House Passes Paygo Budget Rules: Major Exemptions and a Key Challenge

Yesterday, the U.S. House of Representatives passed H.R. 2920, which would reinstitute a pay-as-you-go requirement of budget neutrality on new tax and spending legislation, by a 265-166 margin. 241 democrats and 24 republicans voted in favor of the legislation while 13 democrats and 153 republicans voted against the bill. In essence, the legislation would require any new expenditures or tax relief be offset by spending reductions and/or tax increases to maintain overall budget neutrality.

Nonetheless, a significant share of the federal budget would be exempt from the legislation. Exemptions would apply to, among other programs or laws, physician payments made by Medicare, provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, and the Jobs and Growth Tax Relief and Reconciliation Act of 2003 via scoring (calculating) adjustments. In other words, should Medicare physician payments rocket, no budgetary offsets would be required. At the same time, renewal of expiring provisions associated with the 2001 and 2003 tax relief measures also would not require offsets.

Arguments can be made to rationalize those and other exemptions. For example, allowing the tax relief provisions to expire altogether might prove too economically disruptive, especially at a time when the economy remains weak.

However, on the Medicare front, the exemption is particularly difficult to justify given the long-term fiscal imbalances associated with that program. In that case, the exemption merely serves to postpone the federal government’s starting to tackle the issue of mandatory spending program reforms necessary to put the nation on a more sustainable fiscal path.

Aside from the above-noted exemptions, the first major test of Congressional budgetary resolve could come in the form of health care reform legislation. To date, the Congressional Budget Office (CBO) has estimated that the major legislation likely to be considered would increase the nation’s budget deficits. That raises the question as to whether Congress will make changes to the legislation necessary to make it budget neutral to begin establishing credibility on the fiscal discipline issue or whether Congress will adopt the legislation, even as it would increase the nation’s budget deficits. Considering the exemption put in place for Medicare physician payments, odds probably favor the latter course, though such a course does not ensure that the health care legislation would be adopted. It only suggests that the legislation probably will not be made budget-neutral.

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