The Republicans’ capture of the Senate will allow them to push through an arcane change to the budget process that they hope will tip the politics of taxes in their favor and maybe even clear the way for a comprehensive overhaul of the U.S. tax code.
With control of both chambers, the GOP, led by policy dean Rep. Paul Ryan, is primed to mandate that Congress’ official budget scorekeepers consider the economic growth generated by tax cuts in their official analyses. This “dynamic analysis,” as it is known among budget experts, could drastically reduce the budgetary cost of lowering tax rates.
Because chopping tax rates is a top GOP priority, dynamic scoring has long been the preferred accounting method favored by Republicans, who say that the static analysis now used by Congress’ official budget experts unfairly skews tax debates in favor of higher rates.
The move is viewed with deep skepticism by Democrats, who see dynamic scoring as nothing more than a Republican ploy to excuse what they want to do anyway, namely reduce taxes for high earners and corporations, without acknowledging fiscal irresponsibility.
The debate over dynamic scoring hinges on the technical details of the budget process, but it has significant implications for the size of the federal government, and accordingly it has been raging among partisans since Ronald Reagan made the GOP the party of tax cuts.
Ryan sets the scene
Ryan outlined his plans for dynamic scoring in September, in off-the-cuff remarks during a question-and-answer session at the Financial Services Roundtable in Washington.
“What we want to do is change our measurement so that we can use — people say it’s dynamic scoring. I really prefer to call it reality-based scoring,” the 44-year-old Wisconsinite said.
His staffers were already working on the changes, Ryan said, but he added that “without getting into details, we have to have the Senate to be able to do that.”
After the midterm elections, Republicans control 53 seats and are likely to end up with 54 when Louisiana’s runoff is over.
The election’s results mean that Ryan is set to become chairman of the House Ways and Means Committee; Republican Sen. Orrin Hatch of Utah will be his counterpart on the Senate Finance Committee. Together they will be able to control the Joint Committee on Taxation staff, which provides the official numbers for tax legislation for Congress, and the Congressional Budget Office, which produces Congress’ official budgetary and economic projections. Rather than independent agencies, both scorekeepers are part of Congress and subject to its rules.
For Ryan, changing the rules to account for the supply-side effects of tax changes is common sense.
“This notion that a person’s behavior does not change, incentives don’t matter per tax changes — we know that that’s not true. And more importantly, econometrics has evolved to a place where with conservative econometric modeling we can get much much more closer to the truth and reality based upon experience,” Ryan said.
Moving to dynamic scoring isn’t just about accuracy, though. It’s about politics.
Ryan’s long-stated goal is to develop and pass a comprehensive overhaul of the country’s tax code, which has not had a significant reform since 1986, the same way he pushed through the House sweeping reforms to the country’s entitlement programs and spending to reduce the debt as chairman of the House Budget Committee. Those budget plans eventually became the de facto platform of the Republican Party.
But the struggles of the outgoing Ways and Means chairman, Dave Camp of Michigan, illustrate the difficulty of producing tax reform that would lower rates and broaden the tax base by ending tax credits, deductions and loopholes.
Camp spent years working with his Senate Democratic counterpart, Max Baucus of Montana, to build the support necessary for comprehensive tax reform, which inevitably would rearrange the tax liabilities of nearly every household and business in the country.
After Baucus was dispatched by President Obama to China to serve as U.S. ambassador, Camp, himself about to announce his retirement, rolled out a tax-reform discussion draft on his own in February.
Camp’s plan would have achieved the crucial goal of lowering rates: The U.S. statutory corporate tax rate, now highest among industrialized nations at 35 percent, would be cut to 25 percent. The top individual income tax rate would be rolled back from 39.6 percent to the George W. Bush-era level of 35 percent.
It also was revenue neutral, by the Joint Committee on Taxation’s estimates. By broadening the tax base, it wouldn’t have sacrificed any revenue.
But it would have accomplished those goals at too high a political cost. Because the plan eliminated preferences for almost every industry and group of individuals, it went nowhere. Camp’s own party shied away from it, with House Speaker John Boehner responding “blah, blah, blah” to a reporter’s question of whether it would be brought to the House floor for a vote.
Camp’s problem, Ryan suggested, was that “he had to put the handcuffs of static revenue scoring on his wrists.”
If, instead, Camp could have incorporated added economic growth into the budget score, he wouldn’t have had to expand the tax base so much. That, in turn, would have meant creating fewer losers from the overhaul and making it more palatable.
“If we can do that,” Ryan said of dynamic analysis, “we dramatically improve the tools we use to write tax legislation so that we can make sure we’re not leaving growth on the table.”
Making the change
Instituting dynamic scoring as the norm would be a two-step maneuver for Republicans that congressional Democrats and President Obama would be unable to stop.
The JCT already publishes some dynamic analyses to supplement its official, conventional scoring. For the Camp tax draft, it published a range of dynamic scores that included enough positive effects to generate an additional $50 billion to $700 billion in revenue over 10 years, depending on which assumptions were used in the model, such as the Federal Reserve’s monetary policy and the strength of the underlying economy.
The first step would be the GOP telling the JCT and the CBO to make the supplemental score the official score for budget and spending and tax measures.
“We’re now at a point where we can move past just having supplemental and having definitive scores,” said a House Republican aide with knowledge of the process. Control of the JCT switches from House to Senate each year, so the Ways and Means Committee would call the shots in 2015.
Democrats would have no recourse to stop the change. “It’s a weird thing that at the end of the day how JCT and CBO go about producing estimates isn’t prescribed anywhere,” said the GOP aide, adding that “as a practical matter what we probably want to do is make a change to House rules” at the start of the 114th Congress in January.
The second step, and this might not even be required, would be the GOP changing the directors of the JCT and the CBO to ensure that they were favorably disposed to running dynamic analyses.
“They would have to make sure that they have staff directors in place at JCT and CBO who agree with their philosophy,” said a Democratic aide.
The offices of the Republican members of Congress who would control the relevant committees declined to comment on whether they would change the directors. The current JCT chief of staff, Thomas Barthold, is perceived as opposed to dynamic scoring, but some observers speculated that Republicans might try to keep him in place to implement the rules they established to lend additional credibility to JCT estimates.
The CBO director’s views are less relevant, since the office doesn’t provide estimates for tax legislation (its reports on budgets and economic projections would be relevant, however). Director Douglas Elmendorf’s term expires in January, and he hasn’t said whether he would accept another four-year term.
Installing new GOP-chosen directors wouldn’t politicize the agencies, the GOP House aide said. “These appointment have been made … always by one party or the other; it’s just the reality of the situation,” he said, but CBO remains the “gold-standard third party” scorekeeper all the same.
The beginnings: A curve on a napkin
In other words, the GOP could unilaterally change the rules of the game.
It’s an idea that has been circulating among Republicans since 1974, when, according to legend, supply-side economist Art Laffer, in a meeting with deputy White House chief of staff Dick Cheney and Wall Street Journal associate editor Jude Wanniski, drew a curve on a napkin that showed that a cut in income taxes could lead to higher revenues through faster economic growth.
The push for the budget process to incorporate the economic effects of tax reform has grown stronger since the 1986 legislation brokered by President Reagan and Democratic House Speaker Tip O’Neill. As that overhaul recedes into the past, the tax code has become more outmoded and riddled with loopholes.
Most prominently, the issue came to a head in 2003 with President Bush’s tax cuts. Then, Republicans pushed through significant income and other tax cuts without making up for the lost revenue elsewhere in the budget.
The CBO provided its first dynamic analysis in its estimation of Bush’s budget proposal. Then, Douglas Holtz-Eakin, the GOP-appointed CBO director, found that the proposed tax cuts would not come close to paying for themselves, to the disappointment of many on the Right.
Holtz-Eakin, now president of the American Action Forum, a right-leaning think tank, said he was asked about dynamic scoring before he was selected for the spot, and that it was big issue at the time.
“I think it’s a lot less of a big deal now,” he said, noting that the CBO has done dynamic analyses of the president’s budget for a decade. Since 2003, House rules have required the JCT to produce a dynamic supplemental analysis of tax bills.
CBO also performed a dynamic analysis of the Senate immigration bill last year, and it elicited little controversy, Holtz-Eakin observed.
“In the end it’s the Congresses … that has to decide how it’s going to do the business,” regardless of the official score, Holtz-Eakin said.
The CBO analysis of Ryan’s 2015 GOP budget proposal also took into account some revenue effects, a “fiscal dividend” of $175 billion that would have allowed the budget to balance in its 10th year.
“They’ve been providing these estimates for a while now, they’ve been getting better at it,” said a House GOP aide familiar with the process. “We’re now at a point where we can move past just having supplemental and having definitive scores.”
Democrats disagree
But Democrats will certainly push back against any changes to the scoring process, denouncing them as the latest installment in the GOP’s never-ending effort to cut taxes without paying for lost revenue.
“This is a debate we’ve had for years and years, and the idea that it’s going to end differently for Republicans this time is hard to believe,” said a Democratic House aide familiar with scoring conventions. “Basically it all comes down to them not wanting to make it truly deficit neutral by the scoring rules we have,” the aide said, adding that “it’s just basic trickle-down economics they’ve pushed for years.”
John Buckley, a former Democratic staff director of the JCT, laid out the case against using a number generated by dynamic scoring at a recent Bloomberg BNA event on tax reform.
“You have to understand what the basic purpose of federal budget rules are. … They’re cost accounting rules,” Buckley said. They are intended to attempt to measure the cost of federal actions, not “to measure the wisdom of those changes.”
He likened conventional scoring to accounting rules for corporations. Businesses have to account for research and development costs when balancing their budgets, and cannot count the added sales they expect will result from those investments.
Buckley added that dynamic analyses are “purely judgment calls.” With conventional estimates, one can judge their success against the JCT’s computer models, which include a model of the entire Internal Revenue Code and a sample of 350,000 anonymous individual tax returns and a similar amount of corporate tax returns.
With dynamic scoring, “you can’t go back and look at what you see on tax returns,” Buckley said. Instead, “you kind of have to ask the question what would have happened without the tax change in the economy,” a counterfactual scenario that “you just can’t know.”
Kenneth Kies, a Republican-nominated former JCT director, described the exercise of estimating the behavioral and economic effects of tax changes as “somewhere between pure mathematics and theology.”
Full steam ahead
But Ryan believes the JCT now has the statistical wherewithal to provide a dynamic score, which his staff acknowledges might be wrong but would be less wrong than a conventional score.
“We have evolving standards, academic best practices evolve, you acknowledged that with the immigration bill,” said Ryan Ellis, tax policy director at the anti-tax group Americans for Tax Reform. “This is not 1974, we don’t need to use the exact same methodologies of 1974.”
Ellis added that supporters of dynamic scoring wouldn’t rely on any heroic assumptions to make their math add up. “We’re not asking for magic hats here, we’re not asking for people to pull stuff out of their ass,” he said.
“Econometrics has come a long way since I was doing econometrics on SAS in the 1990s,” Ryan said in September, referring to a popular statistical software package. “We can do so much more in measuring the effects of tax legislation.”
One House GOP staffer waved off Democrats’ opposition to dynamic scoring as whining about normal politics. “There’s always going to be complaints from those who are in favor of higher taxes,” he said. “Anything that makes it hard for them to pursue their agenda is politicizing the process.”
Dynamic scoring might help facilitate Ryan’s efforts to reform the tax code while lowering rates and broadening the base without increasing the deficit — on paper.
But that doesn’t mean that the GOP will find it any easier to get its way.
“If this is done competently, it may be a lot of work for very little payoff,” said Bruce Bartlett, a former staff economist for Rep. Jack Kemp and former Treasury economist who is now a critic of the Republican Party. Any tax reform would require President Obama’s signature, Bartlett noted, which means the Treasury is going to be involved and will score things its own way.
Furthermore, outside groups such as the Tax Policy Center, a nonpartisan think tank, will be issuing scores. JCT’s rules “aren’t binding in a political sense,” Bartlett said. “Ultimately the political system will make sure that the ultimate numbers that guide the tax reform effort are honest, and not phony-baloney, made-up numbers.”
Most members of Congress do not expect tax reform to move while Obama is in the White House, fearing the political consequences of introducing a bill that would create millions of “losers” if it faced a veto. Ryan himself has said that that his ambitions for tax reform might have to wait until 2017, when he would hope to have a Republican in the White House.
Nevertheless, Republicans believe that moving to dynamic scoring in the meantime would help promote the GOP’s overarching message of greater economic growth and less government.
