Wonder why taxes keep going up? There are many reasons, but the
latest congressional trick is to assume a tax hike. The prop
in this fiscal magic show is the Congressional Budget Office (CBO)
revenue baseline, a rabbit hidden so deep in the weeds that it went
unnoticed for years. Most of the time, Congress has to vote on
legislation to raise taxes. But with baseline magic, the tax hike
occurs automatically unless Congress votes to stop it.
Few subjects draw yawns faster than budget rules and process.
Yet these often guide and sometimes govern budget decisions with
profound implications for taxpayers, the economy, and the tussle
over resources. In 2008, baseline magic could produce a $70 billion
tax hike if legislators are not careful.
The purpose of the budget rules and process is to guide
deliberations over taxation and spending, assuring Members due
opportunity to express their wills and voices yet still pushing the
exercise forward to conclusion. As Congress works its will, the
rules and process that guide the fight must be fair in perception
and practice, favoring neither side in the debate. But, in
practice, they are not fair. As the House and Senate go about
fine-tuning the budget resolution for 2009, they should seize the
opportunity to restore fairness to the process.
A Baseline of Fairness
The budget rules, particularly the Pay-As-You-Go (PAYGO) rules,
come into play when a proposed change in tax policy changes the
expected level of tax receipts. The CBO revenue baseline is the
starting point for these calculations, so the assumptions that
underlie the calculation of the revenue baseline can, and in
practice do, bias the outcome of debates over tax policy.
For many years, the CBO revenue baseline reflected the outwardly
appealing assumption that current law would be maintained
throughout the forecast period, typically the next five or 10
years. In years past, this assumption was mostly innocuous because,
with few exceptions, Congress rarely displayed the bad form of
enacting significant tax provisions with expiration dates. The one
significant exception has been the R&D tax credit, which limps
along year-by-year with successive extensions.
In 2001 and again in 2003, Congress enacted major tax relief
that included doubling the per child tax credit, lowering tax
rates, repealing the death tax, and cutting the capital gains and
dividend tax rates. However, for the legislation to be passed, it
was necessary that these provisions be allowed to expire after
2010. Following long-established precedent, the CBO assumes in its
revenue baseline that these tax cuts will expire, thus showing a
massive increase in receipts in 2011 and beyond.
AMT Patch Fight Demonstrates Baseline
The current fight over the AMT patch is heavily influenced by
the CBO baseline. In 2007, some Members of Congress struggled and
strained all year long to explain how extending the AMT patch to
avoid raising taxes on millions of taxpayers was also a tax cut
that had to be offset under PAYGO. They could never explain how
preventing a tax increase was a tax cut, and they certainly knew
they could never explain that sleight of hand to their
Members of Congress were put in this mind-bending position
because the CBO revenue baseline was telling them something that
just made no sense. Under the CBO baseline, extending the patch was
scored as a tax cut. If the CBO baseline were constructed sensibly,
extending the AMT patch would be shown as maintaining current law
and thus not changing the level of tax receipts.
In 2007, Congress managed at the last minute to pierce the fog
rising from the CBO baseline and enacted an AMT patch without an
accompanying tax increase. Congress must extend the AMT patch again
in 2008 and once again overcome the confusion arising from the CBO
Is Changing the CBO Revenue Baseline
An absurd consequence of the CBO revenue baseline is that
legislation extending tax relief, which by 2010 will have been the
law of the land for either eight or 10 years, is estimated to be a
tax cut. On the other hand, suppose the CBO were to follow the more
sensible practice of assuming that current tax laws that are set to
expire continue indefinitely. In that case, extending the tax
relief would still require legislation, but the legislation
required to prevent a massive tax hike would not be shown in the
official revenue tables as a tax cut.
Such a change in CBO scoring practices may seem at first to be
an unfair attempt to make extension of the tax cuts easier.
Extending current law would surely become easier, but correcting
the revenue baseline would also make the process fairer and more
sensible by comporting the conventions that guide the revenue
baseline with those that guide the spending baseline.
When the CBO formulates its baseline for discretionary spending,
it properly assumes that future discretionary spending will rise
with inflation. Thus, spending is shown to increase in the baseline
year after year even though the authority to spend expires at the
end of the current fiscal year. A tax provision expires, and its
effects are dropped from the revenue baseline; discretionary
spending expires and yet is maintained in the spending baseline
plus inflation. This inconsistency in treatment biases the budget
Similarly, certain multi-year spending programs such as the
State Children's Health Insurance Program are sensibly assumed in
the spending baseline to extend indefinitely, long after they are
set to expire. The same holds for the farm program, the highway
program, and many others. Extending these expiring provisions in
the spending baseline while dropping expiring provisions from the
revenue baseline injects a clear bias into Congress's
deliberations. It is unfair and should be remedied.
An Easy Change
Fortunately, returning fairness to the revenue baseline is an
easy job. The CBO needs only to treat tax policy and spending
policy in a parallel fashion. The CBO need make no specific
assumption about future congressional action, but it can make the
simple general assumption that current law, whether spending or
tax, will continue indefinitely until Congress acts to change the
This change can be made at any time, but the ideal moment to
direct the CBO to make this change is during the formulation of the
annual budget resolution. The CBO can and should make the change of
its own accord; but if the CBO stands pat, simple directive
language would suffice to compel it to correct its methodology and
return fairness to the revenue baseline and the budget process.
The budget process needs to be fair and unbiased toward specific
outcomes. The assumptions that go into the CBO revenue baseline
fail this test, as they have done for many years. The Congress
should take the opportunity presented by the debate over the budget
resolution to instruct the CBO to treat expiring tax provisions the
same way it treats expiring spending provisions: continuing them in
J. D. Foster, Ph.D., is Norman B.
Ture Senior Fellow in the Economics of Fiscal Policy in the Thomas
A. Roe Institute for Economic Policy Studies at The Heritage
a more complete discussion of the revenue baseline issue, see J. D.
Foster, Ph.D., "AMT Fix Becomes Massive Tax Hike Via Misleading CBO
Baselines," Heritage Foundation WebMemo No. 1695, November
7, 2007, at www.heritage.org/Research/Taxes/wm1695.cfm.
Curiously, the language of the current budget
resolution indicates that those same Members of Congress who
inflicted this mind-bender on their colleagues in 2007 intend to do
so again in 2008. Fortunately, in this case, history is almost sure
to repeat itself, and the AMT patch will again be extended without
a companion tax hike.