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Pay-Go Rules Could Force Showdown Over Tax Cuts

Posted on October 20, 2017 by Jonathan Curry

Even if Republicans succeed in pushing tax-cutting legislation through the budget reconciliation process, some budget experts say they could find themselves facing down one final procedural obstacle: “pay as you go” rules.

In fact, there are two sets of pay-go: one that is Senate-specific and another that is written into law and applies to both the House and the Senate. Both share the same purpose — to prevent legislation that lowers revenue or increases mandatory spending from increasing budget deficits — but the way they operate is different.

Both Senate pay-go and statutory pay-go prohibit legislation from increasing deficits over five- and 10-year budget windows. Enforcement of Senate pay-go is much like the Senate’s Byrd rule, allowing members to raise a point of order while legislation is being debated on the Senate floor, which gives opponents of a bill an immediate opportunity to end consideration of it. Waiving that point of order requires 60 votes, and if that vote fails, the entire bill fails.

Under Senate pay-go, if there exists a budget surplus from legislation enacted earlier in the calendar year, that surplus can be added to legislation proposing to increase the deficit to determine if there is a net deficit.

Statutory pay-go is enforced less immediately, with the deficit impact — positive or negative — of enacted legislation being added to a “scorecard” for each year. At the end of the year, after Congress adjourns, the Office of Management and Budget tallies up costs and savings for the year. If the net total is negative and adds to the deficit, the OMB automatically implements a sequester of nonexempt mandatory spending programs — which includes programs affecting Medicare, student loans, and farm subsidies — to make up for that cost.

‘Escape Hatch’

The pair of pay-go rules aren’t without workarounds, however, and already, Republicans have signaled their intention to bypass at least one of them.

Senate pay-go comes with what Alan Cohen of the Center for American Progress described in an August report as an “escape hatch”: Lawmakers can include language in the budget resolution exempting reconciliation legislation from the rule. Because passing the budget resolution requires only a simple majority vote, this approach enables Republicans to avoid having to rely on votes from Democrats to override a point of order if one is raised later in the legislative process.

Cohen said that Senate pay-go has historically had bipartisan support, noting that in 2015, 51 out of 52 GOP senators voted to make the Senate pay-go rules permanent. Forty-seven of them are still serving in the Senate.

However, the Senate’s fiscal 2018 budget resolution includes language indicating that they wish to use that escape hatch. According to Ed Lorenzen of the Committee for a Responsible Federal Budget, the resolution gives the Senate Budget Committee chair the authority to adjust the pay-go ledger for the reconciliation bill, “allowing him to remove the costs of tax reform from the scorecard . . . [and] effectively exempting tax reform from the [Senate] pay-go rule.”

Budget Committee member Mark R. Warner, D-Va., filed an amendment with the committee to strike the language exempting the legislation from the chamber’s pay-go rule, arguing during an October 8 Senate Budget Committee markup of the resolution that the rule is a “challenging guardrail, but I think a good one.”

Committee member Luther Strange, R-Ala., offered a rebuttal at the markup, arguing that the only way to produce a “pro-growth” tax reform package is to “allow for a static loss in revenue and allow for increased economic growth that would drive higher revenues.”

According to Strange, reinstating the Senate pay-go rule would “tie the hands of the committee in adjusting budget rules,” which “do not provide for the kind of economic drivers comprehensive tax relief would include.”

The budget resolution passed the committee with the Senate pay-go exemption language intact. Warner was expected to propose a similar amendment during consideration of the budget on the Senate floor. 

A Reckoning

Statutory pay-go may not have the immediate impact that Senate pay-go can have; rather, its teeth come from potentially forcing a year-end political showdown after tax legislation is passed.

Unlike Senate pay-go, statutory pay-go cannot be waived via the budget resolution because the resolution is a “concurrent resolution setting internal rules and procedures for Congress but is not signed into law,” Lorenzen said. “It cannot change enforcement . . . or exempt legislation from statutory pay-go.”

To get around a deficit increase, Congress would have to pass legislation instructing the OMB to ignore the cost of such legislation or to “wipe the scorecard clean.” These “cleansing bills,” however, would be subject to a filibuster in the Senate, which can be overcome only by a 60-vote majority.

That, in turn, could force a showdown over whether to allow the sequester to go into effect, to roll back some of the tax cuts, or to come to a bipartisan agreement to wipe clean the pay-go scorecard and keep the deficit-increasing legislation in effect.

Cohen explained that in such a showdown, Republicans might argue that if the filibuster is successful, Democrats would be held responsible for allowing the sequester to take effect. But, he continued, Democrats could counter that Republicans were fully aware of the threat of a sequester when they passed deficit-increasing tax cuts and that the tax cuts should thus be at least partially repealed.

However, James Wallner of the R Street Institute suggested that in the hypothetical showdown over the sequester, Democrats may not have all that much leverage. The automatic sequester applies to spending, and on its own doesn’t undo the tax cuts. “Conservatives may like that,” Wallner said. Republicans could also gain leverage by attaching a provision wiping the pay-go scorecard clean to a must-pass government funding bill, he added.

“My suspicion is that they will have more than enough votes between the supply-siders who don’t care about the deficit impact and the Democrats and other Republicans who support the programs that would be targeted,” Wallner concluded.

Cohen acknowledged that the threat of a sequester that cuts government spending may not deter some Republican lawmakers. He noted that under a different sequester created by the Budget Control Act of 2011, the sequester “was supposed to be so horrible that it would force Congress to agree on a bipartisan grand bargain, but many congressional Republicans praised the sequester cuts to domestic programs after they began in 2013.”

And Lorenzen noted that in 2002, after the tax cuts under President George W. Bush were enacted, a bill to wipe the scorecard clean was “easily passed” with the support of members who opposed the tax cuts but did not want to see the cuts to Medicare and other programs go into effect.

The three main drawbacks to the effectiveness of statutory pay-go as a tool of fiscal restraint, according to Lorenzen, are that the sequester targets only a “narrow slice of mandatory spending programs requiring deep cuts neither party wants to take effect;” the rule doesn’t directly affect taxes when it’s violated; and it can be reversed relatively easily.

Dynamic Scorecard?

Republicans wishing to avoid a showdown while keeping pay-go in place could try to argue that, with dynamic scoring, their tax cuts don’t actually add to the deficit. But whether they can actually use a dynamic score for this purpose remains in dispute.

Cohen explained that while lawmakers traditionally rely on estimates by the Joint Committee on Taxation to score legislation, the decision on which official score to use is made by the chairs of the House and Senate Budget committees. Thus, there’s technically nothing in the statute preventing them from using other estimates that might show more generous dynamic effects.

However, Cohen said that to ignore the JCT’s estimates in favor of estimates that offset the $1.5 trillion in tax cuts with economic growth effects would “amount to using an egregious scoring gimmick and would undermine decades-long congressional norms and practices.”

Cohen said that if the Budget chairs do not adopt a score, the OMB would get to decide the score for the legislation. The OMB typically uses revenue estimates from nonpartisan economists at the Treasury Office of Tax Analysis, which Cohen said would be “extremely unlikely” to conclude that growth would offset all those tax cuts.

According to Lorenzen, however, the answer to whether revenue from dynamic scoring can be used to comply with statutory pay-go is clearly no. The statute, he said, includes language that is “well-understood to mean that the estimate is static and does not include revenues resulting from changes in economic assumptions.”

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