Memo to Budget Conferees: PAYGO on Tax Cuts Means Higher Taxes

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Memo to Budget Conferees: PAYGO on Tax Cuts Means Higher Taxes

March 30, 2004 1 min read

Authors: Brian Riedl and Keith Miller

Now that both the House and Senate have passed budget resolutions for fiscal year 2005, the budget debate moves into conference. The size of tax cuts, savings from entitlement programs, and an increase in the debt limit are all under consideration, but making sure that the pay-as-you-go (PAYGO) budget enforcement mechanism does not cause tax increases should be the central concern of conferees.

Senate PAYGO Would Force Massive Tax Increases

If PAYGO is applied to tax cuts-which it is in the Senate's resolution but not in House's-taxes would almost certainly go up. While PAYGO allows current entitlement programs to grow unchecked, it would likely lead to the expiration of the current tax cuts. Merely retaining the tax relief that Americans now enjoy would, under PAYGO, require 60 votes in the Senate and a waiver in the House. To avoid this supermajority requirement, lawmakers seeking to prevent tax increases would have to either: A) raise other taxes; or B) reduce mandatory spending by a larger amount than has ever been enacted. Option A is still a net tax increase (raising one tax to avoid raising another), and option B is probably politically unrealistic.

If the 2001 and 2003 tax cuts expire, a married couple with two children and a combined income of $40,000 would see their annual income tax burden rise from $45 to $1,978.

Immediate Tax Increases

Without action by Congress, a portion of the 2001 and 2003 tax relief will expire this year, and millions of families will face large, immediate tax increases. Thankfully, both the House and Senate budgets protect from filibuster the $80 billion needed to extend the child tax credit, the 10 percent income tax bracket, and the elimination of the marriage penalty. In addition, the House budget protects from filibuster an additional $58 billion in tax cuts to extend other expiring provisions, such as those in the 2002 economic stimulus bill.


The Senate and House resolutions differ in several other ways. For example, the House resolution contains $13 billion of required savings from waste, fraud, and abuse in entitlement programs, not included in the Senate plan. These reforms would be prudent and are long overdue.

During the conference process compromise is a necessity, but conferees should stand firm against applying PAYGO to tax cuts. Allowing the Senate's PAYGO provision to move forward would seriously endanger the President's tax cut program, which is doing so much to help the economy.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies, and Keith Miller is a Research Assistant, at The Heritage Foundation.


Brian Riedl
Brian Riedl

Senior Fellow, Manhattan Institute

Keith Miller

Senior Fellow