How the Budget Baseline Favors Spending

By :: July 2nd, 2008

The Congressional Budget Office’s expenditure and revenue baseline is supposed to illustrate the budget implications of extending current policy. Few may care how the baseline is actually constructed, but since all policy changes are measured “from the baseline,” the arcane definitions that describe current policy can have a profound effect on Congressional decisions.

Current policy is not current law. If it were, almost all baseline spending would disappear in a very few years, because most appropriations are good for one year only, and programs such as highway spending and agricultural subsidies must be reauthorized from time to time. Instead of rigorously following current law, the baseline assumes that the Congress will pass new laws that extend such programs. Spending on appropriated discretionary programs is assumed to grow at the rate of inflation, while entitlements are assumed to be reauthorized at current levels.

Oddly enough, the tax side is not treated symmetrically. With a few exceptions, temporary tax provisions are assumed to expire as in current law. Thus, the research and experimentation tax credit, which has been renewed for one year eleven years in a row, disappears from the baseline.

The curious result of this asymmetry is that a renewal of a temporary entitlement at current levels, such as food stamps, is not considered to be a spending increase, but a renewal of temporary tax relief is considered to be a tax cut. This has important consequences if the Congress is applying a pay-as-you-go rule (PAYGO) that requires that any tax “cut” or entitlement “increase” must be paid for with some other tax increase or entitlement cut. Reauthorizing agricultural subsidies at current levels does not have to be paid for whereas extending temporary relief from the alternative minimum tax does require raising another tax or cutting an entitlement. Even if PAYGO is not applied, the definitions used in the baseline tilt the playing field in favor of spending, because the extension of a temporary tax cut is said to “increase” the deficit whereas the extension of a temporary entitlement does not.

A more sensible approach would regard all temporary spending tax policies to be permanent. In addition to leveling the playing field, it would make the baseline a more accurate predictor of future spending and revenues, because almost all temporary tax and spending provisions are, in fact, routinely extended.

Unfortunately, sensible reforms are unlikely at this time. They would require bipartisan compromise and that is implausible because sensible reforms would make it easier to extend the Bush tax cuts for upper income groups. Those tax cuts are hated by liberals and loved by conservatives and rational discourse is almost impossible. I would like to think that we can return to the issue of reforming the baseline once the Bush tax cuts are finally dealt with, but alas, current rules suggest that whatever the Congress does will again be temporary, thus continuing the fight for another day.

11Comments

  1. Anonymous  ::  1:09 pm on July 3rd, 2008:

    You're overlooking the fact that the Bush tax cuts' implementation and expiration dates were manipulated to hide their true cost. It would be far from fair to reward that manipulation by regarding them as permanent.

  2. Anonymous  ::  9:47 pm on July 3rd, 2008:

    …the Bush tax cuts' implementation and expiration dates were manipulated to hide their true cost…
    You are saying that the true cost of entitlements has been disclosed to the public by their creators and is widely known?
    Here are the tax increases needed just by 2030, as per CBO, to fund currently promised spending … compared to past tax increases for costs such as, oh, fighting World War II.
    Are you and the general public aware of those numbers? If not, should you be annoyed at the people who have imposed them on the public without informing the public about them?
    You know, 2030 is not 75 years away.

  3. Anonymous  ::  10:01 pm on July 3rd, 2008:

    Your proposal that all tax and spending programs be considered permanent in the baseline would make sense prospectively IF the same principal was applied in scoring legislation as well. Otherwise you'd create an even larger incentive to have new tax or entitlement policies sunset after a couple of years to limit their costs for purposes of PAYGO and then come back and extend the program permanently for free because they are assumed in the baseline.
    In order to maintain any discipline the baseline and scoring rules must account for the costs of policies either when they are enacted or when they are extended. As the previous poster noted, the 2001 and 2003 tax cuts were sunset in 2010 to reduce the costs of the legislation in order to fit within budget limits — an effort to pour six pounds of sugar into a five pound bag. The authors of the 2001 and 2003 tax cuts didn't object to CBO assuming the tax cuts would expire in the estimates they prepared whenn the legislation was being considered, because that allowed them to enact a larger tax cut than would have been possible if the estimates assumed the tax cuts were permanent.
    Entitlement programs currently are treated the way you suggest, but both when the policies are originally enacted as well as the baseline for extensions. the exception is programs with a hard sunset date written in a way to avoid the rules requiring CBO to consider the program to be permanent. In that case, the costs of the legislation are reduced by the sunset (and therefore the savings necessary to offset the costs for PAYGO are lower) but the program is not continued in the baseline and extending the program would be scored as increasing the deficit.
    The farm bill Congress recently enacted is a good example of this. The bill reauthorized various agricultural programs and the food stamp program for five years, but for the most part CBO scored the costs of the bill over ten years as if the policies continued after the authorization expired. It was that CBO estimate that assumed spending continued after the authorization expired that was used for enforcing PAYGO. The exception was several programs that were scheduled to expire earlier and included a hard sunset. In those instances the sunset helped lower the cost of the bill, but also meant that those programs weren't in the baseline. Negotiators talked about whether or not they wanted to “pay for baseline” for certain programs by being charged with the full cost of the program as if it were permanent when the farm bill passed in order to make it easier to continue the program when the farm bill was reauthorized. In fact, there were several programs created in the 2002 farm bill that had hard sunsets used to limit the cost of the bill that were scored as new spending increasing the deficit when they were reauthorized last year.
    I share your hope that Congress and the next administration can have a bipartisan discussion about updating baseline rules to establish a consistent, common sense standard going forward. But that discussion should not be used to reward policies that were enacted by exploiting the old rules now that the bill has come due.

  4. Anonymous  ::  10:46 pm on July 3rd, 2008:

    Hey, Rudy…I have posted my comment on this, very similar to “Blue Dog”'s comment, over on my blog, http://economistmom.com.

  5. Anonymous  ::  8:23 pm on July 27th, 2009:

    We were always encouraged to spend. This is why we can get loans, pay mortgages instead of paying a house with all the money at a time and buy anything we want on credit. We're a nation of spenders and our kids will inherit our debt.
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  6. Anonymous  ::  10:04 am on March 24th, 2010:

    what you said is a real facts, these steps will make us slaves to them.

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  8. Anonymous  ::  10:33 am on September 7th, 2010:

    Maybe this administration will do a better job, especially considering the current world-wide economic situation.

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  9. Anonymous  ::  8:37 pm on September 7th, 2010:

    Baseline budgeting tilts the budget process in favor of increased spending and taxes. For example, if an agency's budget is projected to grow by $100 million, but only grows by $75 million, according to baseline budgeting, that agency sustained a $25 million cut. That is analogous to a person who expects to gain 100 pounds only gaining 75 pounds, and taking credit for losing 25 pounds. The federal government is the only place this absurd logic is employed.
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