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Consistent Budget Rules Require a Current-Policy Baseline

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Consistent Budget Rules Require a Current-Policy Baseline

September 6, 2017

A debate over esoteric budget rules will determine the fate of $450 billion in tax cuts as part of tax reform. At its heart is a simple question. If Congress passes a new law that simply renews longstanding policy, should its cost be treated as a new cost, or as part of the underlying federal budget? Republicans – backed by consistency and common sense – are asserting that renewing the underlying budget does not change the costs of the budget.

Let’s start from the beginning. When Congress enacts a new tax or spending policy, its cost is measured against the ten-year budget baseline – which is the default budget projection under existing tax and spending policies. The purpose is to protect the status-quo baseline while requiring that any new policies that raise costs be offset with savings elsewhere.

For example, Congress can renew the $12 billion in annual farm subsidies that are included in the baseline, but any expanded or new farm programs must be paid for elsewhere in the budget.

The key question – upon which $450 billion rests – is how the baseline should treat temporary policies that are renewed every few years. A “current-policy baseline” would already include the cost of renewing these policies (which means the renewals create no additional cost), while a “current-law baseline” would assume they expire and produce budget savings (which means the renewals create a new cost that must be offset).

The Congressional Budget Office (CBO) offers a contradictory approach. On the spending side, CBO applies a (mostly) current-policy baseline. It assumes that Congress will regularly renew most entitlement programs, as well as the $1.2 trillion in annually-appropriated discretionary spending (subject to discretionary spending caps). For Social Security and Medicare, the baseline assumes that full benefits will continue to be paid even after the trust funds finally become insolvent years down the road –rather than be cut as required by current law.

Yet on the tax side, CBO applies a (mostly) current-law baseline. It assumes that most expiring tax cuts will not be renewed, essentially raising taxes by $450 billion over the decade relative to today’s tax code.  These expiring tax cuts include bonus depreciation, the work opportunity tax credit, and certain energy incentives.

This inconsistency biases Washington in favor of higher spending and higher taxes. Congress can renew most expiring spending programs for “free” as part of the baseline, yet expiring tax cuts can be renewed only if Congress is willing to raise other taxes or cut spending (or provide a supermajority vote to bypass this requirement).

Congress should apply one consistent standard to expiring tax and spending policies – and the current-policy baseline makes the most sense.

After all, the purpose of the baseline is to project the future cost of maintaining today’s tax and spending policies. A baseline that assumes future tax increases or spending cuts is not a true baseline, especially when it assumes the elimination of long-renewed policies that are part of the permanent government fabric. On the spending side in particular, a pure current-law baseline would assume the elimination of all programs that require congressional renewals, including defense, transportation, education, international assistance, agriculture, housing, research, veterans, public health, and children’s health care programs. It would also assume eventual drastic cuts to Medicare and Social Security when their trust funds run dry. This was never the intention of the budget rules.

So why not simply make all expiring policies permanent? Because accountability requires that Congress review and re-vote on spending programs rather than keeping government on permanent auto-pilot. On the tax side, the current-policy baseline – and the idea that routine renewals cost “new” money” – incentivizes Congress to pass annual $45 billion extensions rather than one permanent extension that would be scored as “costing” a headline-grabbing $450 billion over the decade.

Congress eventually got fed up with the tax extenders, and in 2015 enacted legislation making most temporary tax policies permanent (while voting overwhelmingly to skip the offsets, as an acknowledgement that renewals are not “new” costs). However, Congress excluded some of the temporary policies from achieving permanence, despite no clear intention to let them die (although the largest remaining temporary policy, bonus depreciation, was scheduled for a multi-year phase-down). Under a current-policy baseline, these final remaining policies would also become part of the baseline.

While it would protect $450 billion in tax savings now, a current-policy baseline would actually impede future tax cuts. Lawmakers would no longer be able to mask the cost of permanent tax cuts through disingenuous “temporary” language – all future tax cuts would be scored as permanent and thus require permanent offsets.

Still, critics worry about the transition to a current-policy baseline. If these “temporary” tax policies become part of the baseline, then shouldn’t they have been scored for their full long-term cost – with full offsets required – when first created? Yes, they should have, and all future tax cuts should be scored for their long-term cost as well. Then again, much of the existing programs and policies that comprise the baseline were also initially created without offsets. This is one reason for the enormous budget deficit. And even if offsets had been originally required for the $450 billion ten-year cost, a congressional supermajority still would have waived the requirement, just as they currently do one year at a time.

Republican tax reformers are likely to classify these $450 billion of tax renewals into the baseline – ensuring that they do not count as “new tax cuts” that must be paid for. Critics will say this maneuver “cuts taxes and hikes the deficit.” More accurately, it cancels a tax increase that would have trimmed four percent of the ten-year deficit. Members of Congress are free to raise taxes if they wish, but they have no right to employ inconsistent budget rules that attempt to impose tax increases while leaving spending on autopilot.

Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl.

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