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The Statutory Pay-as-You-Go Act of 2009

Jul 24, 2009 | Budget Process

July 24 - This week the House passed statutory PAYGO legislation requiring spending and tax cuts to be offset in a deficit-neutral fashion. While this bill does take a major step toward fiscally responsible legislating, it also includes a number of exemptions that could prove to add trillions of dollars to the deficit in the upcoming decade.

These exemptions include income tax provisions from the 2001/2003 tax cuts, estate and gift taxes, the Alternative Minimum Tax (AMT), and Medicare payments for physician services.

The Committee for a Responsible Federal Budget (CRFB) has released an analysis, "The Statutory Pay-as-You-Go Act of 2009," which discusses both the necessity of implementing discretionary spending caps along with PAYGO rules, and warns that too many exemptions in the bill could ultimately add significantly to the deficit. The House PAYGO bill adds a statutory sequestration mechanism -- previously not in the House or Senate rules - that would mandate cuts in mandatory programs if the Office of Management and Budget (OMB) determines that Congress had not fully, by the end of their session, offset the budget year costs of new laws affecting mandatory spending. The cuts would generally manifest themselves as uniform percentage cuts to the baseline of mandatory programs, but many programs are exempted, including Social Security, veterans benefits, payments to retirement funds, Medicaid, Supplemental Nutrition Assistance Program, Temporary Assistance to needed families, etc. The CRFB analysis highlights the full list of programs that would be exempted from cuts.

The House bill additionally establishes a "PAYGO ledger," administered by the OMB, that would average and record net ten-year costs and savings from legislation subject to PAYGO. If the ledger sums to a net cost at the end of each calendar year, then a sequestration would be required. The four exemptions mentioned in the first paragraph would not be included in the PAYGO ledger. Also not included in the PAYGO ledger are programs which are converted from discretionary to mandatory, and vice-versa, as well as changes to off-budget programs such as Social Security and debt service effects, and emergency spending.

The analysis concludes with the following points:

  • Statutory PAYGO would be a positive step in dissuading new, non-offset tax cuts or mandatory spending programs.
  • The decision not to add new mandatory spending into the baseline is a wise one.
  • Unfortunately, too many policy provisions are exempt from PAYGO. According to CBO, making exceptions for the 2001/2003 tax cuts, AMT patches, and physician payments reforms "would allow the Congress to enact legislation that would increase deficits by an amount in the vicinity of $3 trillion over the 2010- 2019 period without triggering a sequestration." Although the House substitute would reduce the size of the exemptions, those exemptions still result in unaffordable costs.
  • Too many programs are excluded from sequestration. While some programs may be legally, technically, or politically difficult to sequester, the number of programs forced to "share the pain" should be as numerous as possible. If all programs are punished for the bad behavior of Congress, lawmakers will be more fearful of sequestration and more likely to remain responsible.