Monday, January 25, 2010

Reid Amendment (#3305) on Statutory PAYGO

Wanted to forward along this summary/analysis by my colleague Jon Lieber of the Reid PAYGO amendment (#3305) to the debt limit bill (H.J.Res. 45).  You will note below that the Reid amendment includes a five year PAYGO exemption (i.e. 2010-2014) for a “doc fix” to the Sustainable Growth Rate (SGR) mechanism.  However, the language on pages 25-26 also assumes that the five-year “fix” will NOT be taken into account for purposes of calculating the SGR targets in 2015 and beyond.  This “cliff” resembles provisions that have been included in SGR legislation over the past several years, resulting in a 21% cut in Medicare reimbursements effective March 1 of this year absent Congressional action.  According to the latest estimates from CBO, such provisions would result in cuts to Medicare physician payments of approximately 30% in 2015, with additional reductions likely thereafter.


Senator Reid filed cloture on this amendment this afternoon, along with the Reid substitute (#3299) and the underlying bill, H.J. Res. 45.

The amendment would establish a new statutory pay-as-you-go (PAYGO) regime that applies to changes to mandatory spending or revenues.  This legislation is similar to the PAYGO process that was in place from 1990 to 2002 (with important differences) and legislation that was proposed by the Administration last year, which passed the House as H.R. 2920 by a vote of 265-166 with 24 Republicans supporting it.


Under the Reid PAYGO process, the Office of Management and Budget (OMB) would be required to maintain a running tally and publish at the end of each session of Congress a “PAYGO scorecard” that reports the average annual cost of mandatory spending or tax legislation passed that session over a five year and ten year period.  If that scorecard showed higher deficits over either the average of the five year or ten year period, the Administration would be required to submit a sequester order to Congress that reduces the budgetary resources of direct spending programs by enough to offset that deficit.  This sequester would come from a reduction by a uniform percentage across non-exempt direct spending programs, determined by the Administration.  This sequester could be overruled by an up-or-down vote in the Senate and House if Congress chose to take up the sequester package, although no automatic process for Congressional consideration is provided for in the bill.

Exemptions from the PAYGO scorecard are provided for the following policies, allowing this legislation to become law without offsets:

A 5-year extension of Medicare’s Sustainable Growth Rate (the “doc fix”) with a cliff thereafter;

A 2-year extension of 2009 estate and gift tax law;

A 2-year extension of the patch for the Alternative Minimum Tax (AMT) in place in 2009; and

Permanent extension of 2001 and 2003 tax relief for single taxpayers earning less than $200,000 and married couples earning less than $250,000, including the lower rates, the larger child tax credit, lower rates on capital gains and dividends, marriage penalty relief, and education tax benefits, among other things.

Taking the scores for these policies in the President’s mid-Session Review as a rough guide, these exemptions would total more than $2 trillion, all of which would eventually be added to the deficit.

Exemptions from sequestration:

The Balanced Budget and Emergency Deficit Control Act (BBEDCA) of 1985 as amended by the Budget Enforcement Act (BEA) of 1990 contained dozens of exemptions, and these are continued in this legislation.  In addition, new exemptions are provided for new mandatory spending programs including SCHIP, Part D low income subsidies, and new refundable tax credits.  Other exempt programs include Social Security benefits, railroad retirement benefits, Veterans programs, low-income assistance programs, and net interest; a full list can be found in Section 11 of the text, specifically starting on page 43, and starting in Section 255 of the BBEDCANone of these programs could be touched by a sequestration order from the Administration.

Additional exemptions are provided for economic recovery programs, including the GSE preferred stock purchase agreements, the Office of Financial Stability, SIGTARP, and 7 new transportation programs that are subject to obligation limitations in appropriations bills; in all, over 100 mandatory programs are exempted from sequester.

Other provisions of note:

Emergency legislation would not count towards the PAYGO scorecard, and the emergency designation would be subject to a 60 vote point of order to waive such designation.

Net savings generated from the Community Living Assistance Services and Supports (CLASS) Act, should it be passed into law, would not count as savings for purposes of the PAYGO scorecard.  The CLASS Act raises government revenue through premium payments within the budget window but starts paying out benefits outside the budget window and was used as a pay-for in the stalled Reid health care bill.

The Congressional Budget Office is designated as the primary estimator of the effect of legislation for PAYGO purposes, to maintain the primacy of CBO and Congress’s role in the budget process.


Proponents of statutory PAYGO argue that it is a useful budget enforcement tool that contributed to surpluses in the 1990s.

Opponents of statutory PAYGO argue that it exempts too many spending programs, is biased against tax relief, and that Congress repeatedly voted to overrule sequestrations throughout the 1990s, making it an ineffective tool for budget enforcement.

This PAYGO scorecard would only apply to legislation creating new mandatory spending or tax relief and would do nothing to control two major sources of projected deficit spending – discretionary spending growth and the already enacted growth of existing entitlements including Social Security and Medicare.  Such lopsided treatment builds in a bias against future tax relief, all of which, unlike spending increases, would have to be fully paid for.  The lack of the discretionary spending caps contained in the BEA greatly weakens this PAYGO legislation as an effort to curb out-of-control spending growth and deficits.

Although exemptions are provided for current policies that are generally supported by Republicans, the exemptions do not allow for full extensions of current law:

The exemptions for the AMT and the estate tax only last for two years, building in a tax increase when those exemptions expire at the end of 2011;

The exemption for estate tax provides for a 45 percent rate and $3.5 million exemption for two years and therefore does not go as far as the estate tax policy supported by a bipartisan majority of Senators during the debate over the FY10 budget resolution; and

The exemption for the ’01 and ’03 tax relief does not include the lower tax rates for small business owners who earn over $200/$250k, meaning that a pro-growth tax bill that included this provisions would require offsets under this process.

The averaging mechanism in this bill is a departure from the statutory PAYGO under the Budget Enforcement Act of 1990, which required sequestrations if the PAYGO scorecard showed deficits out of balance in any one year of the budget window; this averaging could favor legislation that had a large up-front cost but was paid for with future tax increases or spending cuts.  Since there is no guarantee that such a tax increase or spending cut would ever actually be enacted into law, this allows for a major budget gimmick that could undermine the entire PAYGO exercise.

It is unclear if statutory PAYGO would be more effective than the existing PAYGO rules of the House and Senate.  The Congressional Budget Office wrote in July that the exemptions for current law in the House bill (which was similar to the Reid amendment), if used in place of existing Congressional rules or a more stringent system, “could lead to larger future deficits.”

Because of the large number of sequestration exemptions provided, CBO also wrote that “any feasible sequestration would not generate enough reductions in spending to offset the costs of major new spending or revenue initiatives.”