The Budget Act Comes of Age

At 40 years of age, the federal Budget Act bears the scars of fiscal battles dating from the Nixon administration, but its influence over legislation and spending has grown and deepened in ways that its authors couldn’t have imagined.

Hailed as good government innovation at its birth, in 1974, the law reshaped the gears that run spending and taxing in Washington. Its core tenet — that Congress needs to understand how much a law will cost — has become conventional wisdom in the years since its enactment.

But its reach stretches beyond just fiscal scorekeeping and budget resolutions. The creation of the reconciliation process, designed to help Congress balance its spending and taxing desires, paved the way for landmark legislation, from George W. Bush’s 2001 tax cuts to President Barack Obama’s Affordable Care Act. On the other hand, focusing attention on legislative price tags has forced lawmakers to rewrite bills and perhaps steer clear of some topics altogether, such as entitlements. Budget scoring helped torpedo proposals such as President Bill Clinton’s health care plan, for example.

For all its impact, the Budget Act’s 40th birthday went little noticed on Capitol Hill this July. But whether or not lawmakers realize it, the law is working its will on their bills and, perhaps more importantly, on the process for passing them. (See also, The Long Tug of War Over Purse Strings)

Signed by President Richard Nixon on July 12, 1974, the law was meant to help Washington get a grip on spending and wrest some budgeting decisions away from the White House. To that end, it freed lawmakers from having to rely on the administration for cost estimates of legislation and appropriations. Many of its core provisions, including the creation of congressional Budget committees and the Congressional Budget Office, now are integral pieces of the Washington landscape.

“I think it’s made the Congress and the executive branch very much more conscious of the cost of new legislation,” says Alice Rivlin, the founding director of CBO and currently a senior fellow at the Brookings Institution. “That was the whole idea of scoring — that you had to know what something would cost before you could sensibly decide whether it was worth it.”

The law also established a powerful new procedural tool called budget reconciliation, which has helped both political parties enact their priorities. Under reconciliation, lawmakers have an expedited procedure to raise or lower spending or taxes to reflect budget resolution levels, including the power to bypass the Senate’s usual 60-vote requirement to pass legislation.

Although reconciliation usually has been employed to reduce the deficit, shrewd lawmakers have used the process to pass laws that increased the deficit or reduced surpluses. George W. Bush’s tax cuts in 2001, for example, were estimated to reduce then-projected surpluses by $1.35 trillion over 11 years. The Bush tax cut package passed in 2003 was projected to increase the deficit by $349.7 billion over 11 years. As for the Bush tax cuts enacted in 2006, CBO estimated a $139.1 billion revenue reduction over a decade.

The budget law emerged out of Congress’ struggle with Nixon over the presidential impoundment of funds that Congress had appropriated but that Nixon did not want to spend. It also served as a forefather to several other budget-related laws that help shape policy today, such as the Gramm-Rudman-Hollings law of 1985, which created the sequestration process and employed automatic spending cuts to enforce deficit targets.

Other additions include West Virginia Sen. Robert C. Byrd’s eponymous rule, which permits a senator to raise a parliamentary point of order to strike “extraneous” provisions from reconciliation bills. First adopted by the Senate in 1985, it was incorporated into the law in 1986. (See also, The Laws That Shaped the Budget Process)

In the Budget Enforcement Act of 1990, Congress set caps on discretionary spending and created a “pay as you go” law that required tax cuts or expansions of mandatory-spending programs to be offset by higher revenue or spending cuts to avoid increasing the deficit. That law expired in 2002, but it was partially replaced by a new “paygo” requirement signed into law by Obama in 2010.

Even with all those laws on the books, a frequent complaint today is that the budget process is “broken.” Budget resolutions are few and far between, and Congress rarely enacts appropriations bills in an orderly or timely fashion.

At a deeper level, though, the Budget Act’s legacy of cost-consciousness continues to shape high-profile legislation today.

Take the veterans bill that’s moving through Congress. House and Senate conferees have struggled more over the cost of the measures than over how to remedy the long waits or improve management at veterans hospitals. In its latest estimate, CBO projected that the bill would increase direct spending by $38 billion a year when fully phased in by 2016, less than an earlier preliminary estimate of $50 billion a year.

“Because of the way the deficit has been the last 10 years, anything you propose has to have offsets, has to be paid for. So you’re always designing it in a way you can afford to finance it by doing something else,” says Tom Scully, a Washington lawyer and Wall Street executive who was a budget official for President George Bush and director of the Centers for Medicare and Medicaid Services during the George W. Bush administration.

Humble Beginnings

When the law was being written, expectations were running high. Oregon Democratic Rep. Al Ullman predicted that the legislation would prove to be “the most significant reform of the 20th century.”

The Republican leader in the House at the time, John J. Rhodes of Arizona, ventured that the new budget procedures would “allow Congress to make fiscal sense to the country.”

Looking at the law’s successes and failures since then, lawmakers seem to have hit that broad mark.

“Prior to the 1974 Act, nobody cared much about scorekeeping except for the current year,” says Brookings Institution scholar Bill Frenzel, who represented Minnesota in the House from 1971 to 1991 and who was the ranking Republican on the Budget Committee. “If the appropriation, or the mandate, fit the current-year president’s budget or the target set by congressional leaders, it was OK. There was only one scorekeeper: the OMB,” or White House Office of Management and Budget.

Paul N. Van de Water, a former CBO official and now a senior fellow at the Center on Budget and Policy Priorities, said the law “was designed to enable Congress to deal more rationally with budget issues. And I think to that extent it’s been a substantial success.”

The Budget Act clarified and restricted presidential authority to impound, or withhold, appropriated funds, putting to bed a long-running controversy that took on greater urgency when Nixon impounded billions of dollars in an effort to restrain spending in the early 1970s. The practice had grown among presidents since World War II, with Harry S. Truman, Dwight D. Eisenhower and John F. Kennedy all getting into scrapes with Congress over it.

It also changed forever the political dynamics on big spending bills. When Congress created Medicare in 1965, there was plenty of disagreement over how to finance the new program, such as whether to use general revenue or a payroll tax, but projected future costs were less of an issue. Instead of an official score from a Congressional Budget Office, the costs of competing proposals were estimated by their supporters or the administration.

The debate centered on other questions, such as whether the program amounted to “socialized medicine,” who should be covered by Medicare, what the benefits would be and how much of the cost would be borne by the individual.

In those days, “the atmosphere was different, because at that time, going back to the Great Society, there wasn’t a huge worry about whether the federal government had the resources,” Rivlin says. “Things were more focused on whether it was a good idea or not. But it certainly was important, how much it was going to cost, and there was very little information.”

Clearing Roadblocks

When lawmakers finished the 1974 Budget Act, they may have expected it to make certain kinds of legislation harder to pass because the costs would be more transparent. It seems unlikely that they realized they had created a legislative process that would help both parties overcome Senate filibusters and add trillions of dollars to the deficit.

Most recently, reconciliation proved crucial to enacting Obama’s signature health care overhaul. Democrats wrote key provisions of the law into a reconciliation bill, enabling them to bypass a Republican filibuster.

The reconciliation bill contained changes to the “main” bill that brought some provisions closer to a version the House passed in November 2009. It increased subsidies to help uninsured people buy coverage and increased some taxes and fees to help pay for the coverage expansion. It also struck a provision, which would have provided special Medicaid funding to Nebraska that was included to secure the support of Nebraska Democratic Sen. Ben Nelson.

Without reconciliation, “certain provisions of the ACA would have been filibustered successfully on the Senate floor,” says Steve Bell, a former Senate Budget Committee GOP staff director and senior director of economic policy at the Bipartisan Policy Center. “Budget Act procedure, as well as CBO’s ‘seal of approval’ on the deficit, combined to put the bill over the line, in my view.”

On the more traditional scorekeeping front, Budget Act requirements helped decide the fate of the Clinton health care plan in 1994, in contrast to the Obama plan’s eventual success 16 years later.

CBO scored the Clinton plan as adding $70 billion to the deficit between 1995 and 2000, contrary to the administration’s projection that the plan would reduce the deficit by $60 billion over five years. The unfavorable cost estimate was a major factor in sinking the proposal.

With that lesson in mind, Democrats wrote the 2010 health care plan in such a way that CBO would score it as reducing the deficit. “The ACA would have been much harder to pass if CBO had decreed that it increased rather than reduced the deficit,” says Rudolph G. Penner, a fellow at the Urban Institute and the second director of CBO. “The CBO approach to scoring the Clinton health initiative was very important to its demise.”

G. William Hoagland, a former Senate Budget Committee GOP staff director and a senior vice president at the Bipartisan Policy Center, says the CBO cost estimate “changed the debate dramatically” over the Clinton health care plan “and, I believe, directly impacted how the ACA under Obama was considered and constructed.”

Van de Water tells a similar story. “In putting together the ACA, people looked at that experience thinking, clearly, one of the things they were going to do is make sure that CBO does estimate that our proposal is not going to add to the deficit,” he says.

Holes and Quirks

The fiscal constraints of budget resolutions, combined with CBO’s scoring of legislation and other laws, such as the pay-as-you-go requirement that new entitlement spending or tax cuts be offset, have led Congress to write laws to fit within those constraints — even to the point of going through seemingly bizarre contortions.

Take the creation of the “doughnut hole” when Congress cleared the Medicare Part D prescription drug law in 2003. Using a budget resolution as blueprint, lawmakers limited themselves to spending $400 billion over 10 years on the prescription drug benefit.

But President George W. Bush wanted basic and catastrophic coverage included in the legislation. He got both, but Republicans had to divide the coverage in an unusual way to keep from breaking their budget.

After enrollees had exhausted their basic coverage, they had to pay thousands of dollars out of pocket until they reached a catastrophic threshold, at which point their coverage would kick back in. That gap in coverage became known as the doughnut hole. Beginning in 2011, however, the ACA began providing some relief to individuals in the doughnut hole and was set to phase out the lapse in coverage by 2020.

“We weren’t willing to spend more than $400 billion, and that drove some of the design,” says Scully.

Bush’s efforts to reduce the estate tax are another example of rewriting bills to produce a certain CBO score. Before the first round of Bush tax cuts in 2001, the estate tax stood at 55 percent and exempted the first $675,000 of value from taxation. In order to stay within the limits in a tax reconciliation bill, the estate tax was only gradually reduced while its exemptions were increased, with the tax fully repealed in 2010.

However, to comply with the Byrd rule, the estate tax was set to return to its earlier top rate of 55 percent when the Bush tax cuts expired in 2011. Any provision that would increase the deficit for a fiscal year beyond the “budget window” covered by the reconciliation measure is considered extraneous matter that can be stricken from the bill on a point of order.

Had the Bush tax cuts, including the estate tax reduction, been made permanent, they would have increased the deficit in the years beyond the long-term budget window, making the proposal subject to the Byrd rule. To avoid the point of order, most of the tax cuts were written to expire at the end of 2010.

“This is a quirk, the way they designed this thing, that was done largely to deal with the cost of the bill,” says Roberton Williams, a senior fellow at the Tax Policy Center and a former CBO official.

Effect on Innovation

Beyond its effect on the design and passage of legislation, some worry that the 1974 law may have had the perverse effect of limiting the kinds of bills Congress takes up.

Stuart Butler, the director of the Center for Policy Innovation at the Heritage Foundation and a member of CBO’s panel of health policy advisers, says its scoring methodology makes it harder to try daring solutions to legislative problems.

“This is not a criticism of CBO officials,” Butler says, “but a recognition that the ability or inability of CBO to score a proposal significantly affects what can even be considered. I’d say that issue makes it less likely that certain innovative approaches can be considered by Congress, since CBO often does not have the body of background research evidence to give some interesting proposals a score.”

As an example, Butler cites the costs of long-term health care, where CBO’s models are relatively less developed. “Thus it will be difficult, or maybe impossible, for CBO to score the impact of many innovative ideas to address the surging potential cost of aging baby boomers,” he says.

For example, he says, one idea that has circulated among think tanks involves blending a long-term-care component into the Medicare Advantage program. This would mean adding nursing-home care and other long-term-care services to these privately run plans, allowing the plans to experiment with different combinations of services to keep total costs down and potentially save money for Medicaid as well as Medicare. But predicting the behavior of plans and forecasting potential savings would be a challenge.

Although CBO has sought to improve its modeling, the agency has had to give priority to developing its tools in the areas of greatest congressional interest, including most recently the ACA and proposals to repeal it. Lawmakers have been less focused on long-term care, by comparison.

But as a result, Butler says, the difficulty in estimating the cost of long-term-care proposals will “likely cause Congress to stick with approaches that are more ‘scoreable’ but less efficient and less likely to be sustained politically, such as simply reducing payment levels to professional care providers.”

A Process Draws Criticism

In recent years, the budget process has been widely panned by critics, who say it is broken, as evidenced by Congress’ inability to pass spending bills and budget resolutions on time and by the rapid and arguably unsustainable growth of the national debt.

Responsibility for those problems, however, doesn’t rest entirely on the 1974 law. It certainly helped Congress get a better handle on discretionary spending, which had grown famously unruly during the Nixon administration. And budgeting considerations are a permanent fixture in today’s legislative debates.

Still, federal health care spending and Social Security continue to grow at an unsustainable clip, and the nation still has to rely on borrowing from other countries to make up shortfalls in tax collections, both of which keep increasing the national debt.

Penner, of the Urban Institute, faults the “inexorable pressures” that an aging population has put on Social Security and Medicare, complicated by the popularity of the two programs. “Congress just hasn’t been able to contend with them.”

Former Senate Budget Committee Chairman Pete V. Domenici, a Republican from New Mexico, says the Budget Act would work better “if the will was there.” But he adds that the accumulation of debt has served as a disincentive for lawmakers, at least in the Senate, to pass budget resolutions, which by their nature must recognize deficit and debt levels.

“That may make it impossible to use this budget act to solve the budget crisis we’ve got,” Domenici says.

Frenzel, of the Brookings Institution, puts the onus on lawmakers. “The real culprit is the Congress’ inability to make choices, or, stated another way, to adjust priorities,” he says. “As long as the big entitlements continue to be the third rail of politics and tax reform remains off the table, there will be precious few new initiatives, and discretionary spending will be depressed.”

Even 40 years ago, some members of Congress recognized that the new law would not be a panacea.

“To make this design work is going to be just as onerous — perhaps more onerous and more difficult — than coming up with the design,” Missouri Democrat Richard Bolling said at the time. Bolling had been on the conference committee that wrote the final version of the law, and he went on to chair the House Rules Committee.

Whether the law would succeed, Bolling added, would “depend almost entirely on the will of the members of this House and of the other body in this Congress and in the next two Congresses.”

It took longer, of course.

Rivlin, who was finishing her second tour as a Brookings scholar when the Budget Act was passed and who took command of CBO the following year, says the law “did reflect a change in the attitude toward fiscal responsibility.”

“We haven’t ended up being all that responsible,” she says now, “but it’s put hurdles in the way of being irresponsible.”

FOR FURTHER READING: The 2010 health care overhaul is PL 111-148, PL 111-152; the 2003 Medicare Part D law is PL 108-173; the 2003 tax cuts are PL 108-27; the 2001 tax cuts are PL 107-16; the 1974 Budget Act is PL 93-344.

First posted July 18, 2014 6:31 p.m.

Corrects state represented by Domenici in the Senate.