Dynamic Scoring

Dynamic Scoring Blogs

CBO Estimates Economic Effects of the President's Final Budget

In addition to producing its own estimate of the budgetary effects of the President's budget, CBO typically estimates the economic effects of the budget as well, in essence producing a dynamic score of the President's proposals. This year's Macroeconomic Analysis of the President's Budget draws a similar conclusion as the previous few: the labor supply effect of immigration reform increases the size of the economy somewhat while other factors on net slightly reduce it, leaving higher Gross National Product (GNP) overall but lower GNP per capita. Overall, the budget would increase real GNP per 1 percent on average over the next ten years (and by about 2.5 percent in the last year), but GNP per capita would be about 0.7 percent lower over the same time period. Dynamic effects not already accounted for would increase deficits by $32 billion over ten years.

It's worth noting that CBO's previous estimate of the President's budget already incorporated the effect of immigration reform on labor supply (from increased population) into its numbers, finding $101 billion of deficit reduction over ten years as a result. The economic analysis incorporates more indirect effects of the increased labor supply, specifically that the larger labor force would increase the return to capital, which in turn would increase productivity by 0.7 percent in 2026. The increased return to capital would, however, also raise interest rates on federal debt.

Other factors would hurt economic growth. In particular, the budget's net tax increases, which are larger than in years past, would raise marginal tax rates by around 3 percent on labor income and around 3.5 percent on capital income when the increases are fully phased in. CBO also finds that the budget's investments would reduce economic growth in the short term, particularly since the increased higher education spending would encourage people to drop out of the labor force and attend school. Most of the investments' effects on productivity would occur beyond the ten-year window.

Congressional Double-Take on Revenue

The Congressional budget resolution proposes to bring the budget into balance by reducing spending $5.3 trillion over the next decade while keeping revenue at current law levels (i.e., no tax cuts). But at the same time, it calls for roughly $2 trillion worth of tax cuts from repealing taxes in the Affordable Care Act (ACA) and extending various expired tax breaks. Some have suggested (subscription required) this $2 trillion difference could be bridged with dynamic growth effects that must now be scored by the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO). However, we find that even under very generous assumptions, the use of dynamic scoring could only recover about one-third of the lost revenue.

Source
Direct Revenue Impact Dynamic Impact (Generous) Max Percent of Revenue Recovered
Repeal ACA Tax & Coverage Provisions ~$1.3 trillion ~$0.3 trillion
~25%
Revive Extenders and Enact Tax Reform ~$0.7 trillion ~$0.4 trillion ~55%
Total Revenue Lost ~$2 trillion ~$0.7 trillion ~35%

Source: CRFB calculations based on Senate Budget Committee and Joint Committee on Taxation documents.

The $2 trillion revenue gap in the budget resolutions comes from two sources. First, the budget calls for the repeal of the tax increases enacted in the Affordable Care Act ("Obamacare") to help pay for the expansion of health insurance coverage. We estimate this would cost roughly $1.3 trillion over the next ten years, based on 2012 estimates. The budget resolution also calls for budget process reforms that would allow temporary or expired tax breaks to be continued without offsets, a move that could reduce revenue somewhere in the range of $700 billion, depending on the exact details.

At the same time, the budget calls for repealing the coverage provisions of the Affordable Care Act and enacting tax reform, two changes which could produce additional economic growth and therefore higher revenue collection. Yet this additional revenue – at least as scored by JCT and CBO – will almost certainly fall short of the $2 trillion in revenue losses.

MY VIEW: Rudolph Penner

Rudolph Penner was the director of the Congressional Budget Office from 1983 to 1987, and he is an Institute Fellow at the Urban Institute and a member of the Committee for a Responsible Federal Budget. He wrote a guest post that appeared in the Tax Policy Center blog. It is reposted below.

The Other Fiscal Implications of the New House Rules

The recently adopted House rules for the 114th Congress are getting attention in the budget world mostly for their requirement that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) take into account macroeconomic effects when scoring budget legislation, a process known as dynamic scoring. But that requirement isn't the only new rule with fiscal implications.

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). 

Event Recap: A Discussion on Dynamic Scoring

The Committee for a Responsible Federal Budget hosted a policy discussion this past Tuesday on dynamic scoring. CRFB President Maya MacGuineas opened the event by noting that dynamic scoring is an issue that will receive considerable attention over the coming months and could have an impact on fiscal policy decisions. Speakers offered their perspectives on the merits and challenges of using dynamic estimates in the legislative and budget process. Senator Rob Portman (R-OH) and Representative Chris Van Hollen (D-MD) offered remarks on their opinions and perspectives on dynamic scoring. A panel of dynamic scoring experts followed, moderated by CRFB President Maya MacGuineas. See CRFB's paper on dynamic scoring for a detailed discussion or our updated 2-page summary.

Sen. Portman spoke in favor of CBO and JCT providing dynamic estimates of bills. He argued that, at the very least, estimates should be done to inform staff and lawmakers how bills will affect the economy. He spoke about the bipartisan support for his bill, which passed by a vote of 51-48 with six Democrats voting in favor of it, when he offered it as an amendment during consideration of the FY 2014 Senate budget resolution. Portman acknowledged that there is a legitimate debate over which models and assumptions should be used, but he encouraged detractors to support presenting dynamic estimates as supplemental information, as his amendment would, not for official purposes. It would be apparent if dynamic estimates are significantly different than current methods, and policymakers would be able to look back to see which estimates were more accurate.

Congressman Van Hollen gave the opposing viewpoint. Van Hollen argued that dynamic scoring inherently demands that CBO or JCT adopt a specific ideology when estimating a bill. He mentioned estimates from the Heritage Foundation predicting revenue increases from the 2001/2003 tax cuts and claims that the 1993 tax increases would harm the economy. He also said that many models for dynamic analysis make assumptions about future actions to offset the cost of tax cuts, effectively giving legislation credit for policies not in the bill. He drew a distinction between the CBO estimate of immigration reform legislation, which took into account the direct impact of additional workers in the labor force, and dynamic estimates which incorporate the estimated indirect economic effects of legislation. Van Hollen reminded audience members that CBO and JCT already use microdynamic analysis in scoring bills—they weigh behavioral responses from individuals and businesses and the factors of supply and demand. He also acknowledged that dynamic analysis is useful as supplemental information, as long as policymakers understand the underlying assumptions.

Senate Switch Could Boost Chances for Dynamic Scoring

If Republicans win a majority in the U.S. Senate this November, they may push to have the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) use dynamic estimates in official scoring of legislation, according to press reports. Dynamic estimates, which include the economic effects of proposed legislation, would provide useful information to lawmakers. Trying to determine these effects, however, is an uncertain science.

Analysis of the potential dynamic effects of legislation could provide policymakers with useful information in evaluating legislation. However, incorporating dynamic analysis into official budgetary scores of legislation could be problematic for a variety of reasons and could lead to Congress enacting legislation that increases the deficit. While such analysis could be beneficial to understanding the full implications of legislation, it should only be provided as supplementary information and not part of the official score.

In brief, dynamic estimates incorporate the effect that legislation would have on macroeconomic variables such as Gross Domestic Product, employment, and inflation. Current scoring conventions only include microeconomic changes. To learn more about dynamic scoring, read our report: Understanding Dynamic Scoring.

House Democrats Release Alternative FY 2015 Budget

This blog has corrected the amount of Medicare savings in the budget. It previously said $50 billion, but that included the cost of repealing the Medicare sequester.

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.

Explaining Ryan's "Fiscal Dividend"

A new feature of House Budget Committee Chairman Paul Ryan's (R-WI) FY 2015 budget is assumption of a "fiscal dividend," which reflects the economic impact of the deficit reduction in the budget. Policy changes have both direct and indirect budgetary impacts. Directly, increases in revenue or cuts in spending lower the deficit. Indirectly, deficit reduction can produce economic effects which, in turn, contribute to additional deficit reduction.

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