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Temporary Laws, Political Accountability, and Fiscal Restraint
May 21st, 2008Howard Gleckman’s criticism of temporary legislation (“The Tax Extenders Ride Again,” May 20, 2008) overlooks the impact of Congressional budget rules. When such rules are considered, a change in law on a temporary (rather than permanent) basis increases political accountability and arguably enhances fiscal restraint.
Consider, for example, the research credit, first enacted in 1981 for a temporary period and generally extended for only one or two years at a time ever since. By passing and continuing the program in temporary increments, Congress has had to take its cost into account for every one of its over 25 years of existence. Each year the credit has been due to expire, Congress has had to determine how to “pay for” its continuation. Even when Congress has simply let the deficit swell and not paid for the continuation, the cost of the program has no doubt crowded out other Congressional spending.
If, instead, the program had been first enacted on a “permanent” basis, the cost of continuation would have disappeared long ago off of the Congressional budget radar screen. The program’s cost, about $8 billion per year, would simply be part of the “baseline” cost of maintaining current law and not require any Congressional approval. No legislator would have to go on record as supporting using $8 billion of taxpayer money to pay for the program for another year. And there would therefore be no crowding out effect—legislators would feel free to support other spending initiatives because the research credit would continue “for free.”
The ability to hide the cost of new spending through enactment of permanent programs is well illustrated by the 2003 Medicare prescription drug legislation. Its cost was estimated to be about $400 billion during its initial ten years, the only period for which costs had to be accounted. Yet its true cost, meaning the present value of all future costs obligated by the legislation, was recently estimated by the Medicare trustees to be about $17.2 trillion. Thus, by passing permanent legislation whose effect extended well beyond the period for which costs were taken into account, Congress made a huge new commitment while taking political responsibility for only a small fraction of its total cost.
The deceptive accounting of a permanent program persists even if Congress subsequently changes its mind and terminates it. For example, suppose that after ten years and $400 billion of costs, Congress ends the prescription drug program because it is too expensive. A repeal of the law as of the beginning of the eleventh year would be accounted for as projected cost savings during the forthcoming ten years. This is because the initial permanent enactment changes the state of current law—the baseline—for all years subsequent to enactment. For programs with growing numbers of participants, the projected cost savings during years 11-20 would likely be greater than the $400 billion of costs for the first ten years. In other words, due to its initial enactment as a permanent law, the ten-year program would appear, for Congressional budget purposes, to have actually saved money.
In contrast, had the drug program been enacted as a temporary measure for only ten years and then allowed to expire, there would be no projected savings from the expiration. Barring estimation error, the temporary legislation would require legislators to take political responsibility for spending exactly the amount—$400 billion—that the program would cost during its ten-year existence.
It is also not clear that Howard’s other concern—that temporary legislation serves as a Lobbyists’ Relief Act—is valid. The basic point is that a temporary feature in a change in law devalues the legislation and therefore should reduce the amounts paid by the private sector to influence the legislative outcome.
None of this, of course, defends any particular change included in the Ways and Means Committee’s recent bill. Bad legislation is bad legislation, whether temporary or permanent.And there may conceivably be other reasons to prefer permanent laws over temporary ones. But if changes are going to be made, then at least from the standpoint of promoting political accountability and fiscal restraint, we should be thankful that the changes are temporary and not permanent.
A draft paper on this topic is attached.
Response to "Scoring McCain's Tax Proposals" by the McCain Campaign
April 20th, 2008by Doug Holtz-Eakin, Senior Policy Advisor, McCain 2008
On April 17, the Tax Policy Center posted “Scoring McCain’s Tax Proposals”. Although I remain a fan of efforts by organizations like the Tax Policy Center to analyze taxation issues, the analysis is misleading on the whole and wrong in some particulars.
At the broadest level, the problem is that the Center focuses on taxes in isolation, while the impact of Senator McCain’s proposal must take into account changes on the expenditure side as well. He has proposed specific discretionary cuts to offset the historic practice of waste and earmarks, a one-year discretionary “pause” (freeze) of spending outside of necessary military and veterans accounts, an overall program review that would encompass defense procurement plans and methods and non-defense programs, and a comprehensive health care reform that is the foundation for addressing the budgetary stresses from entitlements. More generally, the federal government now raises 18.8 percent of Gross Domestic Product in taxes, a figure which is above the average of the past several decades. Yet the fiscal outlook remains challenging. Why? Because of the projected growth in spending. In short, Washington has a spending problem—not a revenue problem. Putting our fiscal house in order is primarily a matter of controlling spending growth.
Turning to the particulars, the Tax Policy Center analysis is flawed in several ways:
It incorrectly attributes a proposal by Fred Thompson to Senator McCain. Senator McCain does support the general idea of having the voluntary choice between the current system and a simpler alternative with a broad exemption and a simple, two-bracket rate structure. As the campaign proceeds he will have the opportunity to flesh out his vision, including how such a system can be revenue neutral. To score a proposal as losing hundreds of billions of dollars when it isn’t even Senator McCain’s is simply wrong and should be corrected immediately.
It assumes immediate implementation of a set of proposals that constitute a vision for a tax code that is simpler, fair, pro-growth and aids international competitiveness. Senator McCain has described this vision over the past 15 months and will continue to develop it in the future. No major transformation of this sort has ever been undertaken without realistic timetables to phase-in new provisions. No major improvement to the corporate tax code would fail to consider—to pick a few examples—the future of the deduction for U.S. manufacturing activities when the rate is already much lower, the treatment of corporate interest in the presence of expensing, the inventory property sales source rules, and other business credits.
The scoring is dramatically influenced by the adoption of unrealistic congressional budgeting conventions. An analysis grounded in sound economics would evaluate the impact of tax and spending proposals that change the current course of policy. Current policy in the United States is an income tax that has a research and development tax credit, a top rate of 35 percent, taxes dividends and capital gains at a top rate of 15 percent, and each year provides a “patch” on the Alternative Minimum Tax. Senator McCain would reform but not change the magnitude the R&D tax credit. He would continue with the current tax rates. In short, there is no change and nothing to “score”. Senator McCain would eliminate the AMT, so it is appropriate to recognize the revenue reduction above and beyond the existence of the patch but no more.
In contrast, the Tax Policy Center uses the congressional baseline, which reflects current law and not current policy. Notice, for example, that the AMT gets patched every year—regardless of which party holds power in Congress—but a current law baseline assumes that it will revert to its full-blown form in the future. In addition, this approach is biased in favor of more spending and higher taxes. Any spending program—even a supplemental appropriation—is assumed to exist forever and rise at the rate of inflation; spending never declines. In contrast, an AMT patch or the current tax rates are assumed to expire and taxes rise. Senator McCain’s approach puts taxing and spending on equal footing by assuming that on both sides of the budget current policy continues in the absence of a proposal. This is not a mere technical quibble—the Congressional budgetary conventions simply defy common sense. If households followed this practice, anytime a spouse planned to go back to work but changed his or her mind, the family would have to cut their spending to “offset” the planned future rise in income.
While the budgetary implications of Senator McCain’s proposals are important, we need to keep our eye on the real goal, which is a tax code that better serves America workers by ensuring that they are not burdened when they invest in their children, move to the middle class, and compete in a global economy. Adoption of the Senator’s proposals would certainly move us in the right direction.