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Is the Furor Over Dynamic Scoring Overblown?

By G. William Hoagland, Shai Akabas

Thursday, January 8, 2015

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Macroeconomic scoring, a la dynamic scoring, has been debated for years – most recently with great fervor on the House floor this week. The House has instituted it selectively as part of the body’s rules package adopted for the 114th Congress. But what would dynamic scoring really mean in practice? Here are some facts about the new scoring rules and clarifications to some common misconceptions.

House Rules

The new House rule requires “major” legislation to be scored on a dynamic basis. Major legislation is defined as:

  • Any legislation (scored first under conventional, or non-dynamic, methods) that includes gross budgetary changes equal to or more than 0.25 percent of gross domestic product (GDP) in a given year – about $45 billion in 2014; or
  • Legislation that the chair of the House Budget Committee (or, for revenue bills, the chair or vice chair of the Joint Committee on Taxation) designates as major.

In these cases, legislation will be given a score that incorporates, “to the extent practicable…the budgetary effects of changes in economic output, employment, capital stock, and other macroeconomic variables.” This methodology will be applied to both spending and revenue legislation that meets these standards.1 (For discretionary spending legislation, the chairmen would not have authority to designate legislation as “major,” so in that area of the budget, only bills that exceed the size threshold would fall under this new rule.) The dynamic score will be the “official” score for consideration of House legislation, meaning that it would be used to evaluate whether PAYGO (or CUTGO, a superseding rule that the House initiated in a prior session) is adhered to. The estimate would also be required to include a qualitative assessment of the impact of the legislation on the budget and macroeconomic variables over a 20-year period.

Dynamic scoring will likely limited to a small number of bills – if applied in the 113th Congress, only three pieces of legislation that were considered on the House floor would have met the size threshold and been scored dynamically under the rule: the Jobs for America Act (H.R. 4), the Permanent Bonus Depreciation Act (H.R. 4718), and the Tax Increase Prevention Act of 2014 (H.R. 5771).

Senate Rules

The Senate has not officially made a similar change, so the two chambers are now in the position of potentially having different scoring rules.

1. What is dynamic scoring?

Dynamic scoring is actually a misnomer. The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) are responsible for producing budget estimates of all legislation (on spending and revenues, respectively). Currently, CBO and JCT’s “static” scores already incorporate many elements of behavioral response on what economists call a microdynamic level. What makes “dynamic scoring” different is that it incorporates the impact of legislation on major economic variables – such as the size of the labor force and capital stock, productivity, and aggregate demand, all of which impact economic growth – and then feeds those back into the federal budget estimates to arrive at a final score.

Here’s an example: If Congress considered legislation that raised sales taxes on alcohol, JCT’s current budget projection would account for the fact that people consume less alcohol when it’s more expensive, meaning that revenues collected from the increase would be somewhat lower than under a true static estimate. A “dynamic score,” in contrast, would both reduce the estimate of revenue raised to include the microdynamic impact of people buying less alcohol when it’s more expensive and also incorporate the macrodynamic impact that fewer people purchasing alcohol could decrease the number of jobs in the economy, which would marginally decrease the size of the economy (or income subject to taxation) and the amount of alcohol that people buy.

2. Is dynamic scoring new?

No. The concept has been discussed for years. In fact, the House has had a rule in recent years that required a macroeconomic impact analysis of all revenue legislation considered by the Ways and Means Committee. The difference was that up until now, this analysis had not been incorporated into the official estimate.

Dynamic scoring remains controversial among academic economists, but it received increased attention in the last Congress surrounding two major legislative proposals. First, the bipartisan Senate immigration bill would have fundamentally altered the size and composition of the U.S. labor force to such an extent that scoring the legislation without accounting for these direct projected macroeconomic changes would have effectively rendered the estimate meaningless. Even so, CBO’s official estimate did not incorporate more complex macroeconomic impacts, which were discussed in a supplemental document that provided what would be considered a “dynamic” score.

In addition, last year, Ways and Means Committee Chairman Dave Camp (R-MI) put forward a major tax reform proposal that would have significantly altered the tax code for both individuals and corporations. Like with the immigration bill, the budget scorekeepers (in this case, JCT) completed both an official (or “conventional”) estimate that included some behavioral responses – like changes in the timing of transactions and in the timing and type of consumption and investment – but assumed no macroeconomic feedback and also a “dynamic” score that incorporated macroeconomic feedback.

3. Why would changing to dynamic scoring matter?

As the non-partisan referees of budget analysis, CBO and JCT’s scores carry substantial influence. Their cost findings can often make or break a piece of legislation and history is littered with legislation that might have passed if it hadn’t scored poorly.

Some analysts contend that dynamic scoring could significantly alter the projected cost of legislation, thereby giving a potential boost to some proposals that look more attractive when scored dynamically, while hurting the chances of others that may show larger deficit increases (or less deficit reduction).

In reality, this scoring change is only applied to “major” pieces of legislation. That said, those would also be some of the most consequential – and potentially controversial – bills that are considered in any given session.

The House rules package does not distinguish between tax and direct spending legislation – both would be subject to the same dynamic scoring rules. But because total discretionary appropriations are controlled by aggregate spending limits currently set in law, unless those limits are increased and appropriations follow for a particular purpose (e.g., infrastructure, education, national security), the triggering 0.25-percent-of-GDP metric would not apply to appropriation bills.

4. What are some of the pros and cons?

For starters, economic growth should be a national policy objective regardless of any political persuasion, and that goal should not be enslaved to a particular economic model or theory. Nonetheless, the role of CBO and JCT is to give the best advice that they can develop to the ultimate decision makers, the elected representatives.

So, those in favor of dynamic scoring argue that accounting for the macroeconomic effects of major legislation is essential to accurately score that legislation. They note that many reforms enacted by Congress do impact the U.S. economy in ways that alter the budgetary effects of that legislation. But others respond that even the best macroeconomic baselines are almost always wrong, so trying to estimate the impact of a particular policy would only introduce more error into CBO’s scores and convey undue certainty about them.

Regardless, proponents claim that overlooking the expected macroeconomic impacts automatically biases policy against pro-growth reforms. The practical problem, however, is that “pro-growth” is often in the eye of the beholder – or rather, in this case, the eyes of the staff of CBO and JCT who are responsible for crafting the many difficult assumptions that are needed for macrodynamic estimates. Often, the economic literature is inconclusive about what those assumptions should be and thus, the resulting score can become increasingly subjective.

Another relevant point that is often omitted from dynamic scoring discussions is that both tax cuts and spending increases tend to show beneficial dynamic effects in the years immediately following enactment, but those effects can often flip in the out-years, particularly beyond any projected budget window. Thus, policies that are projected to spur short-term growth when scored dynamically might also have the unintended (and not projected) result of limiting growth over the long term.

5. Is there an institutional problem caused by the House and Senate having different rules?

Not necessarily.

The Senate has 43 standing rules covering, among other matters, Senate operations, committee responsibilities, floor procedures, voting, and ethics. The Senate rules do not include any direct provisions related to budget scoring, but they do specify that the Committee on the Budget has jurisdiction over matters reported under titles III and IV of the Congressional Budget Act. Title III of that Act does provide the chairman of the Budget Committee with the authority to determine budget estimates. Only very rarely have past chairmen deviated from the standard CBO score.

The Senate rules continue from one Congress to its successor and remain in effect until amended. Changes to the Senate rules have not been frequent, and importantly, ending debate on a rules change resolution requires an affirmative vote of two-thirds of all senators present and voting.

Given that the chairmanships of both chambers’ budget committees are held by Republicans, and the unlikelihood and difficulty of changing Senate rules, the odds would point towards an agreed-upon scoring methodology between the two budget committee chairman.

Alex Gold served as a policy analyst for BPC’s Economic Policy Project.

1 Even dynamic scoring, however, would not account for any possible reduction in public health care expenditures associated with less alcohol consumption.