The incoming Republican majority in Congress is preparing to give number-crunching a controversial twist, and the new math could make it easier for the GOP to cut taxes.
For years, leading GOP lawmakers have wanted to change the way that the nonpartisan congressional staff calculates — or, in Washington parlance, scores — the budgetary cost of changes to the tax code.
Budget scoring now is fairly straightforward: Just figure out how much more money a tax increase would produce for the Treasury or how much a tax cut would cost in lost revenue.
Republicans, however, want two key congressional offices to use complex models to try to predict the broader effect of hikes and cuts on the economy. The process is called dynamic scoring.
“I prefer to call it reality-based scoring,” Rep. Paul D. Ryan (R-Wis.), the incoming chairman of the tax-writing Ways and Means Committee, said in a recent speech to financial executives.
He and other Republicans said the current process fails to take into account the idea that tax cuts can increase economic growth — and therefore government revenue — by encouraging businesses and individuals to invest more.
“We can do so much more in measuring effects of tax changes,” Ryan said.
But Democrats have their own description of dynamic scoring. They call it voodoo economics, a term dating to the Reagan administration’s trickle-down economic theory in the 1980s, holding that more money for the wealthiest eventually makes its way to everybody else.
“What’s dynamic about it?” asked Rep. Sander M. Levin (D-Mich.), the panel’s top Democrat. “It can backfire.”
The Congressional Budget Office and the Joint Committee on Taxation produce cost estimates for legislation that typically assume the overall size of the economy and the workforce remain fixed. That provides a baseline with which to compare different types of legislation.
Dynamic scoring produces cost estimates using scientific models that take into account how the economy and workforce might change if a bill is enacted.
Democrats have strongly opposed the mechanism in congressional policymaking, saying that the methodology is unreliable and that the basic premise that tax cuts won’t increase the budget deficit is false.
There’s no consensus among economists on the arcane issue, which is fiercely debated among liberal and conservative budgetary experts.
“Those on the left, who think it’s the end of Western civilization, need to calm down,” said Douglas Holtz-Eakin, president of the conservative-leaning American Action Forum think tank and a former Congressional Budget Office director.
“And those on the right, who think it’s a magic bullet to make policymaking easier, I think are going to be sadly disappointed,” he said.
In April, the Republican-controlled House voted 224-182 in favor of a bill that would require dynamic scoring estimates on major legislation. The Democratic-controlled Senate never took it up.
But when Republicans take control of the Senate in January to go along with their strengthened House majority, they will be in a position to make the change.
By controlling both sides of Capitol Hill, they are expected to direct the Joint Committee on Taxation and the Congressional Budget Office to add dynamic scoring cost estimates to major bills.
By doing so, Republican could advance one of their top legislative priorities: an overhaul of the business tax code.
“Tax reform has been and will continue to be a long and difficult process,” Sen. Orrin G. Hatch (R-Utah), incoming chairman of the tax-writing Senate Finance Committee, said in a speech this month.
“I believe the expanded and sensible use of dynamic analysis can, if done correctly, be an important tool to help us achieve our goals,” he said.
Republicans have committed to an overhaul that would eliminate some tax breaks and reduce the corporate tax rate to 25% from 35% without increasing the budget deficit.
Using standard congressional scoring, Republicans would have to cut a host of tax breaks coveted by businesses to accomplish the goal. Dynamic scoring could alter that equation.
“At the end of the day, it may mean that you don’t have to eliminate as many loopholes as you might have thought you had to,” said Scott Hodge, president of the nonpartisan Tax Foundation.
The concept has been around for years, and Hodge said its time has come.
“I liken it to instant replay in baseball,” he said, noting Major League Baseball’s long resistance before adopting it this year.
“As people watched umpires make bad calls, they really felt they needed to give them more information to get the call right,” Hodge said. “We’re at that point with tax and budget scoring where the scorekeepers need more information to get the call right.”
The Congressional Budget Office said it takes into account some behavioral changes that could be triggered by legislation, but does not do broader dynamic scoring because “estimates of macroeconomic effects are highly uncertain.”
Still, dynamic scoring estimates have been made for some legislative proposals to provide lawmakers with additional information on top of the standard determinations of budgetary effects.
Last year, the Congressional Budget Office incorporated some dynamic scoring components into its cost estimate for the bipartisan immigration overhaul that later passed the Senate.
The office said it did so because the bill, with its path to citizenship for about 11 million people in the country illegally, would significantly increase the size of the U.S. labor force.
The CBO concluded that the legislation would reduce the budget deficit by $197 billion in its first decade and an additional $700 billion in the following decade.
Then in February, the Joint Committee on Taxation provided a dynamic estimate for a tax reform plan by outgoing Ways and Means Chairman Dave Camp (R-Mich.) using two different models and a variety of economic assumptions.
The estimate said the plan, which included reducing the corporate rate to 25%, could increase tax revenues by $50 billion to $700 billion over a decade, depending on which model is used.
Supporters of dynamic scoring point to the Camp estimate as an example of how tax cuts can increase economic growth, though the information was admittedly not precise.
“It gives us a more realistic idea of how fiscal policy changes will affect the economy,” said Curtis Dubay, a research fellow at the Heritage Foundation, a conservative think tank.
Critics said the wide range of the estimate on Camp’s proposal showed the limitations of dynamic scoring.
Edward Kleinbard, a former chief of staff to the Joint Committee on Taxation, said the process has a fatal flaw: “No person alive” can correctly predict the future path of the economy because there are too many variables.
“It’s like trying to map out the mating dance of butterflies along the side of a highway,” said Kleinbard, a USC professor of law and business. “Just when you think you’ve seen an interesting pattern, a tractor-trailer goes by and blows the butterflies away.
“There are too many big things that can happen in the economy.”