Research & Commentary: States Should Reform How They Budget

Published June 14, 2016

According to Liz Malm of Multistate Associates, 16 states are facing expected budget shortfalls in the 2016 and 2017 fiscal years. One of the primary causes of budget imbalance is the use of baseline budgeting. Simply put, a baseline government budget carries over existing spending levels from year to year, the previous year’s spending is treated as the floor on which to build additional spending changes. The main assumption made with this system is the existing spending level of any government agency is correct and not in need of a reduction.

Citizens Against Government Waste (CAGW) argues baseline budgeting tilts the budgeting process in favor of increased spending and taxes. Baseline budgeting often includes automatic adjustments tied to inflation and expected increases in program size and costs. These assumptions lead to the creation of a budget that is always growing and rarely contracting, which in turn causes budget deficits to grow exponentially. Baseline budgeting also allows programs and agencies to claim cuts in spending when actual spending has not decreased. CAGW likens so-called spending cuts in baseline budgeting to “a person who expects to gain 100 pounds only gaining 75 pounds, and taking credit for losing 25 pounds.”

States are beginning to turn away from baseline budgeting and moving toward zero-based and performance-based budgeting, which have proven effective in cutting deficits. In contrast to baseline budgeting, which builds on the government’s preceding spending base, zero-based budgeting involves a start-from-scratch process in which each agency must prove the value of its services instead of automatically having them funded under an assumption of necessity.

Zero-based budgeting allows for a more efficient allocation of resources that is based on needs, rather than assuming what was previously budgeted is the best use of tax dollars. Zero-based budgeting also forces managers to improve their spending, communication, and coordination, which leads to less waste and a smaller overall budget. A zero-based budgeting system requires patience and consistency; it can also be time-consuming.

Another method for improving budgeting is performance-based budgeting, or “budgeting for outcomes,” which goes even further than zero-based budgeting by measuring effectiveness. It involves identifying the core functions of government, requiring agencies to rank their activities based on priority, setting up effectiveness measurements, and then ranking programs according to their measured effectiveness. These budgeting techniques require more time and resources, so states typically analyze only a few agencies per year instead of all of them. Most importantly, performance-based budget redirect budget discussions away from increasing spending and towards lowering spending.

Writing in The Huffington Post, Bob Williams, a senior fellow at State Budget Solutions, argued using performance-based budgeting is not the same as micromanaging: “This does not mean legislative micromanagement of state government. Rather, multi-agency ‘results teams’ should be given wide latitude to find more effective ways of delivering services to constituents, as long as the state’s goals are being met. Programs that fail to deliver results should then be thoroughly reviewed. Often, competition and market forces can be harnessed and channeled, enhancing quality while reducing costs. Consolidation of various programs might also be warranted, resulting in the more efficient delivery of services.”

Although neither approach is a silver bullet for ending a budget deficit, zero-based and performance-based budgeting can be effective in helping governments prioritize services and identify inefficiencies and waste.

The documents cited below provide additional information on these alternative budgeting mechanisms.

Budgeting for Outcomes
Bob Williams of State Budget Solutions argues one of the biggest causes of the budget deficit epidemic amongst states is the use of baseline budgeting. “Under this system of baseline budgeting, little attention is paid to how funds are spent, or whether in fact those expenditures are making a positive difference in the lives of state residents,” wrote Williams. “Meanwhile, rising health care and retirement costs for state workers are crowding out rival funding priorities.”

WI State Rep. Rob Hutton: Zero-Based Budgeting
In this episode of the weekly Budget & Tax News Podcast, Jesse Hathaway, managing editor of Budget & Tax News and a Heartland research fellow, talks with Wisconsin state Rep. Rob Hutton (R-Brookfield), the sponsor of a new law requiring state government agencies to submit a zero-based budget plan and a budget plan in which the agency becomes more efficient but uses less taxpayer money. According to Hutton, zero-based budgeting helps ensure government agencies are sticking to their core missions and encourages government agencies to re-evaluate their priorities by incentivizing high-performing programs that actually work.

John Nothdurft: Sound Budgeting Techniques in Times of Crisis
John Nothdurft, The Heartland Institute’s director of government relations, discusses many states’ movement toward zero-based and performance-based budgeting. Nothdurft notes states and local governments have relied on these budgeting strategies over the past 30 years to rein in spending during state budget crises.

Focus On Results for Smarter Government Budgeting
Leonard Gilroy of the Thomas Jefferson Institute argues in this paper implementing a priority based or outcome-based budgeting system would help Virginia policymakers more easily identify the government activities most important to taxpayers. Gilroy also argues they would help lawmakers make difficult trade-off and cost-benefit decisions.

What Is Zero-Base Budgeting?
The National Conference of State Legislatures provides a primer on zero-based budgeting.

Performance-Based (Priority-Based) Budgeting: How to Address Budget Shortfalls in The States
Bob Williams, founder of the Evergreen Freedom Foundation, explains how performance-based budgeting helped Washington balance its state budget in 2003 without raising taxes. He writes, “The conventional budgeting approach ignores the efficiency and effectiveness of existing state programs. Rarely is the question asked about how existing programs can be improved or how can we maximize the return on the tax dollars that are collected.”

The Pros and Cons of Zero-Based Budgeting
This testimony from Michael LaFaive, director of fiscal policy at the Mackinac Center for Public Policy, before the Michigan House Appropriations Subcommittee on General Government, outlines the pros and cons of zero-based budgeting. “Case studies about businesses and governments that have adopted zero-based budgeting, or some hybrid of it, generally report some improvement quantitatively or qualitatively. That is, the process has either saved money, improved services, or both,” LaFaive notes.

Budgeting Basics: Priority Budgeting vs. Zero-Based Budgeting
Kristen De Pena of State Budget Solutions presents strong arguments in favor of priority based budgeting, which she says would be more efficient for states to adopt than the zero-based standard.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database, at

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.