmes could prove to be valuable demonstration projects that would help catalyze further climate action. This is important because our results strongly suggest that the goal of deep decarbonization is unlikely to be realized solely by the imposition of a carbon tax set at the SCC price by a state government. However, if more states adopt a carbon tax, then the likelihood increases that regional cooperation will emerge and facilitate the adoption of a common carbon price.Footnote15 Thus, state and regional actions to enact carbon pricing could pave the way to the adoption of a national programme.

In light of the previous discussion, it is interesting to evaluate the current administration’s position on climate policy. During the 2016 presidential election campaign, Hillary Clinton reminded voters that her opponent, Donald Trump, had once tweeted, “[t]he concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive.”141 In August 2017, President Trump followed up his rhetoric by announcing that the United States would withdraw from the Paris Agreement.142 The clear inference to be drawn from this is that federal climate policy will not be enacted anytime soon, and the Administration is also backing away from its international commitments to reduce carbon emissions. Therefore, it seems unlikely that the Federal Government will seek a ruling against state-level BTAs on the grounds of executive preemption. Ironically, recent economic analysis of the Paris Agreement after President Trump’s action suggests other countries’ reaction to the choice of the United States might actually provoke a protectionist response that has nothing to do with climate change and everything to do with the Administration’s overtly protectionist stance and desire to maintain employment in the U.S. manufacturing sector.143

IV. FEDERAL VS. STATE REGULATION OF BORDER MEASURES A. Legal Challenges As yet, there has been no in-depth economic analysis of state border measures such as those proposed in California’s Senate Bill 775. However, both legal and economic observers have suggested that any border measure will likely be subject to legal challenge from within the state, under the dormant Commerce Clause, and potentially from the WTO.102 In terms of federal versus state regulation, the dormant Commerce Clause and associated dormant Foreign Commerce Clause are the two potential constitutional constraints to state-level border measures.103 The interstate version of the dormant Commerce Clause can be used to invalidate a measure, such as a BTA, as being unconstitutional in three ways.104 First, it would be considered per se invalid if it facially discriminates against out-of-state commerce, unless it can be shown that there is no other means of accomplishing a legitimate state objective.105 Second, if it is not found to be facially discriminatory, the law would still be considered invalid if its purpose or effect is still discriminatory.106 Third, even if it is facially neutral, it would be invalid if it creates an undue burden on interstate commerce.107 The legal logic of the dormant Commerce Clause is very straightforward: it is designed to invalidate any protectionist state laws, represent the interests of out-of-staters, and promote national unity.108 The dormant Foreign Commerce Clause is the logical requirement that state laws must be held constitutional when applied to foreign trade–essentially, such laws should neither increase the risk of multiple taxation nor should they undermine the ability of the United States to speak “with one voice in foreign affairs.”109 In the case of multiple taxation, the argument is that in imposing a tax at the state level that affects foreign trade, there is the risk of double taxation because of taxes already being imposed abroad.110 The second argument focuses on the idea that there should be uniformity in the Federal Government’s dealings with other countries and that state-level taxation could frustrate the goal of federal uniformity with the potential for foreign retaliation.111 On the face of it, it would seem likely that border measures would be struck down by the U.S. Supreme Court. For example, it has been argued that because state level climate policy, such as the Regional Greenhouse Gas Initiative (RGGI), necessarily requires a border measure in order to solve the problem of leakage, it would be considered facially discriminatory under the dormant Commerce Clause.112 There is also doubt about whether the so-called “compensatory” (or “complementary”) tax doctrine would be a legitimate defense of any border measures.113 The compensatory tax doctrine allows a state to apply a discriminatory tax if it is designed to achieve a legitimate state objective that cannot be achieved in a way that is non-discriminatory.114 To satisfy this doctrine, the tax on interstate commerce would have to be “substantially equivalent” to that imposed on intrastate trade.115 Some legal observers argue that it would be challenging to establish a uniform way of measuring emissions from in-state electricity generation as compared to out-of-state generation in order to satisfy the “equivalent burdens” dimension of the compensatory tax doctrine.116

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A federal universal basic income system would socialize and democratize the profits gained from the automation of human labor. By taxing the companies monopolizing the benefits of automation at a higher rate and distributing such profits to all citizens utilizing a UBI system, the benefits of automation would be socialized, and the economic gaps left by the elimination of low-paying positions filled. Increased tax revenue from those benefiting from automation would make nationwide UBI systems far more economically feasible, especially if the economic growth facilitated by automation reaches expected levels. However, increasing support for adopting UBI on a national level will require demonstrating its utility on a smaller scale. As proven by lawmakers in California, UBI can also function as an effective method of mitigating the impact of short-term economic crises. Lawmakers and political candidates who utilize UBI to foster economic stability and equality among their constituents will be increasing their approval and popularizing UBI, the only economic welfare program extensive enough to tackle the potentially devastating impacts of industrial automation.

Rather than focusing on familiar concerns about UBI — the risk of dependency, the price tag, how to implement it or how work often provides meaning in one’s life — it is worthwhile to recognize that the case for such a broad and radical reform of our economic system is actually rather weak.

Although an influential 2013 forecast by Oxford University reported that about 47 percent of jobs in the U.S. in 2010 and 35 percent in the U.K. were at “high risk” of being automated over the following 20 years, a more recent study by the Organisation for Economic Cooperation and Development (OECD) puts that figure at about 10 percent for the United States and 12 percent for the United Kingdom.

The program is funded by the Department of Labor (DOL) but is locally administered and managed by states, municipalities, One-Stop Job Centers, nonprofits, and social entrepreneurial ventures (see section VI.6, “Administrative Agencies and Project-Executing Organizations”) in the proposal (Tcherneva 2018).

The goal is to match individual community needs with unemployed resources. A bottom-up approach of management and administration combined with participatory decision-making and budgeting will enhance program effectiveness.

Likewise, consider statutory cases like King v. Smith as studies of how courts can find in statutory welfare rights justice-inspired legislative supplementation of the constitutional catalogue. Unprepared, in the first instance, to declare the existence of a constitutional right to a social minimum (and so openly and irrevocably to constrain Congress), the Court nonetheless was prepared to expand and deepen the limited and qualified commitments Congress had made – and to prod Congress to craft future welfare legislation in keeping with the inclusive commitments the Court attributed to it. Similarly, with other social rights areas, a judiciary mindful of the constitutional dimensions of health care provision or of work and participation has in the past and could in the future nudge state or federal agencies to construe their statutory mandates in ways that lean toward inclusion or actual availability of work opportunities. But widening the circle of eligibility to, striking down exclusions from, and assuring against arbitrary deprivations of statutory social rights are not the only functions courts can and should perform. The facts that social rights are costly and that implementing them involves complex resource allocations have not prevented many well respected American state (as opposed to federal) courts from prodding legislatures to ensure that such rights receive a degree of legislative priority. State courts as diverse as New York’s, New Jersey’s, Texas’s and California’s have found credible ways to assess claims of glaring failure to fulfill constitutional mandates such as state constitutional rights to education or to housing equity. Mindful that implementing such rights involves resource allocations that should rest in the hands of democratically accountable officials, and also involves creation of new administrative structures and institutional strategies that courts are ill-equipped to design, US and other nations’ courts often have responded to these constraints by issuing judicial mandates to legislative, executive, or administrative officers to prepare, submit and carry out corrective plans. Hammering out such plans to vindicate social rights, in turn, entails political conflicts and accommodations. But constitutional-judicial intervention lends clout in these processes to relatively powerless constituencies, catalyzing new alliances among activists and attorneys, reform-minded lawmakers and bureaucrats, and judicial officials. Often, legislators otherwise reluctant or unwilling to vote in favour of increased education or housing funding prove ready to do so, once they can explain that ‘the courts made us do it’. Implementing any social right-inspired plan is also inevitably a protracted process, often entailing substantial trial and error and subject to social and bureaucratic impediments and inertia. Again, there is a virtue here to judicial involvement. Courts can insist on accountability and continued experimentation, even after legislative will flags or fragile bureaucratic coalitions unravel.

Literature suggests that, while it may be easier to evaluate budget practices one at a time, from budget cycle to budget cycle, institutions interact with one another over the long term. States should consider their institutions as tools that work together to promote long-term sustainability, not as singular institutions that function in isolation. Looking at fiscal institutions as toolkits, rather than as stand-alone practices, will help states understand where trade-offs occur over the long term. While some institutions may successfully change one fiscal metric, this may cause challenges elsewhere. Budget institutions that promote discipline in the short term may contribute to volatility and undermine long-term fiscal sustainability. Strict BBRs, for example, can rein in spending and reduce borrowing costs, but may force damaging program cuts or tax increases during economic recessions. The state may also trade away its long-term stability for a current balanced budget by closing gaps through either explicit or implicit borrowing. Tax limits may reduce growth in taxation and limit the size of government but restrict states’ ability to raise revenues to pay off debts or cover unexpected shortfalls. State TELs may also push responsibility to city or county agencies, which may be even less able to handle unexpected shortfalls. Focusing on single short-term metrics may obscure the trade-offs or long-term effects inherent in common budget practices. It would be important for us to have better information on the complementarity of these institutions and on their longer-term effects. Pair strict balance budget requirements with contributions to a BSF. Research suggests that BBRs have a beneficial disciplinary effect on state budget balances. States with strict BBRs respond more quickly to deficit shocks. However, some research also suggests that BBRs make it more difficult for states to respond to revenue shortfalls during a recession without exacerbating the business cycle and volatility. States are also more prone to cut services, rather than raise taxes, to meet BBR requirements, meaning that strict BBRs can result in cuts to school aid or restricted eligibility for optional Medicaid programs, for example. Contributing to a BSF during good times can offset such volatility effects during economic downturns. States would not have to immediately engage in deep program cuts or tax hikes to balance their budgets. BSFs also have their limitations and may not be able to prevent deep program cuts during multiyear recessions, but they can be designed to smooth the relationship between cyclical revenue streams and more constant spending needs.

Now that we’ve come through the debt ceiling drama, most of us who want to see more fiscal responsibility at the federal level can agree that we got to a reasonable result, but the process was – to put it mildly – a problem.

We cannot use the full faith and credit of the nation and the economic health of the global economy as a bargaining chip to restore fiscal responsibility. There has to be a better way.  In fact, many of us who study state budgeting annually observe budget processes that lead to (largely) fiscally responsible decision-making and do not require high stakes hostage taking to get there.