CQ TODAY PRINT EDITION
Corrected Sept. 26, 2008 – 6:36 p.m.
Obama Tax Plan Veers From Pay-as-You-Go
By David Clarke and Richard Rubin, CQ Staff
Barack Obama ’s campaign-trail accounting method is putting congressional Democrats in an awkward position: Their own presidential candidate is undermining the rule they use to fight the federal deficit.
While the issue is arcane, it could determine whether the next Congress would have to find trillions of dollars in offsets for Obama’s tax proposals if he were elected president.
“This is likely to be the first real test of fiscal courage, for not just the next president but the next Congress,” said Diane Lim Rogers, chief economist at the Concord Coalition, a budget watchdog group.
Congressional Democrats have spent the past two years firmly attached to the baseline prepared by the nonpartisan Congressional Budget Office, insisting that any deviations from it be offset with revenue increases or spending cuts to prevent the budget deficit from getting any bigger. Shortly after taking control of Congress last year, they formalized this position in what is dubbed the pay-as-you-go rule.
Under the rule, President Bush’s signature 2001 and 2003 tax cuts (PL 107-16, PL 108-27) would have to be offset with costly tax increases or spending cuts if they are extended beyond their 2010 expiration date, because the baseline adheres to current law.
But the Obama campaign, which wants to extend the tax cuts for the middle class, is taking a starkly different and much more politically convenient view. It believes that because these provisions are current policy, their extension should not be considered a new cost. That allows Obama to describe his proposal as a net tax cut.
This is the same argument Republicans have made in recent years in criticizing the Democrats’ pay-as-you-go rule.
This conflict could put Democrats in a difficult position next year: Do they hold firm to their existing anti-deficit rule or rewrite it to accommodate Obama’s view?
The Concord Coalition estimates a $5.1 trillion difference between the two accounting methods, including interest costs.
It’s a dilemma that some lawmakers have already started mulling, particularly those who consider themselves deficit warriors and who might see such a change as undermining their efforts to control red ink.
“It would create enormous challenges, no question about that,” Senate Budget Chairman Kent Conrad , D-N.D., said of changing the baseline currently used under the rule.
Conrad supports the current system and said until there is time for more discussions it is premature to say if it should be changed.
House Budget Chairman John M. Spratt Jr. , D-S.C., said he also has not come to a conclusion on the issue and would give Obama a “fair hearing before I did anything.” He added, “There may be a reasonable way to treat the thing to serve the interest of both parties.”
Realistic or Not?
While following the pay-as-you-go rule has proven difficult for Democrats over the past two years, they have continued to proudly tout it as evidence of their dedication to governing in a fiscally responsible manner. For years they had called the Bush tax cuts irresponsible because the cost was not offset.
Changing the rule could cause heartburn for some members.
“Obviously, we’ll have to have some in-depth discussions with the leadership,” said Rep. John Tanner , D-Tenn., one of the fiscally conservative “Blue Dog” House Democrats who have insisted on following the rule.
The question comes down to what baseline should be used to measure whether tax and mandatory spending changes would add to the deficit.
The pay-as-you-go rule uses a current-law baseline. Under this system, offsets would need to be found to pay for the cost of extending some or all of the Bush tax cuts because the baseline assumes they will expire. An extension would be viewed as a new tax cut.
The Obama campaign considers this no way to do the country’s budget math.
“No realistic budget analyst thinks that that’s the proper comparison,” Austan Goolsbee, an economic adviser to the Obama campaign, said during a recent C-SPAN interview. In an argument that echoes one made by Republicans in recent years, the campaign maintains that since the tax cuts are currently in place there is no reason to view their extension as costly new tax cuts.
The debate is not about chump change. According to the Urban Institute/Brookings Tax Policy Center, Obama’s tax proposals cost $2.9 trillion over 10 years when measured against the current-law baseline but would actually bring in $627 billion in revenues over that period when measured against the baseline advocated by his campaign. That is because, among other things, Obama would allow the tax cuts affecting those making more than $250,000 a year to expire.
Sen. John McCain of Arizona, the Republican presidential nominee, has proposed more costly tax policies. His plan would cost $4.2 trillion over 10 years against the current-law baseline and $595.8 billion over that period when measured against the other model, according to the Tax Policy Center.
GOP Criticism
Republicans have been highly critical of the Democrats’ pay-as-you-go rule, arguing it is a prescription for tax increases regardless of baseline debates.
The ultimate text of next year’s rule doesn’t really matter, said House Ways and Means member Devin Nunes , R-Calif.
“They’ve proven that they follow it when they want to make political points, but when they actually go to tax and spend, they don’t follow it,” he said.
The tax cuts are expiring because of how Republicans chose to enact them. They were moved through the complex, filibuster-proof budget reconciliation process to make them easier to pass. But that process does not allow policies to increase deficits outside of a 10-year budget window.
In short, Republicans had to choose between deep tax cuts that would expire in a decade or less, which they could advance with only 51 votes in the Senate, or much smaller but permanent tax cuts that would likely be able to garner 60 votes in the Senate. The GOP chose deeper tax cuts, hoping they would be indefinitely extended.
Broader Debate
Democrats say the baseline issue could be addressed as part of a broader reconsideration of budget rules.
Rep. Jim Cooper , D-Tenn., a Blue Dog, said that it may be time to reconsider the entire way in which the fiscal implications of policies are measured, suggesting possibly gauging their cost against the size of the economy.
“We are so far out of kilter regardless of what baseline you use,” he said.
Conrad noted that the government’s takeover of mortgage giants Fannie Mae and Freddie Mac and the discussion about how to treat their assets and liabilities as part of the government’s books are also raising broader questions about the baseline.
“Even with that I would prefer to do [the baseline] the way we’ve done it, but I’m also mindful that we could be entering uncharted waters,” he said.
First posted Sept. 12, 2008 7:48 p.m.
Correction
Corrects to say that Sen. John McCain's tax plan would cost $4.2 trillion over 10 years against the current-law baseline.
Comments
This is undoubtedly an important consideration for the next administration. As David Broder so aptly put it, this is a little reality intruding on the campaign games. The Pay-Go rule will obviously need tooling around with and possibly a re-think, although whichever way you slice and dice it, McCain's tax proposals are considerably more expensive than Obama's (to the tune of between roughly 1 - 2 trillion dollars) whichever baseline you use. At the same time, McCain's proposals would provide little comparative tax relief to most Americans, whilst Obama's plan provides almost 3 times the middle class tax relief of McCain's plan. Make under about $18,000 and you'll get $21 a year on average from McCain, whilst a multi-millionaire will receive a $700,000 tax cut. That is a recipe for disaster, and is a reckless example of Bush-policy on steroids. Didn't the old McCain oppose the original Bush tax cuts as too fiscally reckless? What happened? A McCain win and a Democratic Congress will undoubtedly see a stick with the Current-Law baseline and no re-evaluation. This is a serious problem with McCain's plans. Their cost could mean they are scuppered. Plus, if McCain really wanted to 'balance the budget' by 2013 to pay for his huge tax cuts then all i can say is good luck. He would need to axe a serious amount of programs including the whole Social Security program, Democrats (and most Americans) will simply not let that happen.
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