'Ideas Factory'

REVIEW SUMMARY
What. Gov.-elect Rick Scott's Economic Advisory Council
Issue. State budget and reforming the economy face challenges
Impact. 700,000 jobs in seven years is the plan.

Enacting tough taxing and spending limits on state government may become a key recommendation of Gov.-elect Rick Scott's economic advisory council.

The newly formed six-member council, headed by state budget expert Donna Arduin, began meeting in recent weeks. It will advise Scott on how to rebuild the state's economy and implement his “7-7-7” jobs plan — seven-step plan to create 700,000 jobs in seven years. Arduin drafted the plan for the Scott campaign.

The council's make-up reflects both the traditional fiscal conservative side of Scott and his roots outside the state.

“States like Florida are facing such tremendous fiscal challenges we wanted people with experience and insight not to make changes at the margins, but make reforms,” says Arduin, who helped Scott handpick the group.

“We need wholesale reform,” she emphasizes. Arduin's not talking just about Florida, but also the need to transform other state's economies and budgets where Medicaid, pension and unemployment compensation fund deficits, education funding and prisons costs are big problems.

Arduin speaks from experience.

She advised California Gov. Arnold Schwarzenegger for a year and served as the director for the Florida office of policy and budget under former Florida Gov. Jeb Bush for five years. Arduin has held similar positions in Michigan and New York.

Arduin previously consulted with the Florida House of Representatives and then Speaker, now U.S. Sen.-elect Marco Rubio, on the property tax swap referendum that never made it on the ballot.

Arthur Laffer, who's also on the council, is Arduin's partner at Arduin Laffer & Moore Econometrics. Arduin is president of the firm. Moore is Stephen Moore, an economist and founder and past president of The Club for Growth. He sits on the editorial board of the Wall Street Journal.

Laffer, also founder and chairman of Laffer Associates, and known as “The Father of Supply-Side Economics,” served on President Ronald Reagan's economic policy advisory board. He's well known for his work on the “Laffer Curve,” which explains how cuts in tax rates can result in increased revenue to the government — which happened during Reagan's term.

Other council members include two based in Tallahassee: Robert McClure, president and CEO of The James Madison Institute, and Professor Randall Holcombe, an economics professor at Florida State University. Holcombe's research includes public finance and economic analysis of public policy issues. He's also a senior fellow at the institute, which specializes in a conservative approach to state government issues.

Also on the council is Tad DeHaven, a budget analyst on federal and state budget issues with The Cato Institute, a libertarian think-tank in Washington D.C. DeHaven, who was previously deputy director of the Indiana office of management and budget and a policy analyst with the National Taxpayers Union, says about the council, “I think in one sense we're like an ideas factory. That's how I view my role.”

Tax-and-spend limits

One other budget expert on the panel with big ideas is Talmadge Heflin, a former Texas state representative and appropriations committee chairman, who devised a plan to successfully close a $10 billion budget gap in 2003 without tax increases. Heflin, who served 11 terms in the Texas House, now directs the Center for Fiscal Policy at the Texas Public Policy Foundation, an Austin-based non-profit, non-partisan research institute.

He's an avid promoter of “tax and expenditure limits,” known as TELs, and is working to strengthen Texas' system.

“It's pretty simple,” says Heflin. “People spending money to start a business need to know that there's some predictability in state government. If you're willy nilly changing state policy every time you meet, investors are not going to put their money there.”

Arduin agrees, putting it this way: “Every state has differing resources and assets and different price points as to what the cost of doing business needs to be, or be below, in order for a company to be interested in going there.”

Heflin adds that there needs to be predictability in the regulatory environment of the state. Scott recently named a 26-member regulatory reform transition team to tackle that morass.

Arduin says, “Texas has a tax system superior to other states,” and while saying she doesn't wish to prejudge the council's focus, she confirms that the council plans to have serious discussion about TELs.

In an October policy paper on the subject, Heflin writes that, “ ... a pressing need exists for effective, practical limits on the revenues and expenditures of government.”

Florida currently has a weak revenue limit in the state constitution, “but the way it was written, it's moot; it's ineffective,” according to Arduin. “The way it was written, the spending in Florida will never reach the limit.”

That may be because the constitution only limits state revenue to the average growth rate in state personal income for the previous five years.

This is where Heflin's handiwork may be a big contributor to the council, but it will take the Legislature agreeing to put stronger tax and expenditure limits in the state constitution. He supports constitutional limits based on population growth and the inflation rate.

“It's just the appropriate place,” he says, because it's the kind of thing that shouldn't be changed easily.

And he says now's the time to do it before the economy comes back, to rein in excessive spending growth that otherwise might occur without the limits. If you don't have it in place, it puts the state budget right back where it was — growing faster than taxpayers could support it and less so when the great recession hit.

Heflin says weaker TELs have vague legislative language, and obscure provisions that allow a legislature to easily override it.

He offers a window on Florida's future.

According to Heflin's October policy paper, a stronger TEL generally shares the following characteristics:

Is self-contained within the state's constitution, not requiring enabling legislation;

Applies to all spending, not just revenue derived from sources;

Bases the expenditure limit on the sum of population growth plus inflation or the growth in personal income, whichever is less;

Requires voter approval for growth in appropriations to exceed the limit;

Encompasses all levels of government within the state;

When appropriate, requires the reimbursement of surplus funds to taxpayers and/or into a special reserve account in order to make up for periodic shortfalls; and

Includes spending adjustments according to actual rather than predicted growth rates to keep the long-term growth of the expenditures in check.

'No more kicking the can'

Medicaid will be the biggest challenge, according to several council members including Arduin. But pensions, education, prisons and unemployment compensation taxes are also expected to be key agenda items.

“Taxing payrolls is the biggest disincentive to job creation,” says Arduin. She's especially concerned about unemployment compensation taxes set to go up substantially next month and likely again in 2012. “Unemployment taxes going up at a time when we're trying to create jobs is a very bad thing.”

Bad indeed. The current high minimum rate of $25.20 per employee annually (applied to the first $7,000 of taxable wages) jumps to $72.10 beginning Jan. 1 to help cover higher benefit payouts to the state's 11.9% unemployed. That affects about half of the state's employers — about 240,000 companies.

The maximum rate, which is being paid by more employers these days, according to the Florida department of revenue, remains at a still high 5.4%, or $378 per employee.

Rates would be even higher to cover the $1.74 billion the state has borrowed so far from the federal government after the state's unemployment compensation fund was depleted in Aug. 2009. But the Legislature, concerned about the impact on jobs, passed a bill the first day of the 2010 session to disregard certain rate factors for 2010 and 2011. Without that action, the minimum rate would have risen to over $100 per employee.

Much as the need for the economic advisory council is painfully obvious, how long to keep them at their task isn't. The six budget experts have Gov.-elect Scott's marching orders, but Arduin says it's uncertain how long Scott will keep them engaged.

It could be awhile. But for now, they're meeting at least until early February when the new governor's budget must be submitted.

And there are no more easy ways to pass the buck in the budget game given the federal budget deficit and the state's own $2.5 billion budget hole.

“There is no more kicking the can down the road,” observes Arduin. “Florida has an opportunity to reform state programs, and getting the economy back on track, and that's what [Scott's] asked us to focus on.”

Rick Scott's Economic Advisory Council

Donna Arduin, Chairwoman - President, Arduin, Laffer & Moore Econometrics. Served as Director for the Florida Office of Policy and Budget for Gov. Jeb Bush, where she formulated the governor's policy recommendations and negotiated with the legislature to enact his budget policies. She has held similar positions in California, Michigan, and New York.

Tad DeHaven — Budget analyst on federal and state budget issues for the Cato Institute. Former deputy director of the Indiana Office of Management and Budget and a policy analyst with the National Taxpayers Union.

Talmadge Heflin - Director of the Texas Public Policy Foundation's Center for Fiscal Policy. For 11 terms, Talmadge served Harris County as a Texas state representative and became appropriations committee chairman.

Randall Holcombe - A DeVoe Moore Professor of Economics at Florida State University and published author with a doctorate in economics from Virginia Tech. Senior Fellow at the James Madison Institute, a Tallahassee-based think tank specializing in state government issues.

Arthur Laffer - Founder and Chairman of Laffer Associates, an economic research firm. Known as “The Father of Supply-Side Economics,” Laffer has shaped American economic policy serving on President Reagan's Economic Policy Advisory Board. He has received numerous economics awards and achievements for his work on the Laffer Curve and other economic issues. B.A. in economics from Yale University, MBA and a Ph.D. in economics from Stanford University.

Dr. Robert McClure - President and CEO of The James Madison Institute. Appointed by Gov. Jeb Bush to the Florida Elections Commission and has served on the State of Florida Education Strategic Planning Council. B.A. from Furman University, MS from Florida State University, and a Ph.D. in public policy from the University of Florida.