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CBO Immigration Cost Estimate Doesn’t Support Use of “Dynamic Scoring” for Tax Reform

Some members of Congress are claiming that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) used “dynamic scoring” to estimate the budgetary effects of the Senate immigration bill and should do the same for tax bills, starting with tax reform.  But they’re off base on the immigration bill, and their call for dynamic scoring for tax reform is an invitation for fiscal irresponsibility. Advocates of “dynamic scoring” want to see “macroeconomic feedback” effects incorporated into estimates of the budgetary effects of legislation.  That means trying to estimate (1) how the legislation might change households’ work and saving decisions and businesses’ investment decisions, (2) how those decisions would affect broad macroeconomic variables like gross domestic product (GDP) and employment, and (3) how those changes in the economy would induce changes in revenues and spending. CBO and JCT do not do this in their cost estimates, and with good reason.  Economists do not agree on the size — sometimes even the direction — of macroeconomic feedback from cutting marginal tax rates or making other changes to taxes or spending. Such dynamic scoring would also impair the credibility of the budget process.  Because the estimates of macroeconomic feedbacks are very uncertain, including them in budget estimates would be highly controversial and inevitably viewed as biased and politically motivated. In its official cost estimate of the immigration bill, CBO made an exception to its longstanding policy of assuming that the legislation under consideration does not affect the overall size of the economy.  It did not, however, embrace dynamic scoring. CBO and JCT confront a unique challenge with immigration bills, which — unlike virtually all other legislation — would substantially expand the U.S. population and labor force and therefore affect the budget independently of any impacts resulting from changes in households’ and businesses’ behavior.  As our analysis of the Senate bill explains, CBO’s cost estimate accounted for the direct effects of these population and labor force increases on the size of the economy, revenues, and federal benefit spending.  CBO employed a similar procedure in its cost estimate for the 2006 immigration bill. Other than that, CBO sought (in its words) “to remain as consistent as possible with the rules CBO and JCT follow for almost all other legislation” and did not “incorporate the budgetary impact of every economic consequence of the bill.”  CBO did not, for instance, include more speculative and uncertain effects on GDP, such as changes to business investment and productivity.  In short, CBO’s cost estimate of the immigration bill does not include the type of “dynamic scoring” that some members of Congress are calling for with respect to tax legislation. As it sometimes does with major legislation, CBO provided a separate analysis of additional economic effects not in its official cost estimate of the immigration bill, as well as their potential impact on the budget. Reflecting the high degree of uncertainty surrounding these effects, CBO provided a range of estimates rather than the precise estimates required in an official cost estimate. This is the appropriate approach for any legislation with such potential economic effects, including tax-reform legislation.  But by claiming that CBO employed dynamic scoring in its cost estimate for the immigration bill, advocates of using dynamic scoring for tax bills are seriously misrepresenting CBO’s approach to the unique situation that it faces with immigration bills.  Policymakers should not fall for this mistaken claim when they consider tax reform. The fact remains, as we explained a year ago, that budget plans — whether on the tax side or on the spending (“investment”) side of the ledger — should not rely on dynamic scoring.