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Will Obama's PAYGO Proposal Increase Taxes?

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The Wall Street Journal whipped itself into a frenzy this morning in reaction to President Obama's attempt earlier this week to reassert his commitment to fiscal responsibility. His re-endorsement of "pay-as-you-go" budgeting would be too much for even Donald Trump to sell, the Journal guffawed, after a stimulus, a bank bailout, and a $3.5 trillion budget proposal. But since paeans to budget austerity are about as common as the Journal's criticism of Obama, what can we really expect from the administration's reinstatement of so-called PAYGO rules?

On Tuesday, the Obama administration proposed a set of pay-as-you-go budgeting rules that, if adopted, would require Congress to ensure that new spending is paid for with equivalent revenue increases. The offset requirement would not apply to what OMB Director Peter Orszag calls "current policy": the Alternative Minimum Tax, the Bush tax cuts, physician payments in Medicare, and the estate tax. That is, the administration assumes - along with every other reasonable political observer - that Congress will be unable to allow the massive tax hikes caused by the downward creep of the AMT and the complete expiration of the Bush tax cuts and will be unwilling to resist the powerful influence of rich people and physicians (who would indeed face rather nasty pay cuts). Additionally, the PAYGO rules would not apply to discretionary spending, about 40% of the federal budget.

Republicans, like the WSJ, immediately jumped at President Obama's "fiscal irresponsibility" for permitting such exclusions and even some Democrats chided the President's efforts as insufficient. After all, the President announced the new rules just days after a Gallup poll showed that 51% of Americans disapprove of his efforts to control federal spending.

The primary question raised by the new PAYGO rules is really whether they will provide sufficient political cover for legislators to raise taxes or cut spending. As critics of the President's plan immediately pointed out, legislators - who, let's not forget, make the law - have a tendency to "recategorize" spending they would rather not subject to PAYGO rules.

The other tendency, one less frequently mentioned, concerns the type of taxes legislators use to meet PAYGO rules. Recent revenue-raising measures to make energy and children's health legislation deficit-neutral (the barebones goal of PAYGO) include taxing deferred compensation earned from offshore tax havens, delaying a phase-in of a tax deduction for U.S. multinational companies, and increasing the federal tax on cigarettes. In other words, not the most robust of tax reforms. Legislators bound by PAYGO or deficit-neutral rules often target small groups for tax increases or use gimmicks (like delays in tax cuts) to satisfy the rules. The situation is familiar to anyone paying attention to the struggles of state and city governments who are trying to close budget gaps (most state and local governments are not allowed to run deficits). Taxes on plastic bags, gambling, junk food, and soda have become all the rage.

This is not to say that certain of these tax increases are not desirable (or, for that matter, that they are). But budgetary rules of the PAYGO type can cause legislators to lose sight of the actual aims of the legislation at hand. As Orszag struggled to explain yesterday in a press briefing about PAYGO, the deficit neutrality of health care reform is not the determining factor of the administration's support for the measure. There are other goals - not least important of which is improved health outcomes for more people - that will result from reform.

Not all revenue-raising measures need be germane to the spending portion of a law. But one wonders, given past experience, if one-off solutions for budget neutrality really generate good legislation. This is especially important for any large, long-term, and important changes to the programs - Social Security, Medicaid, Medicare - that many Americans rely on to make ends meet and to which the administration's PAYGO rules will apply.