PAYGO in the House: What it means – and won't mean

In one of their first actions after taking control of the House of Representatives last week, the new Republican majority passed their budget rules for the 112th Congress. The most important may have been major changes to longstanding PAYGO (pay-as-you-go) rules that were designed to constrain federal deficits. If they are followed—and Congress has a long history of ignoring these requirements—the new PAYGO requirements open the door to many more tax subsidies even as they put new pressure on entitlement spending.

In the Democratic House, lawmakers had to offset any tax cut or entitlement increase with equivalent tax hikes or entitlement cuts. Old PAYGO thus meant that tax and entitlement changes couldn’t increase the federal deficit, at least when Congress followed its own rules. Keep in mind that these rules don’t apply to discretionary spending that Congress reviews every year.

The new rules still require the House to pay for new entitlement spending but only with offsetting entitlement cuts—tax hikes will no longer count. And the new spending must be balanced over 1-, 5-, and 10-year periods. That will bar lawmakers from promising to cut spending five years from now to offset new spending today—a gimmick that Democrats used in the 2010 health law.

In contrast, tax cuts won’t require any offsets. And keep in mind that refundable tax credits don’t count as taxes—budget rules say they are spending. As a result, if the House increases the Earned Income Tax Credit or the Child Tax Credit, it can only offset the cost by cutting entitlements such as Medicare and Medicaid. That rule, however, does not apply to other tax breaks, such as repealing the estate tax or cutting tax rates on capital gains or dividends. (I’m not sure how the new rules interact with statutory PAYGO—can rules override law or are favorable parliamentary rulings needed?)

The Republicans also exempted specific laws from PAYGO. For instance, the House won’t have to pay for another extension of the 2001 and 2003 tax acts. Disappointing, though not surprising. Neither will it have to offset the revenue lost from additional relief from the Alternative Minimum Tax, further estate tax cuts, trade agreements, or small business tax relief.

The new rules also exempt repeal of last year’s health reform. This may be a backhanded way to ignore the Congressional Budget Office’s estimate that repealing reform would add $240 billion to the deficit over the next decade. Or it may simply be a frontal assault on an inconvenient obstacle to political grandstanding. (Note that the Dems’ hands aren’t completely clean regarding PAYGO: In the last Congress they exempted the 2001-2003 tax cuts, AMT patches, and the yearly ritual of increasing promised payments to Medicare physicians—the doc fix.)

While the new rules will make it easier for House Republicans to pass more budget-busting tax cuts, the combination of the Democrats’ majority in the Senate and President Obama’s veto pen could limit the fiscal damage.

But don’t be so sure. Remember that in recent years, the House obeyed its strict PAYGO rules by offsetting AMT relief with higher taxes on managers of hedge funds and other investment firms. But the Senate then ignored its own PAYGO requirements and let each year’s patch add to the deficit. And last month, after insisting for two years that fiscal restraint demanded that the Bush-era tax cuts expire for high-income taxpayers, the president quickly gave away that revenue in his compromise agreement with Republicans.

Efforts to maintain some measure of fiscal discipline have hardly risen above lip service in recent years. So while the House may have taken any remaining bite out of PAYGO, it may make little practical difference.

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