Today the President unveiled his proposal to bring back statutory “pay-as-you-go” (PAYGO) rules to the federal budget process. As a story in today’s Washington Post (updated online this afternoon) notes, there are things to like about the President’s proposal:
If approved by Congress, the rules would forbid lawmakers from expanding entitlement programs such as Medicare and Social Security, creating new entitlement programs or cutting taxes unless the cost is covered by spending cuts or tax increases. If lawmakers fail to pay for their initiatives, Obama’s rules would subject some entitlement programs to automatic cuts, according to details of the plan released by the White House.
Deficit hawks applauded the move, saying the automatic trigger, known as sequestration, would mark a return to more serious budget restraint…
“If the administration is going to say, ‘We need to start afresh here and go forward on a pay-as-you-go basis, including health-care reform,’ this is a good way to start out,” said Robert Bixby, executive director of the nonprofit Concord Coalition, which champions deficit reduction.
It certainly seems clear that the Obama Administration is very serious about paying for the cost of health care reform, and that’s certainly better than not paying for it. As OMB director Peter Orszag reemphasized yesterday on his blog:
I have posted on this previously, but it’s worth repeating. The Administration is committed to the principle that health care reform must be deficit neutral over the next decade. That means that every dollar spent on this effort must be paid for – with real savings or revenue proposals that can be scored by the Congressional Budget Office (CBO). The offsets are not in any way theoretical; they are specific proposals that have been determined by CBO to reduce spending or raise revenue…
As we move forward this summer with these changes, you can be sure that health care reform will be paid for – and that we will strenuously debate how to do it.
But there are other things not to like about this PAYGO proposal (from a fiscal discipline standpoint), such as the exemption of some of the largest portions of the federal budget, most notably Social Security, from the automatic cuts (applied if PAYGO is violated), and the exemption of $3.5 trillion (over 10 years) worth of spending and tax cuts (mostly tax cuts) from the PAYGO standard. Again from the Washington Post:
The administration is also proposing that many costly items get a pass under the new rules. Lawmakers would be able to extend the tax cuts passed by the Bush administration beyond their 2010 expiration date, prevent the alternative minimum tax from ensnaring millions of additional taxpayers and increase payments to Medicare physicians without offsetting the enormous costs.
Administration officials have argued that those actions would merely extend current policy, and that exempting them would be “similar to the treatment of expiring mandatory programs under current PAYGO rules.”
That part of the plan is less appealing to fiscal conservatives, who argue that the nation cannot afford to keep the Bush tax cuts in place…
“What I’m not for is waiving PAYGO for $3.5 trillion of items, much of which I think ought to be paid for,” Senate Budget Committee Chairman Kent Conrad (D-N.D.) told reporters…Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said it “largely undermines the purpose” of enacting budget rules.
“This is like quitting drinking, but making an exception for beer and hard liquor,” MacGuineas said in a written statement.
What I really don’t like about the legislation is that it’s a proposal for budget process that dictates too many specifics about tax policy, which really ought to be something more thoroughly developed by the Obama Administration’s Treasury Department and deliberated within the tax-writing committees of Congress. The statutory PAYGO proposal does not just spell out the revenue amounts that are exempted from PAYGO rules, it dictates which specific tax policies are exempt–mostly (and specifically) the 2001 and 2003 (”Bush”) tax cuts and relief from the Alternative Minimum Tax. Going further with Maya’s analogy, it’s worse than making an exemption for beer and hard liquor; it’s like making an exemption for a particular brand of beer and a particular type of hard liquor.
So what’s the big deal with the budget rule including a deficit-financed, permanent extension of the Bush tax cuts? Exempting the Bush tax cuts from PAYGO eliminates the “action forcing event” that the expiration of the tax cuts under a current-law baseline standard would have produced. If extension of the Bush tax cuts were held to the same higher standard as some of Obama’s own tax proposals, such as the Making Work Pay credit (which was proposed with an offset of carbon revenues–I know, LOL), then maybe we’d more carefully try to evaluate whether the policy is worth the cost. And it’s not just a revenue-level, “baseline issue.” By naming the specific tax policies (not just the revenue levels) that are exempt from the PAYGO rules, the proposal presumes Bush tax policy is extended and is not to be replaced by even a revenue-equivalent tax cut of a different form.
If and when this proposal for statutory PAYGO becomes law, the permanent, deficit-financed extension of the Bush tax cuts will effectively be passed as well, because the relative political cost of any tax cuts that are not the Bush tax cuts (and hence not so “free” of budget constraints) will be so high that no such alternative tax policies will be seriously contemplated. Congress will end up rather mindlessly extending the Bush tax cuts, and President Obama will rather mindlessly (yes, despite his great mind) sign the $2 trillion+ worth of them, entirely deficit financed, into law.
When you choose to treat the “policy extended” baseline as the “current law” baseline, you effectively write those policies into current law. And you’ve done it in a clever way under the guise of fiscal responsibility in a piece of legislation that at least seems to be only about some rather innocent and inconsequential yet well-intended budget rules.