Dynamic Scoring Bill Scheduled for a Vote in House Today
Update: The House passed the Pro-Growth Budgeting Act by a 224-182 vote. Also, CBO posted a letter to Chairman Paul Ryan examining the feasibility of conducting the analyses required by some of the proposed amendments to the Pro-Growth Budgeting Act.
The House of Representatives is scheduled today to consider legislation introduced by Congressman Tom Price (R-GA), H.R. 1874, The Pro-Growth Budgeting Act, which would require the CBO to prepare an analysis of the effect that major legislation would have on the U.S. economy. The macroeconomic-impact analysis would be supplemental information in addition to the official congressional cost estimate of the legislation. This legislation is very similar to an amendment by Senator Rob Portman that was adopted by the Senate during consideration of the budget resolution last year.
The issue of dynamic scoring has come up often recently, with Ways and Means Committee Chairman Camp (R-MI) providing a supplemental macro-dynamic analysis of his tax reform legislation and Budget Committee Chairman Paul Ryan (R-WI) including the budgetary effects of the “fiscal dividend” from macroeconomic effects of deficit reduction in his budget resolution.
Under current procedures, CBO's scores of legislation do not take into account macroeconomic responses, changes to variables like GDP, employment, or inflation. They do, however, account for microeconomic responses such as the timing of economic activity, the shifting of income between taxable and nontaxable categories, effects on supply and demand, and interactions with other taxes. Estimates of lower income tax rates, for example, would show an increased tax base as people shift more compensation from nontaxable benefits, such as employer provided health care and retirement plans, to taxable wages. Estimates of spending programs also take microeconomic effects into account. For example, while CBO already takes into account a tax rate increase's effect on how much income a person receives in taxable versus non-taxable form under conventional scoring rules, a macro-dynamic estimate would also take into account the rate increase's effect on variables like GDP or inflation.
The Pro-Growth Budgeting Act
The legislation being considered today would require CBO to provide a macro-dynamic analysis for all major revenue or spending legislation, except for appropriations bills, regarding the impact on real GDP, business investment, capital stock, employment, interest rates, and labor supply. This analysis would also include an estimate of the legislation’s potential fiscal impact, including any changes in tax revenues resulting from changes in GDP. This requirement would apply to legislation with a budgetary effect of at least 0.25% of GDP in any year in the ten year budget window. Importantly the macro-dynamic estimates would be provided as supplemental information rather than as a replacement for the traditional CBO scoring and would not be used for determining whether legislation complies with budget allocations, PAYGO or other budget rules.
There are a number of arguments both for and against adopting or relying on macro-dynamic scoring, which we summarized in a report in 2012.
Arguments in favor include:
- It provides lawmakers with more information about legislation
- It reduces bias against pro-growth policies in scoring.
- It takes advantage of advances in economic modeling and new research about the effects of various policies
Arguments against it include:
- The score would be highly sensitive to the assumptions CBO makes or the model they use
- Requiring CBO to make certain assumptions about future policy changes could render an estimate meaningless
- The impracticality of constantly having to update CBO's baseline economic projections for new legislation
The Bottom Line
As we said in our letter commenting on Chairman Camp’s tax reform legislation, we believe legislation should be designed to add up without the effects of economic growth. At the same time, we believe that legislation promoting the growth should be pursued to the greatest extent possible, and policymakers should have as much information about the potential economic impact of legislation as possible.
Dynamic scoring can offer valuable information about growth effects that conventional estimates do not provide, and the analysis required by H.R. 1874 would provide important information to help lawmakers and the public evaluating the merits of legislation. However, there are significant challenges to incorporating macro-dynamic estimates into the official cost estimate for legislation. For one, dynamic estimates of legislation are subject to considerable uncertainty. Dynamic scoring is extremely sensitive to the assumptions used and there is no consensus on what some of those assumptions should be. In addition, dynamic estimates often require making assumptions about future legislative actions and monetary policy – a practice which is understandably counter to current scoring conventions.
Given the uncertainty in dynamic estimates and the magnitude of the fiscal challenges we face, the responsible course of action would be to rely on conventional scoring of legislation and treat the potential dynamic effects of legislation as a “bonus” to help further reduce the deficit and put the debt on a sustainable path. Relying on projected revenues from dynamic effects to meet fiscal goals creates an undue risk that the deficit will exceed projections if the hoped for dynamic effects don’t materialize as projected.
Regardless of what is and isn’t measured, we would encourage Congress and the President to pursue policies which both promote economic growth and put the debt on a clear downward path.