The House's New Rule on Dynamic Scoring
This week, the House approved a rule change related to dynamic scoring. Specifically, the rule would require the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to "incorporate the macroeconomic effects of 'major legislation' into the official cost estimates "to the extent practicable" used for enforcing the budget resolution and the other rules of the House." The rule also asks for a qualitative assessment of the impact of major legislation on the long-term budget and macroeconomic outlook.
Major legislation is defined as legislation that causes a gross budgetary effect of at least 0.25 percent of GDP in a given year. By this definition, it wouldn’t apply to appropriations bills or legislation subject to appropriations, including highway spending. Instead, it would apply to legislation affecting mandatory spending and revenue, so legislation repealing all or major parts of the Affordable Care Act, for example, would be subject to the requirement for dynamic scores. The rule is not clear whether it applies to off-budget effects such as changes in Social Security taxes and benefits.
If a law doesn’t have a large enough effect to qualify, it can still be designated as “major” by the Chairman of the Budget Committee (or for revenue legislation, by the House member serving as Chair or Vice-Chair of the Joint Committee on Taxation).
Legislation which goes directly to the House floor without committee consideration and therefore not subject to the requirement for a formal cost estimate would not be subject to the rule (though the Chair of the Budget Committee presumably could request a dynamic estimate). In addition, because incorporating macroeconomic effects into estimates is a time-consuming process, it may not be practical for CBO and JCT to produce dynamic scores for legislation considered on short notice.
The dynamic scores would be used for enforcing budget rules in the House of Representatives. Under existing budget rules, the Chairman of the Budget Committee has final authority to provide estimates for determining compliance with budget rules, so the Chairman presumably would still have the ability to use an estimate which does not incorporate dynamic effects. Similarly, the Senate Parliamentarian would likely allow the Chairman of the Senate Budget Committee to use dynamic estimates for purposes of enforcing budget rules in the Senate under current rules.
The rule also replaces the prior rule in the House requiring supplemental analysis of macroeconomic impacts for tax bills. The old rule resulted in a range of potential macroeconomic estimates under different models and assumptions. While the new rule continues the practice of giving JCT responsibility for estimating tax bills and CBO responsibility for all other legislation, CBO and JCT would likely need to work together to develop a common approach to dynamic analysis and to make sure they are using the same baseline economic forecast to ensure consistency.
In the last Congress, the rule on supplementary dynamic estimates of revenue bills resulted in JCT estimates of five bills, though only one would have had a significant revenue impact. JCT also would have likely estimated the effects of the one-year tax extenders bill (H.R. 5771) and the House's jobs bill (H.R. 4) if they had more time before floor consideration.
|JCT's Macro-dynamic Estimates of Legislation from the 113th Congress|
|Legislation||Economic Impact (GDP)
||Additional Revenue Impact||Would Be Considered Under New Rule?
|Bonus Depreciation (HR 4718)||0.2%||Negligible||Yes|
|American Research and Competitiveness Act (HR 4438)||Negligible||Negligible||No|
|America's Small Business Tax Relief Act (HR 4457)||Negligible||Negligible||No|
|Save American Workers Act (HR 2575)||Negligible||Negligible||No|
|The Tax Reform Act of 2014 (HR 1)||0.1% to 1.6%||$50B to $700B||Yes|
As we explained in our paper on dynamic scoring, conventional scoring methods incorporate a wide variety of behavioral responses and thus are really "micro-dynamic" in nature. The House rule expands the effects examined to include macroeconomic feedback effects and thus make the scoring “macro-dynamic,” by estimating the effect that legislation will have on economic growth and employment.
Policymakers should have access to as much information as possible. Knowing the potential economic effects of legislation would provide policymakers with useful information to evaluate legislation and pursue policies which encourage economic growth. However, incorporating dynamic analysis into official budgetary scores raises a variety of challenges that will need to be addressed and could result in Congress enacting legislation that increases the deficit.
One major challenge that will need to be addressed in implementation of dynamic scoring is how a dynamic score will be calculated, including which models and assumptions to use. In the past, CBO and JCT have presented a range of potential outcomes, but dynamic scoring will require CBO and JCT to produce a single point estimate incorporating dynamic effects. Given the significant amount of uncertainty involved in dynamic analysis and the wide range of potential outcomes, it will be important that CBO and JCT take a careful approach in deciding how to produce dynamic scores without political pressure and be very cautious and transparent about the assumptions made in developing dynamic estimates, particularly assumptions regarding future policy actions.
Dynamic scoring is an important topic that will continue to receive attention in the 114th Congress and beyond. In fact, late last year we held an event on Capitol Hill with Sen. Rob Portman (R-OH), Rep. Chris Van Hollen (D-MD), and a panel of experts to discuss dynamic scoring and analysis from both a political and technical perspective.
To help better understand the non-technical issues related to dynamic scoring, we wrote a paper in 2012, Understanding Dynamic Scoring, which described current scoring methods that the CBO and JCT use, provided a history of dynamic scoring and estimating, and presented arguments both in favor and against the use of dynamic scoring.
Given the magnitude of uncertainty in dynamic estimates, policymakers should seek to ensure legislation is at least deficit-neutral under both conventional and newer dynamic scoring methods and consider any dynamic gains a "bonus" to help reduce unsustainable debt. In addition, policymakers must use the best estimates of impartial scoring agencies rather than cherry-picking the most optimistic results.