The House of Representatives voted this week to establish rules for the 114th Congress. One rule change requires that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) dynamically score legislation. The change is a much-needed reform to the federal budgeting process.
The current legislative scoring process completed by CBO and JCT is generally called static scoring. It currently incorporates some microeconomic behaviorial responses to projected changes in federal spending and taxes.
But static scoring misses a big piece of the puzzle. It assumes that the size of the economy is constant. It does not include an analysis of the economy-wide responses to policy changes. By constrast, dynamic scoring acknowledges the obvious fact that actions of Congress could affect gross domestic product (GDP).
Consider a hypothetical income tax increase from 35 to 40 percent. The tax increase may cause individuals to work fewer hours and businesses to reduce their capital investment. Those sorts of decisions will be made by millions of individuals and businesses in response to tax changes. In aggregate, these responses would affect GDP. Dynamic scoring includes these macroeconomic responses.
Contrary to some opponents, dynamic scoring is not new to CBO. CBO has used dynamic scoring before. The large immigration bill in 2013 was dynamically scored to show how less stringent immigration policy could foster economic growth. CBO estimated the economic growth effects of the 2009 stimulus. And CBO’s long run spending projections include supplementary forecasts that include the effects of future spending, taxes, and deficits on economic growth. The House rule change requires that CBO and JCT use dynamic scoring on all legislative cost estimates above a certain magnitude.
Dynamic scoring is not perfect. Its results are influenced by the assumptions made by the models used to produce the results. For this reason, CBO should make its models, assumptions, and data available to outside experts so it can receive feedback from scholars and improve its methods. But static scoring is even less perfect than dynamic scoring. Its assumption of constant GDP leads to results that are biased against policies that lead to economic growth, such as tax rate reductions.
Dynamic scoring will not be a cure-all, but it will be a helpful tool so policymakers can better weigh policy options. Providing Congress with the best information available on policies to help grow the economy seems like a no-brainer. Congress should understand how its actions affect economic output. This rule change starts the new Congress off on the right foot.