Both Dynamic, Static Scoring Fall Short

Posted February 26, 2003 at 4:52pm

As the new Congress begins the battle over President Bush’s new tax proposals, the pivotal fight may be taking place not at the top of Capitol Hill, but in the foothills. The House has already named Douglas Holtz-Eakin to be the new director of the Congressional Budget Office, while Lindy Paull, staff director of the Joint Taxation Committee, has announced her pending departure. Not by coincidence, Holtz-Eakin and Paull’s successor will have similar views on assessing the cost of doing the people’s business. A dynamic duo, to be sure.

The job of advising Congress on how much a legislative program will cost over time — commonly referred to as “scoring”— falls upon the nonpartisan tandem of CBO and the Taxation panel. Since the Budget Act of 1974 created CBO, economists and politicians have argued over the most accurate, realistic or “best” way to score legislation.

While most legislation is scored by CBO, the impact of changes in tax policy is scored by the Taxation Committee. The scoring community mainly falls into two camps: those who favor static scoring and those who favor a dynamic approach. To the protest of many conservative lawmakers, static scoring has been the norm for official assessments.

The general premise behind static scoring holds that a change in taxes equates to a corresponding change in revenues to the government. Dynamic scoring proponents assert that, since tax cuts provide people with more income to spend, a realistic score must also consider macroeconomic effects on labor supply and growth.

Unfortunately, the debate has been largely framed in partisan terms. Many Republicans argue that static scoring artificially raises the price tag on tax cuts and paints an unrealistically rosy picture of tax increases. Democrats argue that dynamic scoring attempts to predict the unpredictable and minimizes the negative effects of tax cuts. So who’s right?

The answer should be obvious: Neither side is indisputably correct. If the facts or economics overwhelmingly supported one method over the other, there could be no debate. But scoring is not an exact science. Both static and dynamic methods require making assumptions and predictions. Both present risk in an environment where the stakes are high. So what should we do?

Absent a consensus on the final impact of a tax policy change, the Taxation panel and CBO should provide analysis up to the point where the two sides diverge: a baseline. A baseline is not intended to be a precise forecast. It is simply a set of initial assumptions upon which both sides can agree to start the debate.

Let the partisans argue about the economic impact beyond those baseline assumptions. Let the merits of those arguments be assessed on the floor of Congress and on Sunday morning talk shows. CBO and the Taxation Committee should not be required to enter where it is difficult to separate economic assumptions from economic ideology. The official score should stop where the agreed-upon economic effects end and the effects in dispute begin: at the static score.

There is little debate that in the short run a 5 percent reduction in taxes would initially equate to about a 5 percent reduction in revenues. This may not be the end of the story, but it is unarguably the beginning. The rest of the story depends upon the economy, government spending and human behavior. Predicting human behavior is a tricky business — especially when some of those humans are lawmakers and government officials who control fiscal and monetary policy.

Static scoring does not provide the final cost of a change in tax policy, but it does provide the last place of agreement. Perhaps static scoring could be called worst-case scenario thinking, ironically the more “conservative” estimate. But it would be more accurate to characterize it simply as a foundation of common ground upon which both sides can publicly debate what they believe to be the total impact.

This year, Holtz-Eakin and Paull’s successor may begin the era of dynamic scoring as the official scoring method of the Congress. The politicization of CBO and the Taxation Committee has begun.

Army Capt. John Gossart is a former legislative fellow to Sen. Mark Dayton (D-Minn.) and currently teaches American politics at West Point. The above views are his own.