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.