Understanding PAYGO: Questions and Answers

The 110th Congress has brought attention once again to a well-known but little-understood fiscal responsibility mechanism: the pay-as-you-go rule, or PAYGO. The House has already enacted a PAYGO rule. The Senate has introduced a PAYGO bill (S. 10), and is expected to pass its own PAYGO rule in the FY 2008 Budget Resolution [1], which is now being considered in the Senate.

The new Congress will face many challenges that will test its commitment to PAYGO rules as it considers expensive changes to tax law, notably relief from the Alternative Minimum Tax (AMT), and modest expansions of some federal programs, such as the State Children's Health Insurance Program. The challenge for the majority will be in addressing these policy issues and still paying for them without being labeled as a party that supports tax increases.

Because PAYGO will be involved in most of the major policy decisions over the next two years, it is important to understand exactly what PAYGO is and how it impacts enacting new policies in Congress. Below are a few commonly-asked questions about PAYGO.

What is PAYGO?
PAYGO is a rule that governs mandatory spending and tax legislation. The purpose of a PAYGO rule is to ensure that neither mandatory spending nor tax legislation increases the deficit. To comply with PAYGO, new mandatory spending programs or tax cuts need to be offset by an equal amount of mandatory spending cuts and/or tax increases. In net, these bills are "deficit-neutral." The term "mandatory spending" applies to spending that is not a part of the annual appropriations process. For example, it includes entitlement programs where the spending is determined by the number of people who are eligible for the program.

PAYGO does not prohibit mandatory spending or tax cuts. It only ensures that these costs are paid for. If they are not paid for, PAYGO requires that they have broad support in Congress to pass.

Does PAYGO apply to discretionary spending?
No. No type of PAYGO applies to discretionary spending. Several procedures and rules put constraints on the annual appropriations process, but PAYGO is not one of them. PAYGO only applies to mandatory spending and taxation legislation. This means programs funded through the annual appropriations process, such Head Start, many environmental programs, and defense spending, are not covered by PAYGO.

Are there different kinds of PAYGO? What's the difference?
All forms of PAYGO are not the same. One type, called statutory PAYGO because it is written into law, needs to be approved by both chambers and signed by the President and has the force of law. This version is self-enforcing on both chambers and the President. Statutory PAYGO can impose mandatory program cuts, or "sequesters," if Congress passes laws that increase the deficit. To suspend statutory PAYGO, the Senate, the House, and the President must approve. .

PAYGO rules, such as what the House did in January, do not have the force of law, are not self-enforcing, and cannot sequester funding. They establish parliamentary points of order that must be raised by a Member to take effect. They are binding only in the chamber that created them. To suspend them, only the chamber to which they apply must approve. In the House, the Rules Committee must make a rule that exempts a piece of legislation from PAYGO. In the Senate, 60 Senators must vote affirmatively to overturn a PAYGO point of order.

But if PAYGO rules apply in both chambers, there is much less difference between statutory and rule-based PAYGO. Under both scenarios, overturning PAYGO would require the consent of the same actors: a House majority, 60 Senators, and the President.

What's the difference between PAYGO in the House and PAYGO in the Senate?
Both the House and the Senate have a type of PAYGO rule. The House rule is simple and essentially requires that all mandatory spending and tax legislation be deficit-neutral. The Senate, however, contains a large loophole. It exempts deficit-increasing legislation if certain changes are made in the annual budget resolution. As a result, many costly bills have been exempted from a PAYGO point of order in the Senate. In FY 06, for instance, the PAYGO rule was modified to exempt a series of tax cuts while it still applied to spending increases.

Different standards apply to overturning these rules in each chamber. House leadership can suspend PAYGO with a special rule. The Senate must provide 60 affirmative votes to overturn a PAYGO point of order.

The House and Senate rules also tabulate the cost of bills differently. The Senate PAYGO rule applies to the sum of costs and savings in bills that have been enacted over a session of Congress. It keeps a running tally of all new mandatory costs and revenue changes. The House rule applies to each bill in isolation. It only takes into account the costs and savings of the legislation being considered. This means that, for example, in the House, a cost-savings bill passed earlier in a fiscal year does not count as an offset to a new mandatory spending measure being considered later.

What's the difference between old PAYGO rules and the new ones?
Congress had enacted a statutory PAYGO rule in the 1990s, but it expired in 2002, and neither the House nor the Senate are considering a new statutory PAYGO law. The House did not have a PAYGO rule until this year.

The new proposals for Senate PAYGO rules in S. 10 and in the FY 08 budget resolution would eliminate the loophole in the current Senate rule. It would prohibit using the budget resolution to assume changes in mandatory spending or tax legislation to side-step the PAYGO rule.

Does a PAYGO rule in one chamber apply to the other?
No. PAYGO rules only apply in one chamber. Each chamber has to have its own PAYGO rule. If PAYGO is to apply in both chambers, they both must create some type of PAYGO rule.

Will PAYGO prevent Congress from passing a recession stimulus package?
It should not, though it may make it slightly harder because if the stimulus contained tax or mandatory spending changes that increased the deficit, the bill would would be subject to PAYGO and would need to be offset. Alternatively, if the bill did not have offsets, the House PAYGO rules would have to be suspended by the leadership of the majority. The Senate PAYGO rule would also have to be suspended, requiring 60 affirmative votes, though this threshold is no higher than the votes needed to end debate on any Senate bill. Then the President would have to decide whether to sign a deficit-increasing bill.

Further, an appropriations bill might be the most appropriate vehicle for a recession-relief package, in which case PAYGO would not apply.

Why is PAYGO important?
A PAYGO rule, and abiding by its principle, is important because it ensures that the government has enough revenue to respond to public demands over the long-term. That may seem counterintuitive, since PAYGO imposes a procedural hurdle that is essentially intended to make it more difficult to pass certain kinds of legislation and make Congress less responsive to immediate demands. But in the long term, PAYGO protects the public from irresponsible spending or tax policy that makes the revenue base inadequate to address public needs. Inadequate revenues reduce the government's capacity to act on public demands by increasing annual deficits, long-term budget imbalances and the interest the federal government pays on the national debt. Lawmakers face more pressure to forgo spending in order to reduce the deficit and balance the budget. And the Treasury Department pays more interest on the debt, which can crowd out spending on other programs.

Adequate revenues over the long term enable the government to expand, maintain and improve government programs. PAYGO rules — and, most importantly, adherence to them — ensure that when the public asks the government to respond, it can.

PAYGO also helps prevent the passage of legislation that would further erode public support of government. It visibly links taxation with program spending, restoring the perceptual connection between public services and taxation. Though not sufficient, restoring this link through PAYGO is a necessary step for "government" to get back its reputation of advancing common interests.