The Congressional Budget Office (CBO) reported last week that the GOP plan to cut taxes by $1.5 trillion over 10 years would trigger automatic spending cuts under the Statutory Pay-As-You-Go Act. This includes a $25 billion reduction of what Medicare pays providers for medical services. Republicans are right to ignore, for now, this potential effect of their tax legislation, as they had no role in the enactment of the pay-as-you-go law in the first place and can fix the problem later. It was House and Senate Democrats who rammed the pay-as-you-go legislation through Congress in 2010 just as they were about to lose their supermajority.
Democrats today complain about the partisan approach Republicans have taken on health care and taxes. They seem to have forgotten how they ran Congress in 2009 and 2010.
During the first months of the Obama administration, the Democrats had a supermajority of 60 votes in the Senate. That sizeable majority allowed them to pass legislation, including the Affordable Care Act (ACA), without any Republican votes. But then the unthinkable occurred. On January 19, 2010, Republican Scott Brown stunned the political world by winning a special election to serve out the remainder of Sen. Ted Kennedy’s Senate term. Kennedy, who passed away in August 2009, had been replaced on a temporary basis in September 2009 by Paul Kirk, who was appointed by then-Massachusetts Gov. Deval Patrick, also a Democrat.
After Brown’s victory, the Obama administration and congressional Democrats knew they would soon lose their supermajority in the Senate. That would mean they could no longer pass legislation under regular order without securing some Republican support. With 41 votes, Republicans would be able to filibuster bills they disliked, except for legislation passed using budget reconciliation legislation, which requires only a simple majority.
Although Brown was elected on January 19, he wasn’t sworn in and seated until February 4. In the interim, Sen. Kirk continued to serve in the Senate. This delay wasn’t unusual, but it proved to be important.
On January 20, just one day after Brown’s victory, then-Senate Majority Leader Harry Reid called up legislation to increase the federal debt limit by $1.9 trillion. That legislation was then amended to include the Statutory Pay-As-You-Go legislation before it passed in the Senate on January 28. The legislation was considered under “regular order,” meaning it was not a budget reconciliation bill. (Budget process changes cannot be passed easily through reconciliation because they generally do not directly affect federal spending or revenue, which means they are vulnerable to removal from those bills under the Byrd Rule.) Statutory Pay-As-You-Go passed in the Senate on January 28 with all 60 Democratic Senators, including Sen. Kirk, voting in favor of it. All Senate Republicans voted against the legislation. The House took up the bill a few days later and passed it, again without any Republican support.
The pay-as-you-go legislation of 2010 put into statute a budget process rule that has been operating off and on since 1990. The premise of the law is that Congress should be precluded from passing legislation that increases federal budget deficits above the levels that would otherwise occur. So, for example, if members of the House and Senate want to pass a bill increasing spending by $100 billion over 10 years, they must include offsetting spending cuts or tax increases equal to or exceeding $100 billion.
In 1990, Congress put the first pay-as-you-go rule in place as part of a five-year budget agreement struck between President George H.W. Bush and the Democratic majorities in the House and Senate. The rule was enforced with a “sequester.” The way the sequester works is that the Office of Management and Budget (OMB) assesses the budgetary effects of all legislation passed each year in Congress. If Congress passes bills during the year that, in total, increase the deficit, then the OMB is required to impose an across-the-board spending cut on unprotected programs to generate savings sufficient to cover the breach.
Unlike earlier versions of statutory pay-as-you-go, the 2010 legislation was permanent and was not put in place to enforce a budget framework. In 1990, President Bush and Congress created the pay-as-you-go concept to lock in place a mix of spending cuts and tax increases intended to reduce the budget deficit. Initially, pay-as-you-go was limited to the five-year period of that budget agreement (1991–1995). The 2010 law, by contrast, was enacted by Democrats to preclude a future GOP-controlled Congress from passing an unfinanced tax cut. In other words, that law was aimed squarely at trying to prevent Republicans from passing a tax cut just like the one that is now moving through Congress.
Democrats sometimes argue that pay-as-you-go is nonpartisan because it is equally tough on unfinanced spending and tax cuts. But that is not quite right. Pay-as-you-go is fine if there is an agreement between the parties on the overall level of taxes and spending. But sometimes there is a legitimate disagreement about the size of government. Democrats often want to increase the size of government, and they are happy to do that by increasing both taxes and spending, which is consistent with pay-as-you-go. Republicans believe a more circumscribed government is better for economic growth over the long-run, and sometimes the best approach to limiting the reach of government is by lowering the overall level of taxation, accompanied by spending restraint. (Although that spending restraint may be less than the tax cut and may come in appropriation bills that are not counted under pay-as-you-go.) President Reagan’s tax cut in 1981 was aimed at promoting economic growth and restraining government. If the Democratic party had its way, statutory pay-as-you-go would preclude future congresses from ever again passing a Reagan-style tax cut. Republicans will never agree to that — and shouldn’t.
The irony is that the pay-as-you-go law passed by Democrats in 2010 might give the GOP new leverage in the budget process over the coming months. If Republicans succeed in passing a 10-year, $1.5 trillion tax cut, the enforcement of pay-as-you-go will require across-the-board spending cuts to eliminate the added annual deficits from lower federal revenue, starting with cuts in funding in 2018. (The GOP cannot undo the pay-as-you-go implications of the tax bill with a simple waiver provision, because under reconciliation rules, the waiver would be subject to the Byrd Rule and would thus need 60 votes to survive.) These spending cuts will hit Medicare and other unprotected programs, including the operating budgets of many federal agencies. Congressional Democrats will not want these cuts to go into effect. But they can’t stop them without Republican cooperation.
The net effect, then, of passing an unfinanced tax cut in the era of pay-as-you-go may be to create added pressure for bipartisan spending restraint to partially offset a Republican-inspired tax cut. That is surely not what Democrats had in mind when they rushed the pay-as-you-go law through the Senate in the early days of 2010.
James C. Capretta is a RealClearPolicy Contributor and holds the Milton Friedman chair at the American Enterprise Institute.