With Republicans taking over control of the Senate in January, legislative leadership is considering who to appoint as director of the Congressional Budget Office. At the center of the debate is the practice of dynamic scoring, which means legislative analysis would account for how the economy is altered by changes in the law.
Simply put, changes in the law make people act differently. Eliminating special interest tax breaks will actually improve the economy because businesses will be more productive and focus less on lobbying. But when government analysts estimate the revenue effects of legislation, they don’t analyze effects on the overall economy.
For example, what if a tax credit for electric cars cost the government $5 billion in revenue over the next 10 years? Government analysts would say repeal of that tax credit would increase tax revenues by $5 billion. But the economy would actually improve slightly because of the credit’s repeal, causing a corresponding increase in tax revenue. Repeal of the credit could hypothetically increase tax revenue by $5.5 billion over 10 years.
Multiply that effect for hundreds of special interest tax breaks with varying magnitudes and it becomes clear why a dynamic analysis of comprehensive tax legislation is more accurate than what government analysts currently do, called static analysis.
In February, House Ways and Means Committee Chairman Dave Camp, R-Mich., introduced the Tax Reform Act of 2014. The Joint Committee on Taxation used static scoring to analyze the bill and essentially called it deficit neutral. The JCT also conducted dynamic analyses using different models and assumptions to account for macroeconomic changes resulting from the legislation. As JCT staff wrote, “The increase in projected economic activity is projected to increase revenues relative to the conventional revenue estimate by $50 to $700 billion, depending on which modeling assumptions are used, over the 10-year budget period.”
Admittedly, such a wide range is not ideal for revenue projections. But dynamic analysis can be used in conjunction with static analysis until improving methods can narrow revenue projections. The more JCT and CBO utilize dynamic analysis, the more their analyses will improve as they compare projections against actual results.
Liberals often complain that dynamic analysis is just a conservative attempt to change basic math in order to cut taxes. However, liberals should realize that dynamic analysis can help with their own pet projects.
For instance, the Border Security, Economic Opportunity, and Immigration Modernization Act that passed the Senate in June 2013 was analyzed by the CBO using dynamic scoring. The CBO showed that immigration reform would improve the deficit gap by $158 billion over 10 years. To this day, immigration advocates use the CBO’s dynamic analysis to show that more immigration would boost the United States economy and reduce the deficit.
When Congress convenes in January, it will likely find itself at an impasse with President Obama. Obama wants more tax revenue to fund government programs, but Republicans want to cut taxes. Conservative tax reform advocates say they oppose increasing the tax burden, but aren’t opposed to more government revenue that results from economic growth. Dynamic scoring can give everybody what they want. Instead of the numerous government funding crises that have happened since 2010, Congress and the President should use dynamic analysis over the next two years to reach amicable budget compromises.
