The Politics of Scorekeeping
- Dynamic scoring estimates the macroeconomic impact of legislation using assumptions about behavioral responses
- By its nature, the process introduces more variables to official estimates and is thus subject to significant uncertainty
- The vote to approve the new House of Representatives rule requiring the use of dynamic scoring for major legislation was mostly along party lines
Now that the 114th Congress has convened and committee leaders are in place, members of Congress and the public alike are speculating what the Republican tax agenda will look like and whether 2015 will (finally!) be the year for tax reform. Just weeks into the new Congress, tax proposals are already trickling in, with the president unveiling new tax plans.
In most tax policy discussions, policymakers talk about the need for revenue-neutral proposals. Although the deficit is shrinking, Congress does not want to pass a tax bill that will add to it, so a tax bill’s “score,” or economic impact, can become a sticking point. The score for a piece of legislation often dictates what tax provisions are included, which revenue raisers are added to offset the cost, and whether a tax incentive is made permanent or rolled into the annual tax extenders package.
A New Rule for Scoring Tax Proposals
One of the first acts of the House of Representatives this year was to approve a rule altering the method by which the Joint Committee on Taxation and Congressional Budget Office determine the economic impact of major legislation—something Republicans have been discussing for years. As expected, the vote of 234-172 was mostly along party lines.
H. Res. 5 requires JCT and CBO to estimate the macroeconomic impact of major legislation “to the extent practicable.” Major legislation is any proposal with a gross budgetary effect in any one year in excess of 0.25% of GDP or any bill that the chairman of the Ways and Means Committee or Budget Committee designates as such.
Dynamic Scoring Proves Divisive
The purpose of this type of estimation, referred to as “dynamic scoring,” is to predict the macroeconomic impact of any proposal—positive or negative. This becomes particularly controversial in the case of tax legislation; if a proposal is predicted to generate additional revenue, it makes it easier to craft a revenue-neutral plan and possibly avoid making tough political decisions. Although JCT and CBO sometimes provide supplementary macroeconomic estimates along with the official score for major legislation, this change would require their estimate to include this analysis. Barring Senate action, the House change does not apply to estimates for Senate budget proposals, so it is possible lawmakers will be in a situation where they are using two different sets of numbers.
Dynamic scoring sounds like a tweak that only a few economists or policy wonks would care about, but depending on whom you ask, this change could mean the addition of “realistic and honest analysis” or “voodoo economics” into the legislative process. Unsurprisingly, this is a partisan issue.
How JCT Currently Scores Legislation
In conventional scoring, JCT estimates begin with a revenue baseline, which is CBO’s 10-year projection of federal revenue in the absence of any statutory changes. Conventional scoring assumes that a legislative proposal will not change the gross national product and the size of the economy. Conventional revenue estimates are sometimes referred to as being “static,” with many believing that these analyses assume taxpayers will not change their behavior as a result of statutory changes; however, JCT does take into account certain microeconomic behavioral responses. One example is factoring in reduced gas consumption when scoring a gas tax increase.
Critics of conventional scoring contend that it does not accurately estimate the impact of legislation. Policymakers could use dynamic scoring to compare provisions that are equal in cost to better distinguish which would generate economic growth.
In his statement before the House Ways and Means Committee last year, Douglas Holtz-Eakin, former CBO director, argued that using dynamic scoring for tax reform proposals would “expand the range of economic impacts to include the pace of economic growth.” He stated that some of the positive features of this type of scoring are that analysts would:
“(a) consider the direct impacts on program costs and tax receipts; (b) evaluate the effects on incentives to work, save, invest, legally or illegally avoid paying taxes, and generally conduct economic affairs; (c) estimate the resulting change in the overall level of economic activity; (d) compute the impact of this higher or lower level of economic activity on program costs and tax receipts; and (e) calculate the net impact of the legislation on the unified budget. The key difference is step (d), which is in turn built upon (c).”
More Variables, More Uncertainty
Even proponents of dynamic scoring acknowledge that the process is not easy. In his testimony, Holtz-Eakin stated that it would be necessary for CBO and JCT to agree on a single approach with regard to various factors (in contrast with CBO’s current method of creating multiple macroeconomic estimates for the president’s budget proposals). In a speech in November, Senator Orrin Hatch (R-UT) acknowledged that macroeconomic analysis is subject to uncertainties, but those will exist regardless of the model used. Certain assumptions need to be made, but proponents of dynamic scoring argue that the perfect should not get in the way of the good, especially since conventional scoring also provides imperfect estimates.
Critics of dynamic scoring argue that the estimates are highly uncertain, as they are sensitive to assumptions made about a policy and its relationship to the economy. As pointed out by Peter Orszag, another former CBO director, “Theoretically dynamic scoring is the right thing to do. . . . Just practically, it’s problematic.” The difficulty arises from modeling the macroeconomic impact of complex legislation.
Orszag noted that conventional scoring contains fewer variables, creating less uncertainty in the score. This challenge can be seen with the dynamic estimates for the proposed Tax Reform Act of 2014. JCT used multiple dynamic models to estimate that the proposal would increase federal revenue by between $50 billion and $700 billion over a 10-year budget window, in contrast with the conventional score’s estimate of $3 billion.
Critics of dynamic scoring worry that using it would politicize CBO; “undermine the integrity of budget scorekeeping, hurt our ability to maintain fiscal discipline and lead to more financial inequality”; and allow Republicans to “hide the true costs of tax cuts behind a debunked mantra that tax cuts pay for themselves.”
Interpreting the New Rule
With all the partisan rhetoric over the issue, the uncertainty over how JCT and CBO will apply the new rule has received little attention. Dynamic scoring will apply only to major legislation—“to the extent practicable”—and Republicans did not include language dictating what assumptions should be used. That leaves CBO and JCT economists with considerable leeway to determine how to interpret the rule and build on the macroeconomic analysis they already conduct. Whether the new estimates provide a more realistic picture of economic impact or serve as a “smoke-and-mirrors” tactic, dynamic scoring will certainly be a focal point in upcoming tax debates.