CBO Budget Baseline Will Compete With Other Baselines

Visitors to House and Senate Budget Committee mark-ups are often surprised by how debates over baselines consume more time than debates over policy.  That’s because agreeing to a baseline forces certain policy decisions.  If you assume tax cuts will be extended in the baseline, it doesn’t cost anything to extend them.  If you assume the President’s spending proposals in the baseline, you can show large spending cuts when you remove them, even if they had little chance of enactment anyway.  That’s the game being played now.  This morning, the Congressional Budget Office will release its baseline as required by the Budget Act in its annual Analysis of the President’s Budget. CBO is constrained to take into account “present law,” except that any expiring trust fund taxes are assumed to continue.  That means that last December’s tax cuts will be assumed to expire at the end of 2012, even though most, if not all, of them will be extended at a 10-year cost of $3.2 tr.  President Obama wants to allow the tax cuts for those with incomes over $250,000 to expire, even though he agreed to extend them for two years last December.  Assumptions about what expires and what doesn’t are crucial.  For decades, Congress has passed large tax cuts that are assumed to expire so their long-run cost can be hidden, even though everyone knows they will be continued.  That’s why getting a realistic U.S. budget baseline requires adding back the cost of extending expiring tax cuts, funding the wars in Iraq and Afghanistan, and the cost of other hidden spending.  Be sure to go to the back of CBO’s Analysis to add these back plus interest.  If you look at a graph of CBO’s and OMB’s budget baselines over the years, they always show the deficit declining more rapidly than actual deficits.  Each year, we adjust the baseline deficit upward and replay the game.

About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

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