“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” –US Constitution, Article 1, Section 9
Every year, the legislative branch of the federal government meets to consider money issues. Specifically, each year, the Congress must pass laws that permit funding of federal agencies, allowing the Treasury to disburse funds for everything from sewage and electricity bills to launching the Space Shuttle. As the holders of the government purse, the Congress maintains a vital check on the executive branch; programs that Congress deems unnecessary don’t get money. And lately, the politicians of both Houses (and both parties) have been trumpeting the concepts of fiscal responsibility, including living inside the amount of income generated by the taxation policies of the United States.
But how exactly Congress balances the nation’s checkbook deserves a second look.
In normal terms, say those of a privately-held business, balancing the books is a relatively straightforward move. Consider the following conversation:
CFO: Mr. President, our sales revenues are down in the fourth quarter. We won’t have quite enough cash to cover current liabilities.
President: Do we have any assets we can liquidate?
CFO: Not quickly, sir.
President: Right then. Can we get a short-term loan?
CFO: Of course sir.
President: Then do it.
The end-of-year records would record the loan as a liability, and the bank would expect payment. Similarly, unless the cash was in the bank, the checks that the business wrote would not be honored. Publicly-held companies might have another option (sale of stock), but the results would be essentially identical. If the money wasn’t in the bank, the checks would bounce.
But Congress is a different beast altogether. The Treasury is actually operating at a deficit, and has been for years. In reality, the U.S. is one of the world’s largest debtor nations, with foreign-held debt exceeding $3.7 trillion dollars. That debt is (or should be) recorded as a national liability, and if we were to make payments in interest on that debt directly, we would require nearly a third of the gross taxation income annually. To keep from adding to it, Congress has been required at times in the past to stay within very rigidly defined spending caps. In essence, if they wish to spend money elsewhere, they must first find either 1) a new funding source that will pay for the expenditure or 2) a means of rescinding money from other accounts and agencies (think of this like a balance transfer).
Recently, the Senate wished to pay for some additional provision (what exactly this was for is not clear), but the amount necessary would have exceeded the caps. So the Senate cast around for an additional funding source and found one: the gross receipts tax that every business which sells to a state or local agency must pay. The tax amount isn’t very large, but IRS hasn’t been very good about collecting this tax. Accordingly, Congress passed a proviso in the same act that required state and local agencies to withhold 3% of the contract price and send it on to the Treasury, thus capturing the uncollected tax. As an example, if Company X sold a load of pink paint to the Massachusetts General Services Division for $100 million, GSD would cut the check for $97 million and send the remaining $3 million to the Treasury. When Company X filled out its tax forms that year, it would record the $3 million as having already been paid (think withholding on your paycheck). This proviso nicely bridged the gap between what was available and what was needed.
Aside from the fact that the state and local agencies are screaming that they should not be required to do the job that the feds can seem to do, there are two interesting parts to this.
1. It is very likely that this provision will never be enforced, since it must survive judicial challenge and may also be invalidated now that the Democrats have the majority in both Houses of Congress.
2. The proviso does not take effect until 2010.
However, Congress used a future stream of revenue to offset a current expenditure, in essence floating a national check for three years, without any surety that the supposed revenue stream would actually arrive. An interesting method of balancing the national checkbook, to be sure, and one which in normal business would never be honored. However, this is Congress, and if money gets too tight, they can always print more. That this would deflate the value of the dollar means little; money literally can appear out of thin air for these people…