paygo

What is PAYGO?

“Pay-As-You-Go” budgeting (or PAYGO) requires that any increases in entitlement spending or decreases in revenue (tax cuts) be offset by reductions in other entitlement spending or through increases in revenue. PAYGO is designed to encourage sustainable government spending, ensure responsible tax cuts, and prevent growth in the budget deficit.

PAYGO rules were originally adopted in the 1990s, during the last period of growing federal budget deficits. According to most sources, PAYGO was successful in limiting deficit growth. From 1991 to 1997, enacted legislation that was subject to PAYGO consistently met the requirements for funding new tax cuts or entitlement expansions with offsetting taxes or spending cuts. These PAYGO rules also were enforced by an automatic, across-the-board cut of non-exempt entitlement spending (known as “sequestration”) if new spending or tax cuts were not offset.

During the budget surpluses of the late 1990s and the subsequent tax cuts of 2001, Congress began voting to disregard the PAYGO rules. The original PAYGO rules expired in 2002.

Currently, only the Senate operates under a weaker PAYGO rule that was enacted as part of the budget resolution in 2004 and expires in September 2008. This version of PAYGO, sometimes called “one-sided PAYGO,” allows the Senate to enact new tax cuts or entitlement increases without paying for them as long as they are included in the most recent budget resolution. Any senator may block tax cuts or entitlement increases outside of those specified within the budget resolution by offering a point of order that can only be waived with 60 votes. Currently, however, new tax cuts or entitlement spending increases already included within a budget resolution cannot be challenged.

Reinstating PAYGO in the 110th Congress

Democratic leaders in the House and Senate have promised to implement stronger PAYGO rules in the 110th Congress. Like the PAYGO rules in the 1990s, the version adopted by the 110th Congress would require lawmakers to offset spending increases or revenue decreases with comparable entitlement cuts or tax increases. It is important to note that PAYGO is a rule, and is not anticipated to pass statutorily.

In the House, PAYGO allows a single member’s objection to block non-offset tax cuts or spending increases unless the House Leadership decides to waive the PAYGO rule. In the Senate, a single member can block non-offset tax cuts or spending increases – regardless of whether those provisions were included in a budget resolution. The Senate rules require 60 votes to proceed.

Proponents of reinstating PAYGO rules argue that

PAYGO requires Congress to recognize that both entitlement spending and tax cuts must be paid for with current revenue – and reject the notion that tax cuts are different from entitlement increases and need not be offset (Source: Center for Budget and Policy Priorities and Heritage Foundation).

PAYGO requires Congress to recognize that unchecked budget deficits matter and can eventually harm the nation’s economy (Center for Budget and Policy Priorities).

While PAYGO would discourage non-offset tax cuts or entitlement spending, it would also prevent tax increases or spending cuts in the future by reducing the need to pay off future debt (Center for Budget and Policy Priorities and Heritage Foundation).

PAYGO rules covering both entitlement spending and tax cuts would discourage Congress from creating additional “tax entitlements” that would complicate the tax code and increase the deficit (Center for Budget and Policy Priorities).

Reinstating stronger PAYGO rules would close the current loophole that allows new entitlement spending or tax cuts to be exempted from PAYGO if they appear within Congressional budget resolutions (The Concord Coalition).

PAYGO can be flexible. In the event of an economic downtown or national emergency, PAYGO rules could be waived to allow necessary spending or tax cuts (Center for Budget and Policy Priorities).

Critics of reinstating PAYGO rules maintain that:

PAYGO would not be effective as long as expanding, previously-established entitlement programs are exempt from “pay-as-you-go” considerations (up to 96 percent of mandatory entitlement spending, according to CBO estimates). To be effective, critics believe that PAYGO should include all mandatory entitlement spending (The Concord Coalition and Heritage Foundation).

Reinstating PAYGO would not control unbalanced discretionary spending on domestic or defense programs. Managing discretionary spending would still need to occur during appropriations in the annual budget resolutions (Heritage Foundation).

Reinstating PAYGO would not close the budgetary loophole provided by exempted “emergency” spending. New regulations for managing emergency spending, such as a separate emergency fund accessible through a 60-vote majority, may be necessary (Heritage Foundation).

PAYGO would not be effective if Congress passed additional legislation blocking OMB from sequestering funds in the event of non-offset tax cuts and spending – as Congress did during the 1990s (Heritage Foundation).

Resources

For more information about PAYGO, see:

Heritage Foundation: Memo to Representative Pelosi: How to Make PAYGO Discipline the Federal Budget.

Center For Budget and Policy Priorities: Reinstatement of Pay-As-You-Go is a Welcome Step Toward Fiscal Responsibility.

For more general information about federal budget reform, including PAYGO, see

The Concord Coalition: Budget Process Reform: An important tool for fiscal discipline, but not a magic bullet.