Making the Case for Dynamic Scoring

By Rachel Cole

Wastewatcher, May 2017

When Congress considers legislation to lower taxes, the Congressional Budget Office (CBO) will be using dynamic scoring to help estimate its cost.  In 2015, Congress required CBO to use dynamic scoring on legislation with an impact of at least 0.25% of gross domestic product over the next 10 years (about $45 billion in 2015), or at the request of the Budget Committee chairman.

Prior to this much-needed change in scoring, only static scoring was used by CBO.  Under that system, if an individual earns $100 and is taxed at 50 percent, the federal government receives $50 in revenue.  If the tax rate is lowered to 25 percent, then the federal government loses $25 in revenue.

On the other hand, dynamic scoring, also known as macroeconomic analysis, assumes tax cuts result in predictable, and largely positive, behaviors:  The extra $25 in the individual’s pocket will result in saving, spending, or investing the increased disposable income.  Individuals can save the extra $25, which gives banks more capital to loan to other individuals or businesses; spend the extra $25 and increase the demand for goods and services that create jobs; or invest that extra $25, which benefits financial markets and allows individuals with pensions and other retirement plans to stabilize their fixed income with more diverse portfolios.  In turn, this saving, investing, or spending can increase the taxpayer’s original $100, including the government’s taxable share.

The fiscal year (FY) 2018 budget resolution is expected to include instructions for a reconciliation process to pass a tax reform package.  If any tax cuts are projected to increase the deficit in the 10-year window (which has been used in the past for such legislation) the tax cut would expire at the end of those 10 years.  Dynamic scoring would help reduce the number of tax cuts that would meet such a fate.  Indeed, static scoring has miscalculated the effects of past tax reform legislation.

Former Sen. Phil Gramm (R-Texas), a former economics professor and former chairman of the Senate Committee on Banking, Housing, and Urban Affairs, testified on May 10, 2017 before the Senate Budget Committee.  He said,

The CBO projected that the 1997 Balanced Budget Act would produce a $77 billion fiscal dividend over seven years, of which $33 billion would come from additional revenue growth.  But in 2000, CBO actually found that revenues in that single year were ‘$303 billion more than estimated in 1997’ due to ‘the strength of the economy and changes in characteristics of income.’  By January of 2001, CBO reported that an additional $1.34 trillion in revenues had flowed to the federal government than had been projected at the time the Balanced Budget Act of 1997 was enacted.

In other words, because of its adherence to static scoring, CBO incorrectly estimated the effects of tax cuts on economic growth by a long shot.  And that wasn’t the only time CBO got it (wildly) wrong:  CBO famously miscalculated the effects of the Affordable Care Act (ACA).  CBO projected that exchanges would be stable with 21 to 22 million enrollees by 2016.  However, 17 of the original 23 state exchanges have collapsed, and enrollment averaged 10 million people in 2015, meaning CBO overestimated enrollment by 120 percent.  CBO also projected that the Medicaid expansion would cost $4,281 per enrollee in 2015, but the cost per enrollee was $6,366.

The FY 2018 budget resolution is expected to be released in the coming weeks, and expanded use of dynamic scoring should be included.  It was been decades since the tax code was substantively reformed.  The time is ripe for Congress to lessen the burden on taxpayers, and dynamic scoring can help members achieve that goal.

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