Budget 'PAYGO' Rule Could Force Up Taxes, Fears Analyst

by Mike Godfrey, Tax-News.com, Washington

26 April 2004

As President Bush’s 2005 budget moves into conference now that the House and Senate have passed budget resolutions, free market think tank the Heritage Foundation is warning that tax cuts could be in jeopardy if pay-as-you-go rules are applied to the budget plans.

The pay-as-you-go, or PAYGO, rule stipulates that new spending or tax changes must not add to the federal deficit. New proposals must either be ‘budget neutral’ or offset with savings derived from existing funds.

“If PAYGO is applied to tax cuts - which it is in the Senate’s resolution but not in House’s - taxes would almost certainly go up,” claimed Heritage Foundation Economic Policy expert Brian Riedl.

Consequently, if the PAYGO rules are applied to the 2005 budget, it will allow current entitlement programs to grow unchecked, whilst the current tax cuts will likely be left to expire, explained Riedl.

To retain tax reliefs such as those on estate tax, a 60 vote supermajority will be needed in the Senate under pay-as-you-go rules, and lawmakers seeking to avoid this would also be forced to either raise other taxes or reduce mandatory expenditure, an option Reidl thinks “unrealistic”.

“Allowing the Senate’s PAYGO provision to move forward would seriously endanger the President’s tax cut program, which is doing so much to help the economy, and once again put America’s family businesses at risk of double taxation and liquidation to pay the onerous estate tax,” he warned.

Under current law, the burden of the estate tax will be reduced in 2005, 2006, 2007, and 2009, before it is repealed entirely in 2010.

However, Riedl fears that with PAYGO rules in place, the estate tax could be reinstated in 2011 at a rate of 60% with a $1 million exemption, a worse scenario than the current top rate of 48% and $1.5 million exemption.

Recommended