NCPA - National Center for Policy Analysis

Eliminating PAYGO

June 14, 2002

A new report by economist Jason J. Fichtner for the Joint Economic Committee of Congress recommends amending or eliminating pay-as-you-go (PAYGO) budget requirements. PAYGO was established with the Budget Enforcement Act of 1990, and twice extended through FY 1998 and FY 2002. The rules are set to expire in 2002.

The PAYGO principle requires that all new direct spending and tax legislation for a fiscal year must be deficit-neutral. Although generally praised for increasing accountability among lawmakers, Fichtner argues that PAYGO often results in inferior options and bad tax policy. He says:

  • Legislators are often forced to accept second- or third-best solutions to problems in an effort to stay within PAYGO requirements.
  • PAYGO rules result in overly optimistic economic and technical assumptions to stay within PAYGO requirements.
  • Odd budget schemes are often adopted just to stay within the rules.
  • It is an obstacle to tax legislation that would make the system fairer, more efficient and stable -- because PAYGO rules do no affect previously enacted taxes and legislation, but do affect new legislation.

The study recommends permitting dynamic revenue analysis of tax legislation, or at the very least allowing legislation exempting appropriate tax deferrals from PAYGO requirements.

Sources: Jason J. Fichtner, "Extending the Budget Enforcement Act: Revision of PAYGO Rules Necessary for Better Tax Policy." Joint Economic Committee, United States Congress, May 2002, Washington, D.C.


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