January 17, 2007 Taxation Committee Real Estate Finance Committee Federal Issues Committee Housing Opportunity Committee Equal Opportunityand Cultural Diversity CommitteeThe following is for study only and has NOT been approved by the Board of Directors.
What is Pay-As-You-Go (PAYGO)? The basic idea behind PAYGO is that any new spending or tax changes must not add to the federal deficit and therefore must be either “budget neutral” or create an increase in revenue. This means that any new spending or tax cuts must be offset either from existing funds orthrough revenue enhancements.
History of PAYGO The inception of PAYGO started with the bipartisan 1990 budget agreement between President George H.W. Bush and the Democratic controlled Congress. With a soaring deficit, both parties were looking for ways to eliminate the deficit while sharing the burden across the board. PAYGO was seen as a compromise for both parties as entitlements would be kept in check as wouldany tax cuts. PAYGO became the bipartisan and practical way to get a handle on the increasing deficits that the U.S. was seeing in the early 1990’s.
PAYGO was seen by both partiesas successful and partly responsible for the fiscal spending that turned the deficits of the early 1990’s into the surpluses of the late 1990’s. In 1993, when President Clinton took office, PAGYO was extended; as it was in 1997 for President Clinton’s 2nd term. Throughout most of this period, the control of the executive and legislative branches was split between parties. During the first Bush Administration the Congresswas controlled by the Democrats. Then during most of the Clinton Administration the Republicans were able to take control of the Congress, coming into power with their Contract with America. PAYGO was used by both parties to make sure that tax cuts and spending were not abused by either party.
However, in 2000 President George W. Bush won and both the Presidency and Congress were now in control by the Republican Party.With both branches of government under a single party rule, President Bush and the Republican controlled Congress allowed PAYGO to expire in 2002. From 2002-2006 the concept of PAYGO was brought up by the Democrats as a way to controlspending and tax cuts that brought the nation back into deficit spending. Nonetheless, the Republicans were only willing to discuss following PAYGO rules when it came to new spending, not when it came to paying for revenue lost from taxcuts. With the Democrats now back in control of Congress, they have promised a return to PAYGO for all budget issues.
Description of how PAYGO works The system behind PAYGO is meant to be one that issimple to apply and enforce. There are three major areas to consider when looking at PAYGO: How do you pay for tax cuts, how do you pay for entitlement increases, and how do you enforce the PAYGO rules of “budget neutrality”?
Tax Cuts Any tax cut or tax credit, which decreases revenue, must be offset or “paid for” in the current year as well as for the projected costs for the next five years. Thecost of the tax cuts or extensions can be offset by either a tax increase or elimination of a tax break in another area (in the same or separate bills) or be a reduction in entitlement programs (either in the same or separate bills).
Entitlement Increases The rules for entitlement increases are very similar to the rules for tax cuts or extensions. Any entitlement increase, which increases costs, must be offset or “paid for” inthe current year as well as for the projected costs for the next five years. The cost of the entitlement increase can be offset by either a tax increase (in the same or separate bills) or be a reduction in entitlement spending in another area (either in the same or separate bills).
Enforcement of PAYGO Any bill that either raises or decreases revenue must be “scored” before there can be a vote on the bill. “Scoring” a bill means that the Congressional Budget Office (CBO) projects what the bills revenue decreases or increases will be over a specified period of time (for PAYGO it is the current year and the next five years). Additional offices look at these projects as well, including the Executive’s Office of Management and Budget (OMB). If at the end of any session of Congress OMB determines that the costs of tax cuts or entitlement increases enacted have not been fully offset then the President is required to “sequester” specified entitlements to make up for the gap in the offset. “Sequester” involves an across-the-board cut in entitlement programs, except for those programs which are exempted. Among those programs NOT exempt are: Medicare, farm price supports, veteran’s education benefits, and social service grants to states.
PAYGO can be removed from a piece of legislation if there is a supermajority vote (60 votes) in the Senate. By passing this supermajority vote first, any expenses passed by this legislation would not have to be offset under the PAYGO rules.
Outlooks and Problems with PAYGO The use of the PAYGO system makes it harder for major reforms to be made to current law. While it may be easy to find the funding for tax extenders which cost $45 billion over 5-years; you run into larger problems when trying to reform complex follies, such as the Alternative Minimum Tax (AMT). The elimination of the AMT is projected to be a loss of revenue of $1.2 trillion over ten-years. Under PAYGO this means that there would have to be either elimination of spending, tax breaks, an increase in taxes, or a combination of those alternatives before AMT can be eliminated. This starts the complex problem of deciding whohas to “pay” for the elimination of the AMT. Do all taxpayers need to pay more or do certain groups on special government programs need to lose a portion of their benefits in order to fix this dilemma? Under PAYGO rules, the fix to a complex problem can often lead to the creation of other complex problems as well.Some of the major programs that the Democrats are looking to reform include:
- Medicare Prescription Drug Program -Elimination of the Alternative Minimum Tax - Reduction in rates for student loans and an increase in Pell Grants - Full funding of No Child Left Behind - Universal Healthcare - Stem cell research - Increased funding for domestic security
The changes desired to all of these programs means an increase in either the cost of the program or spending levels. In order to make these added costs “budget neutral”; Congress must find increased revenue in other areas or reduce current programs. This will be a complicated challenge for the Democrats. They will need to find ways to eliminate the pet projects that other Congressmen find important for their constituencies and they will have to offer either the elimination of certain tax breaks and/or the increase of taxes for at least some levels of income. Any change made in the House must still pass the Senate, where cloture takes 60 votes and the Democrats only hold 51 seats. Additionally, any bill must still be signed by President Bush, who has taken a firm stance against the elimination of tax breaks and increases in taxes