On Tuesday, the House will vote on whether the the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) will be required to use “dynamic scoring” when they quantify the impact of a potential bill. What sounds like a small technicality could have a huge impact on lawmaking and the country’s finances.
What is dynamic scoring?
When a bill is proposed, the non-partisan CBO often scores it, or offers its best estimate of how much it will cost and how it will impact the economy. In scoring tax legislation, the CBO and JCT look at a range of economic models that could predict the impact of any changes. But they assume that the size of the economy and workforce will stay fixed at their current levels.
Dynamic scoring would require that they include in their estimates any changes in the economy and the workforce resulting from tax legislation in the future. This would almost certainly mean including the assumption that tax cuts increase economic output, bringing in more government revenue in the long term that would help make up for the money lost to the cuts.
What’s the danger?
While it sounds helpful to consider how a bill would change the economy, it’s incredibly difficult to estimate what the economy will do in the future. Macroeconomic forecasts are very uncertain. This would mean that the CBO and JCT would have to rely on some big assumptions, which quickly become political in nature.
For example, last year the JCT estimated that Rep. Dave Camp’s (R-MI) tax bill could generate between $50 billion and $700 billion in additional revenue over a decade thanks to faster growth, but the bigger number included the assumption of large spending cuts that weren’t in his bill. The estimate also didn’t take into account any negative impacts that might arise from those steep cuts. As Chye-Ching Huang and Paul N. Van de Water at the Center for Budget and Policy Priorities write, “If highly optimistic economic and fiscal assumptions like these are included in official cost estimates but then fail to materialize, the result will be higher deficits and debt.”
This is particularly true because there’s little evidence that steep tax cuts will lead to higher economic growth, especially if they end up increasing the deficit. A recent paper from the Brookings Institution found that while tax cuts can have the impact of encouraging people to work, save, and invest, which can generate growth, “if the tax cuts are not financed by immediate spending cuts they will likely also result in an increased federal budget deficit.” For example, it doesn’t find evidence that the Bush tax cuts in 2001 and 2003 led to economic growth. Multiple studies have come to the same conclusion of President Regan’s 1986 tax cuts.
The new requirements would also ask the CBO and JCT to release a single estimate of the economic impact of a bill, rather than a range as they do now.
How would it impact policy changes?
Using dynamic scoring is widely expected to make it easier for Republicans to pass large tax cuts without having to find additional sources of revenue to make up for them. Huang and Van de Water write, “By incorporating additional revenue in the official cost estimate (as a result of an estimate of economic growth), this would enable lawmakers to write bills with deeper tax-rate cuts, or smaller offsetting curbs on tax breaks, than they otherwise could do.” While dynamic scoring wouldn’t necessarily cover the entire cost of tax cuts such as those proposed by Reps. Paul Ryan (R-WI) and Camp, it would make them easier to pass by appearing less expensive without increasing taxes or decreasing spending as much as otherwise would be necessary.
Given that Republicans are seeking a tax code overhaul that would eliminate some tax breaks, reduce the corporate tax rate to 25 percent, and not increase the deficit, they would have to cut a number of other tax breaks to make it work under the current scoring model. But with dynamic scoring, they might not be forced to make those decisions.
It’s also possible that Democrats could use it to argue that increasing government spending on certain programs, such as universal preschool, comes with greater economic growth and the costs would be lower.