Dynamic Dysfunctions

by Guest Blogger, 2/10/2003

At the start of this Congress, the Republican-led House Ways and Means Committee made the implementation of the controversial practice of “dynamic scoring” for budget decisions one of its first orders of business.

In a process referred to as “scoring,” the Congressional Budget Office (CBO) and the Congressional Joint Committee on Taxation (JCT) provide official analyses and revenue effects of each proposed House and Senate bill that has the potential to change the amount of federal revenue available each year. For example, the estimated direct annual loss of revenue resulting from permanent estate tax repeal is $56 billion. This is called "static scoring," in which the cost of a tax cut is calculated to be the gross loss of revenue. Given the number and extent of the tax cuts proposed by this administration, even though the President insists that even with the direct benefits going overwhelmingly to the wealthy, the tax cuts will still lift all boats, static scoring only shows the negative effect on the deficit of huge and costly tax cuts. In contrast, “dynamic scoring” refers to the factoring in of possible increases in economic growth when “scoring,” or calculating, the amount of lost revenue a tax cut (or spending proposal) will create.

Advocates of dynamic scoring argue that the practice offers a more realistic view of the likely budget effects of tax cuts by incorporating increased business activity that they believe accompanies lower tax rates. Some proponents, including the American Enterprise Institute’s Kevin Hassett, claim that the current system of static scoring misrepresents and distorts the full impact on the federal budget. Hasset has also suggested that dynamic scoring offers results that are no more incorrect than the current static methods, and that legislators should have all scores presented to them so that they can decide which most accurately account for a tax cut package’s impact.

Opponents point out that dynamic scoring masks the true costs of tax cuts by relying on the potential for an increase in revenue that many economists argue is unlikely and also difficult to predict with any real accuracy. One example of this problem is well illustrated by a recent Washington Post article, which identifies no fewer than four different “scores” for the President’s proposed dividend tax cut and the other elements of his most recent tax break package – the static 10-year cost of the total package has been estimated to be $694 billion. The 10-year cost estimates for the dividend tax cut, alone, varied from a low of $125 billion (from the Heritage Institute’s dynamic score) to a high of $394 billion (the static cost estimated by JCT).

A paper by Deborah Kobes and Jeff Rohaly of The Urban Institute demonstrates that instituting a formal policy for the use of dynamic scoring would require planning or estimating around future fiscal policy, taxpayers’ future behavior, and future business cycles well beyond the window of time for which they can reliably be predicted. “Unfortunately,” they conclude, “measures of macroeconomic feedback effects are very sensitive to assumptions that are subjective… Given the degree of uncertainty inherent in current methods of macroeconomic forecasting, true dynamic scoring would not allow the consistent and comparative cost estimates” provided by CBO and JCT.

CBO and JCT do currently provide estimates to illustrate potential effects on the economy of significant tax proposals, at the request of Members of Congress, but such estimates are not official and only offered as supplemental information. Even opponents of dynamic scoring have encouraged this practice to continue in the same sort of advisory, rather qualitative (and not quantitative) manner because, as Kobes and Rohaly explain, they “show how sensitive a proposal would be to various changes in these [macroeconomic] assumptions. However, producing an estimate in the form of a single revenue or cost number would be misleading.”

Or as former CBO Director Rudolph Penner, now Senior Fellow at the Urban Institute, explained, “There is nothing to prevent CBO from doing studies to inform the Congress of the findings of academics and others as to the complete dynamic effects of specific policy changes. In fact, CBO has done such studies on capital gains tax rate changes and other things. The Congress will probably be disappointed by the wide range of uncertainty on such matters, but it is no wider than CBO has to deal with when forecasting the economy more generally.” Penner went on to make it clear that dynamic scoring becomes a nightmare when Congress expects to be able to get clear, reliable, constant estimates for complex tax packages.

In the meantime, however, a greater potential for confusion has been created by the House Ways and Means Committee’s decision. Since neither CBO nor the Senate currently use dynamic scoring in calculating the costs of tax bills, a comparison of House and Senate versions of these bills will likely prove difficult over the course of this Congress, with House bills likely showing a substantially lower cost of a tax break package than that calculated in the other estimates.

Of course, in the end, the House’s dynamically-scored estimates might not be lower than the static scores of the Senate and CBO. The Post article notes that many economists, even those in favor of dynamic scoring, have warned that the costs in the later years of these large tax cuts may outweigh the additional revenue dynamic scores predict for the first few years of the tax break package.