CQ TODAY ONLINE NEWS
Oct. 4, 2011 – 10:34 p.m.
Disputed Scoring Method May Enter Tax Debate
By Sam Goldfarb, CQ Staff
Members of the joint deficit reduction committee are discussing ways to increase the federal government’s revenue collections, although it may require a bit of creative thinking to bridge divisions between the parties on the issue of taxes.
Republican lawmakers have signaled that they might accept higher revenue — an encouraging development for Democrats — as long as most or all of the extra money comes from projections of improved economic growth, rather than directly from tax increases.
That may have opened the door to the long-resisted idea of “dynamic” scoring or analysis, an often disputed method of counting the anticipated positive macroeconomic benefits of tax cuts, including faster growth, bigger incomes and higher tax payments.
Of specific interest to the joint committee is whether a comprehensive tax code overhaul might boost revenue and what sort of instructions to give to the official scorekeepers of legislative action — namely the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) — should they examine such a proposal.
If they do, and if dynamic scoring yields the desired results, both parties might find something to brag about. Democrats could highlight increased tax receipts, while Republicans would tout lower rates and higher growth projections.
So far, Republicans have demonstrated more interest than Democrats in rewriting the tax code by reducing rates and eliminating or curtailing breaks, arguing that a streamlined tax code and lower rates for businesses would be a boon for the economy. And Democrats have been listening to their arguments.
Keeping an Open Mind
The committee has to find a minimum of $1.2 trillion in deficit savings to avoid painful across-the-board spending cuts that automatically go into effect in 2013 if that target is not met.
Democrats are still demanding that any deficit reduction package include conventional tax increases, such as eliminating some corporate tax breaks without changing rates. And their interest in dynamic scoring remains cautious.
Democrats — and some Republicans — have long objected to the use of dynamic scoring, arguing that the economic benefits of lower tax rates are uncertain and cannot be relied upon to solve fiscal problems. Dan L. Crippen, a Republican economic policy expert who headed the CBO from 1999 through 2002, earned the ire of some congressional Republicans for refusing to accept dynamic scoring and insisting that the George W. Bush-era tax cuts be subject to traditional “static” scoring.
Still, flexibility in the GOP’s anti-tax position has given Democrats some hope, and they have been happy to let Republicans make their case, at the very least to keep them at the bargaining table.
Making some use of dynamic scoring “could be helpful” to the joint panel, one Democratic aide said this week, adding quickly that raising revenue by more direct methods was imperative given Republican demands for deep spending cuts.
Among joint committee members, Sen.
Disputed Scoring Method May Enter Tax Debate
Sen.
Democrats have engaged in these discussions, aides say, partly as a consequence of lessons learned from previous deficit reduction negotiations.
Debt limit talks led by Vice President
Rather than specific tax increases, however, both plans called for a fundamental tax overhaul that would limit breaks and reduce rates for individuals and companies. Both were carefully worded so Republicans might claim that at least some additional revenue would come from the dynamic effects of faster growth.
When calculating the official cost of legislation, neither JCT nor CBO account for such effects. The two scorekeepers do, however, address economic growth in separate reports that analyze legislative proposals from a macroeconomic perspective.
No Easy Options
In a sign that Democrats regard any discussion of tax policy as a victory, a lengthy Sept. 22 committee hearing on the tax code was largely devoid of specific proposals and more focused on subjects agreeable to Republicans, including the potential for a broad overhaul and a change in scorekeeping practices.
Tax policy discussions that have occurred since then behind closed doors have continued on this course, according to aides, leading to a certain amount of good will on both sides, if no easy answers.
Perhaps the biggest problem facing committee members is that very few experts believe it is possible to rewrite the tax code by Nov. 23, the deadline to vote on legislation that would trim the deficit.
One frequently mentioned fallback option is that the joint deficit reduction committee, instead of writing a tax overhaul itself, would instruct the House Ways and Means Committee and the Senate Finance Committee to do so by some date in 2012.
Even then, establishing guidelines for the two tax-writing committees would be a challenge.
The joint committee would almost certainly need to resolve differences between the parties with more specificity than was required of either the president’s fiscal commission or the Gang of Six, said Ed Lorenzen, a senior adviser at the Committee for a Responsible Federal Budget, a Washington think tank, who served on the staff of the fiscal commission.
Dynamic scoring will be “a key issue of discussion,” Lorenzen said. At the same time, he said, it is a “difficult issue.”
Disputed Scoring Method May Enter Tax Debate
Regardless of its exact approach, the joint committee will first need to determine an overall revenue target. Then, the question of factoring in economic growth might be handled in a variety of ways.
One option would be to raise a certain amount of revenue by traditional means, with a guarantee that tax rates would be reduced in the future if growth helped raise more money than expected. An alternative would be to pass a tax overhaul that is officially revenue-neutral, in an attempt to satisfy Republicans, with triggers that would increase tax rates automatically in the future if economic growth and extra revenue did not materialize.
Smaller-scale issues related to dynamic scoring are also being discussed, including a move to ensure that JCT publishes a macroeconomic analysis of a tax overhaul at the same time as it publishes an official revenue estimate. In addition, lawmakers are curious to know if JCT might be able to reveal more about its revenue estimates.
As JCT aides frequently point out, its conventional forecasts are far from simplistic. Rather, the revenue estimates account for a range of ways legislation might alter taxpayer behavior. For instance, JCT has determined that reducing the tax rate paid on stock dividends would increase the amount of dividends that companies pay their shareholders.
If not easy to implement, a more transparent revenue estimate might have political benefits in that it could show certain appealing consequences of tax changes.
“That definitely would be very helpful,” Lorenzen said.