April 7, 1997

Proposed Constitutional Amendment Would Impede
Deficit Reduction and Protect Special Interest Tax Breaks


On April 15, the House of Representatives will vote on a constitutional amendment (H.J. Res. 62) to require a two-thirds vote by the House and Senate for any bill that raises federal revenues. This amendment is ill-advised for a number of reasons.

The proposed constitutional amendment, however, would effectively preclude such action. It would be virtually impossible to amass the two-thirds majority the amendment requires to pass large deficit reduction packages that include both reductions in federal programs and measures to raise revenue. As a result, the amendment would erect serious new barriers to long-term deficit reduction.


I. The Constitutional Amendment and the Long-Term Fiscal Forecast

The federal deficit has now been reduced to about 1.5 percent of the Gross Domestic Product, a level that the 1996 CBO report indicates would not cause significant damage if deficits remained at that level over a substantial period of time. But if no action is taken to raise revenue or restrain Medicare, Social Security, Medicaid, and lesser entitlements — and other federal spending remains constant as a share of GDP — the deficit will rise sharply when the baby boom generation retires. CBO has forecast the deficit will rise to 12 percent of GDP by 2030 if no such action is taken.

Deficits of that magnitude would be unhealthy for the U.S. economy. To avoid such a development, major deficit reduction that extends well beyond the steps Congress and the Administration are currently considering will eventually be needed.

Testifying before the Bipartisan Commission on Entitlement and Tax Reform in 1994, Robert Reischauer, then the director of the Congressional Budget Office, observed that the public would be unlikely to accept the steps that would be required either to extract all of the needed deficit reduction in the decades ahead just from government programs or to extract all of the needed deficit reduction just from revenues. In the long run, Reischauer predicted, policymakers will agree on some mix of program cuts and revenue increases to prevent deficits of a magnitude that would do substantial damage to the economy.

The proposed constitutional amendment is designed to ensure that virtually none of those future deficit reduction measures come from the revenue side and virtually all come from cutting programs.1 That the amendment would bar virtually all revenue increases can be seen by examining House votes for the four principal deficit reduction measures enacted between 1982 and 1993 that raised federal revenue. Although three of these four measures were signed by Republican presidents and all four enjoyed the support of Democratic Congressional leaders, none received two-thirds support on the House floor. A fifth measure — the 1983 Social Security rescue plan, which increased Social Security payroll tax collections — also failed to secure a two-thirds vote despite strong support from President Reagan and Congressional leaders.

Votes for Recent Legislation that Raised Taxes

Between 1982 and 1993, five pieces of legislation that raised significant revenue were enacted. President Reagan signed three of these measures, while President Bush and President Clinton each signed one. All five failed to secure a two-thirds vote on the House floor.

In passing the Tax Equity and Fiscal Responsibility Act of 1982, a measure crafted in substantial part by Senator Bob Dole, the House vote was 226-207. When the House considered its version of the 1983 Social Security rescue plan the following year, the vote was 282-148. The vote for the 1987 budget reconciliation bill, a product of bipartisan negotiations that contained both spending cuts and revenue increases, was 237-181, while the 1990 budget agreement passed by only 228 to 220. The 1993 budget agreement passed by a slender 218-216 vote.

During this period only one measure that raised revenue secured a two-thirds vote, the 1989 reconciliation bill. The 1989 bill was a minor measure. It did relatively little to reduce the deficit and contained only very small revenue increases. The revenue increases in all five of the pieces of legislation that failed to secure a two-thirds vote exceeded the level of revenue increases in the 1989 bill.


The constitutional amendment thus would likely lead to one of several outcomes: 1) larger deficits over time; 2) a greatly shrunken federal government that is unable to do very much beyond running Social Security and Medicare, maintaining national defense, making federal pension and veterans payments, and paying interest payments on the national debt; and 3) overly steep reductions in Social Security and Medicare that significantly reduce the living standards of millions of elderly people who are not well off. Such stark outcomes are not necessary if a balance of spending cuts and revenue-raisers ultimately can be considered over the next three decades. Such balance is what the amendment is designed to prevent.

That the statements in the previous paragraph are not hyperbole can be seen by examining the long-term fiscal forecast CBO issued last year on the magnitude of the deficit through 2050 under current tax and entitlement law. When the baby boom generation reaches retirement and an unprecedented proportion of the population is elderly, some increases in revenues are likely to be needed, in addition to actions to restrain expenditures across the government, including expenditures for Social Security and Medicare.


II. The Amendment Effectively Bars Measures to Close Tax Loopholes

The requirement for a two-thirds majority would apply not only to measures to raise tax rates but also to measures to cut unproductive tax expenditures that grant subsidies to powerful special interests. A recent Congressional Budget Office study found that over half of the corporate subsidies the federal government provides are delivered through the tax code. Curbing corporate welfare provided through the tax code is one way to help reduce the deficit, but it would require a two-thirds vote under the proposed amendment. This would essentially rule out closing unproductive corporate tax breaks as a way to help shrink the deficit.

In fact, a substantial share of the federal budget would effectively be placed off- limits for deficit reduction by the constitutional amendment. Provisions of the tax code that the Joint Committee on Taxation classifies as "tax expenditures" — spending programs that operate through the tax code by selectively reducing the tax liability of particular individuals or businesses — now cost more than $400 billion a year. (The corporate subsidy provisions that operate through the tax code are a part of this total.) This is more than the government spends on Social Security or defense.

In testimony before the Entitlement Commission in 1994, Federal Reserve Board chairman Alan Greenspan referred to these provisions of the tax code as "tax entitlements" because they entitle those who qualify for them to government subsidies provided in the form of a tax reduction. Greenspan testified that the tax entitlements should be looked at, along with the spending entitlements, in developing measures to address the nation's long-term deficit problem.

If anything, the proposed constitutional amendment would encourage the spread of more tax expenditures over time, since such measures would take only a majority vote to enact but a two-thirds vote to remove. In addition, if Congress passed a series of tax changes that were thought to be deficit-neutral, but clever, high-priced tax lawyers and accountants then found ways to convert some of the measures into tax shelters at greater-than-anticipated cost to the Treasury, it would take a two-thirds vote to scale the shelters back so the original measure did not produce a net revenue loss.

Most States Do Not Have Supermajority Requirements

Only seven states require the approval of at least two-thirds of their legislatures for any tax increase. Six other states either require such approval for some taxes but not others, require a three-fifths rather than a two-thirds vote, or both. Other states generally require simple majority approval for revenue increases of all sorts.

Furthermore, a 1993 General Accounting Office study of state budget trends found that a majority of states surveyed had used both spending cuts and revenue increases to balance their budgets in recent years. Revenue increases accounted for about one-third of the deficit reduction these states instituted to balance their budgets during the period studied.

Even measures that raised revenue by shutting down opportunities for tax fraud would require a two-thirds vote. So would measures to prevent companies from gaining tax advantages by moving plants and jobs overseas.


III. Amendment Tilts Toward the Wealthy and the Powerful At the Expense of Average Families and the Poor

Most government benefits that low- and middle-income Americans receive come from government programs, such as Social Security, Medicare, Medicaid, student loans and grants, unemployment insurance, school lunches, and food stamps. By contrast, most government subsidies that wealthy individuals and large corporations receive come through tax subsidies. As a result, a constitutional amendment that makes it extremely difficult to scale back tax subsidies when decades of deficit reduction lie ahead tilts the playing field in favor of the wealthy and powerful over Americans of average or lesser means.

In addition, such a constitutional amendment would place off-limits even measures asking program beneficiaries who have high incomes to pay more for the government benefits they receive. For example, measures to "means test" Medicare premiums by raising the premium charges for those at high income levels must rely on the tax code to collect the increased premiums, since Social Security offices (which administer Medicare) have no information on beneficiaries' current incomes. Indeed, when the Republican budget bill reached the House floor in the fall of 1995, the House parliamentarian advised that its provision raising Medicare premiums for those at higher income levels could constitute a tax increase. Under the constitutional amendment, measures of this nature would require a two-thirds vote, rendering them extremely difficult to pass. This makes it more likely that when steps are taken to restrain Medicare costs, low-income and middle-income beneficiaries would have to bear a heavier share of the load.

The amendment also would be likely to injure the middle class and the poor for another reason. If the federal government is unable to raise revenue when needs for public expenditures rise, one likely result will be to shift more of the burden of raising revenue and meeting public needs to state and local governments. Most state tax codes are regressive (i.e., the taxes they impose consume a larger percentage of the income of lower-income households than of higher-income households). State and local governments extract a larger proportion of the revenues they raise from the middle class and the poor, and a smaller proportion from the affluent, than the federal government does. If revenue-raising burdens are shifted from the federal to state and local levels, the share of the overall tax burden borne by the middle class and the poor is likely to rise.

Law School Dean Warns of Perverse Effects

In testimony before the Subcommittee on the Constitution of the House Judiciary Committee on March 18, Samuel C. Thompson, Dean of the University of Miami Law School, warned of potential perverse consequences from the proposed amendment. Thompson wrote:

"Under either interpretation, H.J. Res. 62 will have the effect of making it much harder for Congress to close tax loopholes, because any such legislation could be blocked with a mere 34% vote in either house of Congress....

"This amendment would also penalize the American public for mistakes made in the tax legislative process. For example, assume that after an adoption of this Constitutional amendment, Congress adopts a flat tax. Assume that before enactment it is estimated that the flat tax will reduce revenues by $100 billion. It turns out, however, that the revenue estimates are wrong and the actual revenue loss is $200 billion, which will lead to a significant increase in the budget deficit. The Treasury immediately proposes legislation to increase the revenues by $100 billion, thereby restoring fiscal responsibility. The legislation is, however, opposed by powerful special interest groups who will prevail if they can convince just 34% of the members of either the House or the Senate to vote against the amendment....

"The core problem with this proposed constitutional amendment is that it would give special interest groups the upper hand in the tax legislative process. Once a group of taxpayers receives either a planned or unplanned tax benefit with a simple majority vote of both houses of Congress, the group will then be able to preserve that tax benefit with just a 34 percent vote in one house of Congress. Thus this amendment would create an unlevel playing field in the tax legislative process. Indeed, I believe that if enacted this amendment would become known as the 'Tax Loophole Preservation Amendment to the Constitution.'"


IV. Amendment Could Lead to Overly Large Cuts in Social Security and Medicare Benefits

Social Security and Medicare benefits need to be restrained in the years ahead. Both programs are out of long-term actuarial balance, and both contribute significantly to the projected increase in the long-term deficit.

But the constitutional amendment would likely lead to larger reductions in Social Security and Medicare benefits than otherwise would be needed, reductions that could adversely affect the living standards of modest-income or poor retirees. This would be the case for several reasons.

First, by effectively preventing revenues from contributing to deficit reduction despite the need for large-scale deficit reduction in the decades ahead, the amendment would place a greater deficit-reduction load on Medicare and Social Security. These two programs are projected eventually to constitute half or more of the federal budget, exclusive of interest payments on the debt. If there is no revenue contribution to deficit reduction, there will have to be a greater contribution from Medicare and/or Social Security than would otherwise be the case.

Second, the amendment would effectively rule out measures to raise Medicare premiums for those at higher income levels. As noted above, the 1995 budget reconciliation bill contained such a measure. When it was about to come to the House floor, the House parliamentarian advised that it could constitute a tax increase. A House rule that Congress adopted in January 1995 required a three-fifths majority for measures raising tax rates, so the parliamentarian's advice meant the budget bill would need a three-fifths vote unless this rule was waived. The House leadership promptly arranged for a waiver of the rule. But once a supermajority requirement is in the Constitution, no waivers are possible. If Medicare premiums cannot be raised on those at high income levels, more of the burden of addressing Medicare's financing problems is likely to be placed on elderly people at low- and moderate-income levels.

Third, the amendment would require a two-thirds vote for common-sense measures to help address Social Security's long-term financing problems in ways that involve raising more revenue for Social Security. For example, most Social Security experts agree that all state and local employees should be brought into the Social Security system. Some state and local government workers in a number of states remain outside the system, comprising the last sizable group of workers not covered under Social Security. Although the Advisory Council on Social Security recently split three ways in its recommendations on how to address the program's long-term financing problems, the Council was unanimous in recommending that all state and local government workers not covered under Social Security be brought into the system; all three of the rival Social Security plans the Advisory Council submitted contained this recommendation. Expanding coverage in this manner would improve the balance in the Social Security trust fund while benefitting many workers who spend only part of their careers in the government sector. But expanding coverage entails a revenue increase, since the newly covered employees and their state and local employers would become subject to the Social Security payroll tax. Thus, this provision would require a two-thirds vote and become more difficult to pass. Failure to pass proposals such as this would likely mean that larger Social Security benefit cuts eventually would have to be instituted instead. Such benefit reductions would require only a majority vote.

Finally, the constitutional amendment would effectively rule out small adjustments in Medicare and Social Security payroll taxes as part of the effort to bring these programs into long-term actuarial balance. Modest increases of a fraction of a percentage point in the payroll tax would require a two-thirds vote under the amendment, making them virtually impossible to achieve. Yet Medicare in particular is so far out of actuarial balance that it is difficult to see how to restore long-term balance to the program without some increase in payroll tax contributions along with other significant changes, unless the health insurance that Medicare provides is scaled back substantially.

In a symposium in 1995, Henry Aaron of the Brookings Institution, who is a well-known expert in this area, observed that the full $270 billion that Republican Congressional leaders were seeking at that time in Medicare savings over seven years could be achieved if one combined those aspects of the Republican Medicare proposals that represented sound (and in Aaron's words, courageous) policy — and that yielded about half of the $270 billion in savings — with an increase of one-quarter of one percentage point in the employer and the employee shares of the Medicare payroll tax. This would slightly reduce workers' wages. (Most economists believe that both the employee and the employer shares of payroll taxes are effectively borne by employees in the form of lower wages than the employees otherwise would receive. As a result, claims that small increases in payroll taxes would heavily burden employers and cause substantial job loss have little merit.) In return, employees would get a Medicare system that had the resources to provide continually improving health care to their parents and ultimately to themselves as it took advantage of emerging medical technologies that improve health and prolong life.

Furthermore, one of several reasons that Medicare and Social Security face long-term deficits is that over time, a steadily increasing share of employee compensation is being provided in the form of fringe benefits not subject to the payroll tax, while a steadily smaller share is provided in wages that are subject to the tax. Modest measures to shore up Social Security and Medicare by slowing the erosion in the share of employee compensation subject to the payroll tax would, however, require a two-thirds majority under the proposed amendment.


V. Weakening Our System of Democracy

The amendment would seriously weaken the principle of majority rule that has been at the heart of our system of representative democracy for more than 200 years. As Rep. James Moran has observed, it would partially restore the system we had in the 1780s under the Articles of Confederation, a system that functioned poorly and was soon scrapped.

The Articles of Confederation required the vote of nine of the 13 states to raise revenue. At the Constitutional Convention in 1787, the Founding Fathers recognized this was an insurmountable defect and fashioned a national government that can impose and enforce laws and collect revenue through simple majority rule.

The proposed constitutional amendment would end the ability of a majority of the American people, acting through their duly elected representatives, to decide whether they would like to raise more revenues so the federal government can address needs the majority finds legitimate. The amendment would deny the majority this right both now and in future generations. As Representative Nancy Johnson (R-CT) pointed out on the House floor during debate on a similar constitutional amendment in April 1996, future generations should be "free to establish that balance between taxing and spending that they believe is in their interest."

James Madison on Majority Rule

The Constitutional Convention rejected requiring supermajority approval for basic functions such as raising taxes. Supermajority rules had applied in the Continental Congress. The framers of the constitution had experience with these rules and understood what they were rejecting.

In the Federalist Papers No. 58, James Madison, one of the key figures in drafting the Constitution, explained why the Constitution rejected supermajority rule:

"It has been said that more than a majority ought to have been required for a quorum, and in particular cases, if not in all, more than a majority of a quorum for a decision....[But that would mean] ... [i]n all cases where justice or the general good might require new laws to be passed, or active measures to be pursued, the fundamental principle of free government would be reversed. It would be no longer the majority that would rule; the power would be transferred to the minority. Were the defense privilege limited to particular cases, an interested minority might take advantage of it to screen themselves from equitable sacrifices to the general weal, or in particular emergencies to extort unreasonable indulgences."

Madison equated majority rule with "free government." In his view, freedom consisted not just in protecting individuals from unreasonable intrusion by government, but also in the right of citizens to have an equal voice in the affairs of government. According to Madison, a person whose vote is diluted by supermajority rules is not an equal citizen and so does not fully enjoy the fruits of freedom.

At its core, the amendment is rooted in deep distrust of the ability of the majority of the American people to make decisions that the authors of the amendment believe to be ideologically correct. Hence, the amendment seeks permanently to deny the majority that right. Powerful, well-connected minorities would gain great power at the expense of the majority. As a result, the amendment must be regarded as anti-democratic.


VI. The Potential for Extensive Litigation

Finally, if placed in the Constitution, the proposed amendment would raise a host of knotty issues that would probably need to be resolved by the Supreme Court. For example:

End Notes

1. The constitutional amendment would require a two-thirds vote in each House to enact legislation that increases "internal revenue." While that phrase is ambiguous, it should be noted that the Internal Revenue Code covers individual and corporate income taxes; Social Security, Medicare, and other social insurance taxes; most excise taxes such as those on gasoline, alcohol, and tobacco; and gift and estate taxes.