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CBO Revenue Scoring — The Mystery Behind Tax Legislation

September 08, 2010

By Rick J. Kaplan, CPA
Partner
BlumShapiro

How often do we now hear the famous quote by Otto von Bismark from the 19th century, "There are two things you don't want to see being made - sausage and legislation?"  Barely a day goes by without media coverage of deficit projections, with the news focused on how to close the budget deficit.  Depending on one's policy viewpoint, there will inevitably be a discussion on the merits of tax increases and spending reductions.  Although the severity of the deficit is greater than any time since World War II, the process of controlling deficits was significantly addressed in the Congressional Budget Act of 1974 with further modifications by what are now known as Pay-Go rules.  The very quick and simplistic rule is:  if there is a spending increase, including a "tax expenditure," there must be an offsetting revenue increase -- of course, with enough exceptions to make the physics of nuclear fission seem simple.  More about the "nuclear option" below.  

How do Congress and the President determine how much revenue is gained or lost by a tax increase or decrease or, conversely, by allowing or prohibiting a deduction?  This job is assigned to the Congressional Budget Office (CBO) and the task is known as "Revenue Scoring," although the CBO also "scores" tax expenditures -- tax expenditures being in the nature of lost revenues -- think of the home mortgage deduction as a tax expenditure.  The CBO is commonly referred to by both political parties as nonpartisan - unless the result is not the politically desired result. 

Of some controversy among both academics and politicians is the concept of "static analysis" versus "dynamic analysis."  The CBO generally uses static analysis, meaning that the change of one item being measured does not change the potential relationships with other items.  For instance, increasing the value of the home mortgage deduction does not also measure a loss of tax revenue because of a potential decrease in rental income collected by apartment landlords. That is to say, the behavioral consequence of shifting from being a renter to a homeowner is not measured.  So although CBO is viewed as nonpartisan, the debate about lower tax rates to increase revenue will be a debate not answered by the CBO.

So as tax legislation winds its way through Congress, proponents of a particular item seek out the CBO to "score" the revenue impact, be it higher or lower.  There is also a process called "budget reconciliation" and, to those wise in the ways of the Washington Beltway, it's a loaded term.  The normal Senate rules of operation require a 60 vote majority to prevent a filibuster and invoke "cloture" -- the ceasing of debate.  However, if a matter of "budget reconciliation" is brought forth, only 51 votes are needed. This is the "nuclear option" since it deprives the minority party of seeking some consensus with the majority.  Despite protestations at the time, "budget reconciliation" has been used by both Republican and Democratic majorities during the two Bush administrations and the Clinton administration.  It is of importance to note the difference between competing versions of House and Senate legislation sent to a conference committee to "reconcile" differences and true "budget reconciliation."

Given the partisanship exhibited over the last several years, it should not be surprising that this is the first time since 1974 that the House of Representatives has not passed a budget, supposedly based on how the Nation is to operate for the coming fiscal year.  The driver for postponing a vote was the healthcare debate, should the deficit implications be part of the budget, and thus subject to "budget reconciliation," or debated and resolved with a 60 vote in the Senate. 

The revenue "scoring" can be found at the end of every piece of tax legislation.  There are currently dozens of tax proposals, all with the "scoring."  However, as far as basic tax legislation in 2010, virtually no important tax bill has emerged.  The last tax bill passed by Congress as of this writing on July 14 was an extension of the Homebuyers Assistance and Improvement Act of 2010, passed by Congress and signed by the President on July 2.  This allowed for new homebuyers to receive a credit of up to $8,000, provided they close by September 30, 2010 for contracts entered into by April 30 2010.  The act was "scored" by CBO to cost the Treasury $140,000,000 for approximately 180,000 new homebuyers.  As an offset, for the budget to be neutral, part of the revenue raised by this tax expenditure was to increase fees for electronic bad funds on tax payments ($46,000,000) and for cooperation between the Treasury and the Bureau of Prisons to stop a scam whereby incarcerated folks were claiming the Homebuyers Credit ($6,000,000). 

As Yogi said, "You can look it up!" 

 

 

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