Basing budget baselines.

• Author: Kamin, David
• Position: Abstract through III. A Taxonomy of Baselines C. Status Quo Baseline, p. 143-181

ABSTRACT

Measuring the cost of legislation or even projecting the course of the federal budget requires defining a budget baseline--a starting point capturing the current state of the budget. Budget baselines underlie most measures employed in federal budget debates and enforcement rules. Yet, despite their widespread use, budget baselines engender considerable confusion and abuse.

For instance, when legislators enact temporary tax breaks, the breaks are officially estimated to cost far less than they likely will because of a loophole in federal budget baseline rules. Then, later efforts to extend the tax cuts are counted as increasing deficits when, in fact, by more reasonable metrics, they do nothing of the sort and might even reduce deficits.

In response to such problems and the relative lack of scholarly attention, this Article seeks to ground budget baselines in a theoretical framework and then apply this framework to some of the leading debates involving baselines. For example, after presenting this new framework for understanding budget baselines, the Article proposes a way to fix the official baseline so that temporary tax cuts no longer appear less expensive than they really are and extensions no longer appear more expensive. This Article also uses this framework to describe why the long-term fiscal shortfall is smaller than often depicted and why a long-term budget metric now under consideration should be rejected.

By arriving at a better understanding of budget baselines, this Article helps to inform a number of key fiscal debates and makes recommendations for how to improve budget measures going forward.

TABLE OF CONTENTS INTRODUCTION I. HISTORY OF BUDGET BASELINES A. The Advent of the Federal Budget Baseline B. Baseline Disagreement and (Some) Consensus C. Long-Term Baselines: Confusion Always Reigns II. THE PURPOSES OF BUDGET BASELINES A. Setting the Agenda B. Policy Design: Expected Effects C. Policy Design: Using the Status Quo as a Reference Point D. Facilitating Political Accountability E. Enforcing Budget Targets F. Aiding Private Sector Planning G. Serving Irrational Biases III. A TAXONOMY OF BASELINES A. Current Law Baseline B. Low Attention Baseline C. Status Quo Baseline D. Expectations Baseline E. Policy Uncertainty Baseline F. Where Does the Official Baseline Fit? G. Summing Up: A Focus on Clarity and Expectations IV. LESSONS FOR BASELINE DEBATES A. Getting Rid of Baselines Is Not a Viable Option B. Baselines Should Not Be Frozen in Nominal Terms C. Ignoring Policy Cliffs (Much of the Time) 1. Why We Should Ignore Policy Cliffs 2. Applying This to the Official Baseline D. Clarifying Long-Term Baselines 1. How the Long-Term Fiscal Challenge Has Been Exaggerated 2. Confusion Compounds: The Curious Case of Generational Accounting CONCLUSION INTRODUCTION

It was the end of 2012, and Washington was embroiled in a fiscal standoff. Hundreds of billions per year in tax cuts (collectively known as the "2001 and 2003 tax cuts") were scheduled to expire. (1) Republicans wanted almost all of them extended, (2) but Democrats demanded that the high-income tax cuts be pared back. (3) The economy was on the line, as projections showed that failing to resolve the standoff and allowing all the tax cuts to expire at once could end the nascent recovery and drive the country back into recession. (4)

This "fiscal cliff" drew plenty of headlines, (5) but one relatively little-noted aspect of the cliff is that it had largely resulted from a quirk in what is known as a budget baseline. Furthermore, its resolution would be subject to the same quirk, making a final deal best seen as a tax increase appear as a very large tax cut, at least in the official cost estimates.

To quote from Merriam-Webster's Dictionary, a baseline is "a starting point." (6) Or, to offer a somewhat more technical variation on that--and applying it to a legal system--the baseline is the starting point of the legal regime and the reference point against which to measure legal change. The budget baseline is a subset of this: it is the starting point of the legal regime with budgetary effect. Anytime someone cites the cost of new legislation or describes how much a policymaker is increasing (or decreasing) spending, a baseline is at play--since any change must be measured relative to a starting point: the baseline.

The official budget baseline was a central character in the story of the fiscal cliff. Specifically, the official baseline treats expiration of temporary tax cuts as "real," even as it assumes extension of a number of major spending programs that also regularly expire. (7) The original authors of the 2001 and 2003 tax cuts took advantage of this loophole and wrote in an expiration to reduce the cost of the tax cut package and avoid budget enforcement rules that could have otherwise made enactment much more difficult. (8) Further, the same rule would govern in resolving the fiscal cliff. Despite the Democrats winning what some called a tax increase on the highest-income Americans, the Congressional Budget Office (CBO) estimated that the final deal added nearly $4 trillion to the deficit over the coming decade by making most of the tax cuts permanent. (9)

As this illustrates, when it comes to temporary tax changes, the baseline used to judge our current course and changes from it is broken. In this Article, I propose a way to amend the official baseline to close this loophole--which both parties continue to abuse--going forward. (10)

At the very same time that baseline manipulation was playing a large (albeit underappreciated) role in the fiscal cliff mess, it also featured in another fiscal debate dividing Washington: the long-term course of the federal budget. Back in 2012, CBO emphasized a long-term scenario--essentially, a baseline capturing our current course--that showed the budget on a track toward fiscal calamity. (11) CBO projected debt in excess of 250 percent of GDP by the 2040s. (12) These types of projections set the stage for the deficit-reduction recommendations from entities like the Bowles-Simpson fiscal commission, and helped justify the fiscal austerity that began in 2010. (13) However, this long-term baseline and others like it were fundamentally flawed and represented not so much a devastating long-term outlook as a fundamental confusion over that outlook--a point this author made at the time. (14)

And just one year later in its 2013 report, CBO highlighted a much rosier fiscal future. (15) In this new projection, debt stood at around 100 percent of GDP by 2040 (16)--not low, but much better than the projection from the year before and probably not deserving of the "fiscal crisis" label. In large part, this radical turnaround reflected different assumptions about the course of future law, but not anything that policymakers had done in the meantime. (17)

The radical change in the long-term trajectory has received less notice than it deserves; this reflects the more fundamental problem that many baselines--and perhaps long-term baselines especially--rely on unexamined assumptions. The inconsistency derives from confusion, even among the official budget agencies, as to what long-term baselines should measure. This Article offers a theory to ground long-term baselines by better describing what they can and should measure, and rejects a long-term metric advocated by some--called generational accounting--that represents an incoherent approach to long-term budgeting and reflects a further misunderstanding of baselines.

In sum, confusion around and abuse of budget baselines have shaped some of the most important fiscal policies of the current century, and failures in budget baselines have undermined political accountability, budget enforcement rules, and a proper understanding of the likely effects of these budget policies. In this Article, I seek to remedy this confusion and abuse.

I start by laying out a historical and theoretical groundwork in Parts I and II. Part I describes the origins of budget baselines in the 1970s and their subsequent widespread use in federal budgeting. Part II then engages in theoretical work that so far has been largely neglected by the literature, identifying how budget baselines can be constructively used in decision making. This is in contrast to some recent scholarship that sees baselines as largely arbitrary (18) and servicing irrational biases. (19)

Part III then brings organization to the jumble of employable baselines by creating a taxonomy of different budget baselines--differentiated by the part of the legal system these baselines hold constant going forward--and recommending which baselines to use and when. I argue that priority should be given to the expectations baseline--reflecting what is actually expected to occur. To give two examples: we should generally expect temporary tax cuts to be continued, and the baselines we use should reflect that expectation. Similarly, we should expect that the unsustainable will not be sustained in fiscal policy and that, one way or another, the budget deficits will be controlled in the coming years. Consequently, some of the predictions of fiscal calamity for future generations are overstated and certainly improperly framed.

With this taxonomy established, Part IV of this Article then applies these conclusions regarding which baselines to use to four separate ongoing debates that prominently feature baselines. First, I engage the longstanding debate over whether we should use baselines at all; I answer this "yes" in light of the considerable information that would be lost in the absence of baselines. Second, I describe why spending in the baseline should grow in nominal terms, despite calls (especially from conservatives) for a nominal freeze. Specifically, I conclude that a nominal freeze is not consistent with any of the constructive purposes of budget baselines, and serves only to misinform decision makers (if anything)...