Not Just Kansas Anymore

April 26, 2017

Back in 2010, Kansas Governor Brownback and his Republican-controlled legislature initiated a “real-live experiment” in a particular brand of conservative economics. It blew up. And we, who don’t live in Kansas, may get hit by a much bigger explosion.

Experiment Blows Gaping Budget Holes

The Kansas Republicans eliminated income taxes for variously-structured small businesses. They also reduced income taxes for individual filers. This, Brownback said, would attract businesses, grow those there and create many thousands of jobs.

Well, Kansas, which must balance its budget every year, saw income taxes fall about $54 million short of projections — and then $333 million. Brownback filled the holes by shifting money from funds meant for special purposes..

Not enough. So Brownback cut funds for a range of programs, e.g., higher education, Medicaid, in-home services for seniors. And he tried to cut funding for K-12 education by $28 million — an action the Kansas Supreme Court found unconstitutional.

Why should we who don’t live in Kansas or have ties to anyone who does care? Because the Trump administration and leading Congressional Republicans have the same theory in mind for their tax cuts. And they’ll predictably trigger cuts in cuts in programs that benefit low-income people.

Faith in Theory Remains

A theory dating back to the mid-1970s, holds that tax cuts will stimulate so much economic growth that the additional revenues gained under the lower rates will offset the seeming losses, even reap more — because business will invest more, people work more, save and invest more.

It’s now commonly known as supply side economics — or pejoratively trickle down. Note how it favors tax cuts for corporations and well-off individuals, since lower-wage workers already have to earn as much as they can and have little or nothing left over to buy stocks and bonds.

Both the theory and some specific features of Brownback’s experiment underpin what the Trump administration and Congressional Republican leaders have in mind for their promised tax reform.

House Speaker Ryan’s Better Way tax reform plan includes large tax cuts on individuals’ investment income, lower tax rates for all businesses and an immediate, instead of a multi-year write-off on their investments.

The promise here is economic growth — in the labor force, productivity and wages. Though the cuts will be larger than “loopholes” and deductions eliminated, the package will, the plan says, be revenue-neutral, i.e. neither more nor less tax revenues collected.

Ryan cites a fairly recent House rule that requires the Joint Committee on Taxation to use dynamic scoring, rather than beginning with the current revenue baseline and then adding and subtracting estimated gains from increases and losses from cuts.

Last year’s concurrent budget resolution, i.e., the basic blueprint for budgets the House and Senate will develop, directed the Congressional Budget Office to do the same, insofar as it responsibly can.

No one with any basic economic smarts doubts that taxes have some effect on choices that affect growth. JCT and CBO factored these in their pre-dynamic scoring.

But the economists must build and use even more complex predictive models for dynamic scores. These — and so the results — can vary widely. But JCT and CBO  must deliver only one score, rather than a range, with explanations as they used to.

And now Trump’s Director of Office of Management and Budget says that both the budget and the administration’s tax reform proposal will reflect some dynamic scoring, but with a considerably higher growth rate than CBO’s.

The plan, he more recently said, ‘”will pay for itself” with growth — nearly $2 trillion over the first 10 years. The Tax Policy Center, on the other hand, estimates a $6.2 trillion loss in revenues, plus another trillion for interest on the mounting debt.

Devil Isn’t Only in Model Details

White House economists are still hammering out details of the tax reform plan, reportedly consulting with Congressional leaders — Republicans only, one infers.

Two things we know for sure. The business tax part will be “phenomenal” and the speaker, whom I trust need not be identified, believes the whole package “bigger than any tax cut ever.”

But what if, as in Kansas, it results in revenue losses? Edward Kleinbard, a former JCT chief of staff, thinks this likely — in part because the models assume that only individuals (and one assumes businesses) make productive investments. But government spending boosts growth too.

Less of that and the deficit will rise. The dynamic scoring partisans will push for deep cuts in investment programs and/or social insurance, he warns.

We know from experience that a rising deficit will prompt a wide range of cuts — both safety net and investments that give low-income people opportunities to earn more, e.g., by gaining more education and marketable skills, better public transportation, renovated neighborhoods that attract businesses.

These all give their children a better chance to do better too.

When Republicans balked at raising the debt ceiling in 2011, the Obama administration brokered a deal. Congress then passed the Budget Control Act — a two-part spending reduction measure.

We first had across-the-board cuts for both defense and non-defense programs that depend on annual appropriations, then caps on each, which Congress and the President later agreed to temporarily modify.

And look what’s happened.

As I’ve said before, programs generally need more funding just to sustain a steady state because costs rise — rent that housing vouchers subsidize, food and beverages that nutrition aid programs pay for* teaching materials, salaries and operating costs in public education programs, from pre-K through college, etc.

But funding for non-defense programs is now 16% lower in real dollars than in 2010. Title I funding targeted to high-poverty schools has remained basically flat, notwithstanding its current Every Child Succeeds Act name.

The Child Care and Development Block Grant — the largest source of federal subsidies for lower-income families serves fewer children in an average month than in any year since 1998, according to the latest official figures.

The Community Development Block Grant, which Trump wants to eliminate, lost $6 million last year alone. Local housing authorities are shy well over $26.5 billion needed to repair and/or renovate deteriorating public housing units merely to avoid further losses, estimated at 10,000 a year.

These are only examples I can readily recall in enough detail and find links for. We will surely have a plethora with those phenomenal tax cuts.

* Most nutrition assistance programs administered by the Agriculture Department must receive enough funding for everyone eligible. This is not true, however, for WIC or two programs that supply food directly, rather than as a cash-equivalent or a reimbursement.

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If You Don’t Like the Answer, Change the Question

January 12, 2015

A recent New York Times op-ed warns that the Republican leadership will instruct the (up till now) nonpartisan Congressional Budget Office to use dynamic scoring when it estimates the revenue impacts of changes to the tax code.

The House of Representatives, in fact, passed a rule last week that requires not only CBO, but the also nonpartisan Joint Committee on Taxation to use dynamic scoring for all “major legislation” — and to provide just one estimate, rather than the range they’ve customarily provided for large-scale economic effects.

We’ve had rumors of this radical change ever since Republicans seemed like to gain control of the Senate, as well as hold onto their House majority. Fueling them was the expectation, proved correct, that Congressman Paul Ryan, who’s a fan of dynamic scoring, would become head of the House tax-writing Ways and Means Committee.

And we’ve had warnings of the consequences for even longer. Because dynamic scoring has been around for quite awhile.

How CBO and JCT score legislation might seem far removed from policies that affect poor and near-poor people in America. But it isn’t because dynamically-scored tax cuts can make prospective revenues seem greater than they’ll actually be.

Congress can then more easily make tax cuts that will drive the deficit upward — and so set the stage for spending cuts (except for defense) more severe than even those we’ve seen.

Brief explanation from a non-economist who believes she’s read enough to grasp the basics.

How CBO and JCT Score Legislation

When bills with any potential revenue impact are proposed, they’re sent to CBO for a score, i.e., estimates, over a 10-year period, of how the legislative changes will increase or reduce federal revenues. JCT gets involved when the bills are tax-related.

As the op-ed author, Professor Ed Kleinbard explains, the experts try to predict how people will respond and to fold the results of those responses into the scores.

Say, for example, some Congress members want to raise the gas tax. CBO and/or JCT would factor in the likelihood that some people would drive less. Buy more fuel-efficient cars too perhaps. And so the revenue estimates wouldn’t be as high as a straightforward addition of the extra paid at the pump if drivers kept buying as much gas as they do now.

Congressman Ryan is thus pulling the wool over our eyes when he claims that the current scoring method fails to “take into consideration behavioral changes or economic effects.” Ditto the far right-wing Heritage Foundation’s tax and policy guru, who asserts that the current method is “static.”

How Dynamic Scoring Differs

Economic models that produce dynamic scores include estimated impacts on the entire economy and the revenue consequences thereof.

In the case of tax cuts for individuals, they’d factor in broad assumptions about what people would do, e.g., work more because they could keep more of what they earned (or less for the same reason), buy and/or invest more, which could ramp up production, create jobs and, therefore, boost income tax collections.

Similar sorts of assumptions for business tax cuts.

What the models don’t do, Kleinbard says, is factor in the consequences of tax cuts that don’t trigger spending cuts or tax hikes later. Nor, he adds, do they include the negative effects on economic output that would result from less government spending.

CBO actually does sometimes estimate “feedback effects” on the overall economy. But, it says, they tend to be “small relative to the direct budgetary effects.” And, as I said above, it never offers a single macroeconomic impact estimate.

Not what the Republican tax-cutters want. As Citizens for Tax Justice says, they’re looking for something like the oft-debunked Laffer curve, which has been used to argue that tax cuts pay for themselves.

Implications of the One-Estimate Rule

All the responsible experts I’ve read emphasize the iffiness of dynamic scoring. Understandably, because as Kleinbard says, the models economist use involve a lot of assumptions about who will do what if taxes rise or fall.

The Center on Budget and Policy Priorities, which has been bird-dogging the issue, points out that JCT produced eight different estimates of the dynamic effects of just-retired Congressman Dave Camp’s tax reform plan.

They ranged from $50 billion to $700 billion in additional revenues over the first 10 years — or from another perspective, a 16-fold difference between the lowest and highest estimates of the increase in the total value of goods and services produced.

And which do you suppose Camp cited? Which do you suppose Republicans tax-writers would use if presented with the options?

But under the House rule, they wouldn’t be. They’d get just one — and instead of, rather than in addition to the conventional score that’s provided the basis for revenue estimates up until now. But only when they thought it would support their plans, since they could easily evade the “major legislation” standard when it wouldn’t.

And very importantly, they wouldn’t necessarily get the explanations for dynamic scores, as they have up until now. Which means that we wouldn’t have them either.

The model that produced the estimate Camp touted assumed that Congress would prevent the deficit from soaring by cutting transfer payments, e.g., Social Security, unemployment insurance, SNAP (food stamp) benefits.

One way or the other, the dynamic scoring gambit will ultimately feed arguments for cutting social insurance, safety net benefits and/or other programs that are properly viewed as investments, e.g., in science, infrastructure, public education. Like as not, all of the above.

That, Kleinbard concludes, “is what lies inside the Trojan horse of dynamic scoring.” And it’s why we everyday citizens ought to care about what seems so arcane.