Obama Submits 'Paygo' Legislation To Congress

by MIke Godfrey, Tax-News.com, Washington

12 June 2009

United States President Barack Obama has submitted new legislation to Congress that would require all new tax cuts or increases in government spending to be offset by higher taxes or spending cuts elsewhere in the system.

Obama said that his proposed ‘Statutory Pay-As-You-Go Act of 2009' (or 'paygo') would restore fiscal discipline to Washington, help to halve the federal deficit (expected to hit USD1.8 trillion this year) by the end of his first term and reduce the national debt by preventing spending from getting out of control. However, senior Democrats showed little enthusiasm for the idea, and one senior Republican in the Senate derided the legislative proposal as a mere “fig leaf” to disguise the administration’s and Democratically-controlled Congress’s appetite for spending on new entitlement programs.

Obama said: “The deficits that my administration inherited reflect not only a severe economic downturn but also years of failing to pay for new policies - including large tax cuts that disproportionately benefited the affluent. This failure of fiscal discipline contributed to transforming surpluses projected at the beginning of this decade into trillions of dollars in deficits. I am committed to returning our government to a path of fiscal discipline, and paygo represents a key step back to the path of shared responsibility.”

He added: “paygo would hold us to a simple but important principle: we should pay for new tax or entitlement legislation. Creating a new non-emergency tax cut or entitlement expansion would require offsetting revenue increases or spending reductions.”

Paygo rules were first enacted in 1990 as part of the Budget Enforcement Act and came into effect in fiscal year 1991 when the federal deficit was equal to 4.5% of gross domestic product. However, the rules were allowed to lapse by Congress in 2002 after the federal budget returned to surplus in 2000. While the House and Senate still use paygo rules, Obama argues that the subsequent budget nosedive into record federal deficits is prime evidence that these rules need to be strengthened and enshrined in legislation.

“In the 1990s, statutory paygo encouraged the tough choices that helped to move the government from large deficits to surpluses, and I believe it can do the same today,” he said. “Both houses of Congress have already taken an important step toward righting our fiscal course by adopting congressional rules incorporating the paygo principle. But we can strengthen enforcement and redouble our commitment by enacting paygo into law.”

Obama’s proposal was greeted with a lukewarm response from Democratic leaders, however. Senate Budget Committee Chairman commented that a statutory paygo provision is “worth considering” as part of a more comprehensive deficit and debt reduction plan, but he expressed “serious concerns” with certain aspects of the administration’s proposal.

“Even as it puts in place sequester mechanisms to reinforce paygo, it exempts more than USD4 trillion in deficit increases (with debt service) from paygo, including extension of the 2001 and 2003 tax cuts for those making over USD250,000,” he observed.

Senate Finance Committee Chairman Max Baucus also applauded the President for focusing on fiscal discipline, but he noted that Congress already has paygo requirements and is worried that this extra statutory regulation would put the US agriculture industry and Medicare program at risk of automatic benefit reduction.

"I commend the President’s extra effort to rein in deficit spending but I remain concerned about the potential effect of this proposal on American farmers, seniors and veterans,” he said.

Baucus also fears the effect that new paygo rules might have on healthcare reform. However, his Republican counterpart on the Finance Committee implied that Obama’s new proposal was nothing but a smokescreen to legitimize more federal spending.

“In theory ‘paygo’ sounds like a reasonable policy, but in practice it’s been a failure,” Grassley said. "When statutory paygo was in effect in the 1990s, most programs were exempt, and Congress consistently voted to waive the required spending cuts. This proposal is simply a fig leaf to appease those who say they support fiscal discipline but continue to vote for more spending.”

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