Dynamic Scoring of Tax Bills: How Big a Deal?

As he moves from chairman of the House Budget Committee to the Ways and Mean Committee, Rep. Paul Ryan is pushing to change the rules for pricing tax legislationThe change would make it easier for him to pursue a sweeping tax-reform bill, but it won’t do nearly as much as proponents or critics have said.

The issue is whether cost estimates of proposed legislation by the Congressional Budget Office and Congress’s Joint Committee on Taxation should incorporate a bill’s macro-economic impact, a practice known as dynamic scoring. Today, CBO and JCT estimate changes to spending or revenues but ignore the impact the legislation would have on the size of the overall economy and feedback those economic changes would have on revenues and spending (though an exception was made for the 2013 immigration-reform bill).

Republicans have never liked this: Tax cuts can make the economy grow faster, they argue, and would cost less than traditional budget estimates.

Mr. Ryan’s rule would require the JCT (which handles tax bills) and CBO (which does spending) to incorporate “to the extent practicable” the effects on revenues and spending of changes in the economy that would result from passage of legislation. Estimates should also include a “qualitative assessment” of macroeconomic effects 20 years into the future.

Some liberals and deficit fighters say this would lead to budgetary mischief, encouraging tax cuts that would end up widening the budget deficit. Supply-siders and tax cutters say it would end the counter-productive approach that discourages Congress from adopting measures that would help the economy grow.

How big a macroeconomic kick would be found? We actually have some idea. Prodded by the House, the JCT has been issuing such estimates for years alongside its official scores; CBO has done so occasionally. The new rule would require these macro effects be folded into the official score, adding credibility because the numbers would be provided by the two nonpartisan agencies, not by the more partisan Budget Committee or Ways and Means staff.

A recent test case is the tax reform bill proposed by outgoing Ways and Means Chairman Dave Camp (R., Mich.). The official score said that the Camp plan would raise roughly the same amount of revenues as the existing tax system, or about $40 trillion over the next decade. Using two different economic models to incorporate macro-economic effects, theJCT estimated that the Camp plan would do better than break even: It  would increase gross domestic product 0.1% to 1.6% over the next decade, adding $50 billion (0.1%) to $700 billion (1.8%) to federal revenues over the decade. Some outside analysts argued that even those numbers–which aren’t very big–weretoo high.

In practice,  incorporating macro-economic effects into the official estimate would have allowed Mr. Camp to cut tax rates a bit more and still proclaim his bill revenue-neutral. Mr. Ryan probably has just such a maneuver in mind.

Mr. Ryan’s  proposed rule was written narrowly, partly in response to caution from JCT and CBO staff.  It would apply only to major pieces of legislation that would change spending, revenues or deficits by at least 0.25% of GDP in a year ($43 billion in 2014). This threshold would have captured only three House bills in 2014, though the chair of the House Budget or Ways and Means Committee could designate any bill as “major.” The Ryan rule is also written so CBO won’t routinely gauge the macro benefits of major public investment spending, such as pre-K or infrastructure, which generally are thought to boost growth. That said, the new approach presumably would have applied to the Affordable Care Act and probably would have made it look more costly.

Most bills that Congress considers don’t  have an impact on the overall economy that’s big enough to measure, including some popular tax breaks that don’t live up to the boasts of their backers.

When Congress considers legislation big enough to influence the pace of economic growth, however, it makes sense to take that into account. Perhaps doing so would nudge lawmakers toward better tax policy.  As William Gale and Andrew Samwick wrote this fall: “Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy.”

Doing these estimates is more complicated because there are so many moving parts in the U.S. economy and because Congress tends to tweak tax bills up to the last minute. The “to the extent practicable”  language in the proposed rule gives JCT and CBO some wiggle room.

The surprise may come when JCT and CBO estimates of the macro-economic impact of legislation get a lot more attention because of the rule change–and the effects don’t turn out to be very big.