BACKGROUNDER: RESUMPTION OF "PAYGO BUDGETING"

House Democrats, as part of their first-100-hours agenda, passed a new rule to reinstitute pay-as-you-go budgeting (often known as PAYGO) under which spending and taxing in the House of Representatives will again become a zero-sum game. PAYGO budgeting, a concept first proposed by Rep. Leon Panetta (D-CA) in the 1980s, simply requires Congress to "pay as they go." If a Member of Congress proposes new tax cuts (or an extension of tax cuts scheduled to expire), the budgetary costs in lost revenues have to be paid for by offsetting tax increases or offsetting spending cuts.

Similarly, if a Member of Congress proposes a new entitlement program (or expansion of an existing entitlement such as a new Medicare benefit), the budgetary costs in higher spending have to be paid for by offsetting entitlement cuts or offsetting tax increases. PAYGO applies only to the 53% of the budget comprised by Social Security, Medicare, Medicaid, and other entitlement (or "mandatory") spending programs. The 38% of the Budget that is "discretionary," or subject to annual funding decisions, is controlled by spending limits set in the annual Congressional Budget Resolution. (The other 9% of the Budget are mandatory interest payments on the accumulated Federal Debt.)

Not widely reported is that, under the new House rule, sponsors of new tax cuts or spending increases have to ensure that their proposals are budget neutral over 5 years and over 10 years. (In "budget talk" a proposal is budget neutral when it would not increase deficits or reduce surpluses.) So, for example, if you were to propose a new tax cut, the offsetting spending cuts or tax increases would have to be sufficient to fully cover the revenue costs of the new tax proposal over the first 5 years of the provision and over the first 10 years. This is to ensure that new tax cuts or spending increases can't evade the PAYGO requirement by a slow phase-in that pushes most of the costs into later years.

This sounds like a tough requirement, but keep in mind that the House action was merely a change to House Rules and lacks the teeth of the statutory PAYGO rules, first negotiated in a 1990 bipartisan agreement between President George H.W. Bush and a Democratic Congress. Under that more robust PAYGO law of the 1990s, any violations of the PAYGO requirement would have triggered automatic reductions in Medicare and other entitlement spending. This was the Sword of Damocles approach to budget discipline borrowed from the defunct Gramm-Rudman-Hollings law of the 1980s. The idea was that automatic across-the-board cuts in Medicare and other programs, which would result from violating the PAYGO requirement, would be so politically unpalatable that Congress would comply with PAYGO discipline. (In budget talk, the automatic cuts were known as a "sequester.")

The PAYGO law enacted in 1990 was one factor that led to the budget surpluses of the late 1990s (along with very substantial packages of spending cuts and tax increases in 1990, 1993, and 1997). Statutory PAYGO was effectively abandoned in 2001 and officially expired in 2002.

Re-enactment of a tough PAYGO law with an automatic sequester is likely to encounter stiff resistance from many congressional Republicans and the Administration who oppose the pay-as-you-go concept because it would require offsets to pay for extension of the scheduled-to-expire tax cuts of 2001 and 2003. Moreover, adoption of a Senate Rule, similar to the House Rule, is unlikely because amendments to the Standing Rules of the Senate can be easily filibustered by Senate Republicans (since shutting down a filibuster on a Rules change requires a 2/3 vote). The one possibility for imposition of a PAYGO rule in the Senate is incorporation of PAYGO into the upcoming FY 2008 Congressional Budget Resolution (which is protected from filibuster).

The adoption of the House PAYGO rule is already having a major impact. The House passed legislation last week (H.R. 5) to cut student loan rates, the cost of which would be offset, in part, by reductions in subsidies to financial services companies; the cost of the bill was also held in check by phasing in the rate cuts.

The House passed a second piece of legislation (H.R. 6) to provide for renewable energy subsidies that would be offset by cutting energy tax subsidies and recouping certain royalties.

Other Democratic priorities such as the goals of closing the so-called "doughnut hole " (gap in coverage) in the Medicare prescription drug benefit, and repealing or limiting the reach of the Alternative Minimum Tax will be extremely challenging in light of their high cost and the renewed PAYGO rule in the House.