Committee for a Responsible Federal Budget

How PAYGO Rules Could Affect Tax Reform

Oct 18, 2017 | Budget Process

Most of the discussion about rules that could prevent tax reform from increasing the deficit has focused on the Byrd Rule. Congress could get around the rule, which prohibits increasing the deficit beyond the budget window, by having some of the tax cuts expire at the end of the budget window. A budgetary constraint that hasn't received as much attention are the pay-as-you-go (PAYGO) rules against legislation increasing the deficit within the budget window.

There are two basic rules that apply to legislation increasing the deficit over the ten-year budget window:

  • Senate PAYGO Rule The Senate PAYGO rule creates a 60-vote point of order against any legislation that would increase the deficit over five or ten years. Under normal consideration, this provision would likely be the death knell of any tax reform reconciliation bill that increased deficits.
  • Statutory PAYGO – Statutory PAYGO provides for an across-the-board sequester of non-exempt mandatory spending programs if lawmakers enact net deficit-increasing legislation over the course of the year. Whenever lawmakers enact legislation affecting mandatory spending or revenues, the Office of Management and Budget (OMB) records the budgetary effect of the law. OMB then divides the ten-year effect and puts that amount on the PAYGO scorecard for each of the ten years. If Congress adjourns for the year with deficit increases still on the PAYGO scorecard, OMB issues an offsetting sequester of non-exempt mandatory programs.

The Consequences of Violating Statutory PAYGO

If Congress were to pass $1.5 trillion in unpaid-for tax cuts, statutory PAYGO would trigger a sequester unless waived (described in the circumvention section below). Such a sequester would have consequences.

Social Security and means-tested entitlements are exempt from the statutory PAYGO sequester. Medicare is subject to the sequester but limited to a reduction of 4 percent (on top of the 2 percent reduction already in effect because of the sequester under the Budget Control Act). Other mandatory programs subject to a full sequester include agriculture subsidies, student loans, the Social Services Block Grant, and mandatory spending in the Affordable Care Act other than exchange subsidies and Medicaid expansion.

If lawmakers enacted a $1.5 trillion tax cut this year (and all other legislation had no net effect), OMB would issue a sequester of $150 billion on mandatory spending for 2018. That same process would be repeated for each of the next nine years. Because the total base for the sequester is $114 billion in 2018, a deficit increase of $1.14 trillion or more would require the full 4 percent reduction in Medicare plus the elimination of all non-exempt programs; in this case, a $1.5 trillion deficit increase would still leave a $36 billion increase in the 2018 deficit even if it were offset by statutory PAYGO spending cuts. It would require elimination of all these programs until 2027, at which point they would face 95 percent funding cuts.

Below is an illustrative table showing how the sequester might affect non-exempt mandatory programs in 2018 and 2027:

Program 2018 Sequester Cut (%) 2027 Sequester Cut (%)
Medicare $28 billion (capped at 4%) $56 billion (capped at 4%)
Agricultural Subsidies and Supports $14 billion (100%) $11 billion (96%)
Affordable Care Act's Risk Adjustment Program $5 billion (100%) $9 billion (96%)
Operations and Support for Customs and Border Patrol $2 billion (100%) $3 billion (96%)
Student Loan Administration $2 billion (100%) $2 billion (96%)
All Other Programs $62 billion (100%*) $69 billion (96%*)
Total $114 billion (100%) $150 billion (96%)

*Some programs have limits to the percentage by which they can be cut; for most programs, cuts can be up to 100%. Source: calculations based on June 2017 CBO baseline.

Circumventing PAYGO

There are two ways Congress can get around the Senate PAYGO rule. The most straightforward way, which the Senate budget resolution would do, would be to include a provision in the budget resolution exempting specific legislation from the PAYGO rule. The budget resolution can pass with 51 votes, so including an exemption from Senate PAYGO rules would get around the 60-vote requirement. Senator Mark Warner (D-VA) has proposed an amendment to the budget to strike the exemption in the Senate budget resolution for reconciliation legislation, which if successful would require tax reform to adhere to PAYGO rules or else require 60 votes to override it.

The second way to get around the Senate rule would be to change how tax reform is scored. Congress would accomplish this by relying on dynamic scoring that would give tax reform credit for increased revenues from economic growth and a current policy baseline that assumes temporary tax breaks are extended. Using dynamic scoring would likely allow for a few hundred billion dollars of additional breathing room, while using the current policy baseline would mask another $460 billion of costs. Dynamic scoring would not be quite as gimmicky since it would still rely on the Joint Committee on Taxation's relatively reasonable assumptions for the dynamic score, but it would still make it easier for policymakers to satisfy PAYGO. Using a current policy baseline is clearly a gimmick that would lower the bar for revenue neutrality.

However, neither of these strategies would get around statutory PAYGO, which requires a current law baseline and cannot be changed or waived in a budget resolution. In recent years, Congress has often circumvented statutory PAYGO by including a provision in the legislation that excludes the costs of it from the PAYGO scorecard. This tactic would not work in a budget reconciliation bill because it would violate the Byrd Rule (because waiver itself does not produce a change in outlays or revenues). If tax reform increased deficits and no other action was taken to offset that cost, the PAYGO scorecard would reflect the deficit increase and put into motion a sequester at the end of the year.

The other way Congress could get around statutory PAYGO is by passing legislation before the end of the year stopping a sequester. This legislation would "wipe the PAYGO scorecard clean" to remove the deficit increase so that no sequester is triggered. Doing this would require 60 votes in the Senate, but it is quite possible that the bill would clear that hurdle if Democrats supported the bill to prevent potentially draconian sequester cuts or if it were attached to must-pass legislation. That is what Congress did in the late 1990s and early 2000s when it passed legislation increasing the deficit, most notably the Bush tax cuts in 2001.

A History of Bipartisan Support for PAYGO

Despite Congress circumventing PAYGO over the past few years, both Senate PAYGO and statutory PAYGO have received bipartisan support since their inceptions. Senate PAYGO was enacted by a Democratic Congress in the Fiscal Year (FY) 1994 budget resolution; it was then renewed by a Republican Congress in 1995, extending Senate PAYGO through 2002. A weakened version of Senate PAYGO existed until 2007, when a Democratic Congress revived it. In 2015, a Republican Congress permanently enacted Senate PAYGO by eliminating its expiration.

Statutory PAYGO has a similar bipartisan history. Originally passed as a result of the 1990 bipartisan budget agreement, statutory PAYGO then received support from the 1993 Clinton budget agreement and was extended under the 1997 balanced budget agreement. Though it was effectively eliminated in 2003, statutory PAYGO was revived by Congress in 2010 in its current form. The current version has no expiration date and affects all legislation today – though enforcement has been gamed, as mentioned above.

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In short, the Senate PAYGO rule is unlikely to be a barrier to deficit-increasing tax reform as long as the exemption stays in the budget resolution. However, getting around statutory PAYGO will require legislation wiping the scorecard clean, which is not a certain prospect. Even if PAYGO rules ultimately don't prevent a deficit increase, they will at least require lawmakers to explicitly vote to overrule budgetary constraints, bringing more accountability to Members of Congress who vote to increase deficits. In addition, the existing PAYGO rules could be strengthened to better guard against deficit-increasing legislation.

Note (10/24/2017): Since publication, we added the table showing what a sequester could call for.