House Hearing Questions Whether PAYGO is Enough to Control Spending

The House Budget Committee held a hearing [1] on June 24 on the Statutory Pay-As-You-Go (PAYGO) Act of 2009, which was recently introduced by Rep. Steny Hoyer (D-MD). During the hearing, House members focused on the enforcement mechanisms in PAYGO, the significant exemptions granted under the proposed legislation, and whether the bill is the appropriate method to reinstate fiscal discipline in Congress.

The hearing was headlined by Peter Orszag, Director of the Office of Management and Budget (OMB); it also featured testimony from Douglas Holtz-Eakin, former Director of the Congressional Budget Office (CBO), and Robert Greenstein [2], Executive Director of the Center on Budget and Policy Priorities. All three witnesses testified that PAYGO is not a panacea and that additional, difficult decisions about health care spending reform and an overall re-examination of spending priorities will be necessary to combat a sustained decline in the American economy.

Orszag emphasized the primary purpose of the legislation is to avoid making the structural deficit any worse and to complement congressional PAYGO rules. Orszag also stated that PAYGO is designed to apply to both spending and to taxes because "a reduction in a revenue dollar can have the same impact [on the deficit] as an increase in spending."

As written, the act would use the threat of sequestration to force lawmakers to balance any new mandatory spending with increased revenue (taxes) or a reduction of mandatory spending elsewhere. If Congress passed legislation that did not meet these requirements (and hence was not deficit-neutral), then sequestration would result in automatic, across-the-board spending cuts to mandatory programs.

One of the major and unresolved criticisms of this version of PAYGO is its exemption of many of the provisions of the 2001 and 2003 Bush tax cuts, the Alternative Minimum Tax (AMT) patches, the expected growth in physician payment rates under Medicare, and estate tax reforms. Rep. Paul Ryan (R-WI), ranking member of the committee, was particularly perturbed by what he felt were shortcomings in the act, including the lack of annual discretionary spending caps, the exemption for expensive policies that could be deemed "emergency," and the overall growth in federal spending that he felt was unsustainable and irresponsible.

Ryan is not the only one who feels this way. Three of the exempted policies (the Bush tax cuts, the AMT patch, and the Medicare physician payment rates) were recently mentioned in a CBO report [3] about the long-term budget outlook. The CBO report stated that without serious re-evaluation, these policies would contribute to a potentially "explosive fiscal situation." During the hearing, some members of the committee expressed concern that these exemptions gave unnecessary privileges to the policies. Orszag testified that these exemptions are necessary in order to ensure that PAYGO rules will not be waived in the future. In the past, PAYGO rules were waived for the purpose of political expediency, and the budget discipline the rules attempt to enforce never materialized. Orszag felt that by exempting these costly tax and entitlement provisions, PAYGO would be applied more consistently.

There was also discussion during the hearing about who would judge the cost of legislation that would be required to comply with the new PAYGO rules and how that analysis should be conducted. The "scoring" methodology of the act would allow the passage of legislation that is budget-neutral over a ten-year period, even if it may not be budget-neutral in a specific single fiscal year. Some members of the committee questioned the length of this scoring window and worried that unavoidable inaccuracies in projections over such a long time-frame would decrease the impact of the rules to begin with.

Several committee members also voiced concerns about who would do the scoring. The legislation would require OMB to review proposed legislation and determine violations based on the OMB's budget baseline. A few members were not comfortable with putting OMB in charge of scoring, but the U.S. Supreme Court has found [4] that allowing the legislative branch to trigger sequestrations is unconstitutional since it allows Congress to interfere with the execution of the laws, an executive branch power. Therefore, under the structure of this PAYGO legislation, OMB must determine PAYGO violations based on the OMB baseline and then enforce sequestrations when necessary.

The hearing also sent the clear message that rising entitlement costs are being driven by a startling growth in health care costs and that this is the primary driver of the government's long-term fiscal issues. Orszag stated that health care reform is necessary in order to avoid a long-term fiscal disaster and emphasized that point throughout the hearing.

With an aging population and rising health care costs, any delay in addressing health care would result in a rise in government debt, more tax revenue diverted to pay for interest on the federal debt, and greater uncertainty about the strength and resolve of the American economy. While PAYGO is not able to solve these long-term problems, it can help to prevent the outlook from getting worse.