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The Hamlet Budget: A Tragedy Written on Capitol Hill

As I watched the House and Senate Budget committees mark up the fiscal 2009 Congressional budget resolution last week, it was hard not to come to the conclusion that something was definitely rotten in the state of federal budgeting.

[IMGCAP(1)]This was especially the case when it came to taxes. How else can you describe the extraordinarily disingenuous and totally inconsistent statements made and positions taken about the pay-as-you-go rules? You could almost hear “to PAYGO or not to PAYGO, that is the question” being spoken on the floors of the House and Senate and in press conferences around Capitol Hill.

PAYGO was first put in place by the Gramm-Rudman-Hollings Act in 1985 to prevent a legislated increase in mandatory spending or decrease in revenues from making the deficit worse than it would be under current law. PAYGO doesn’t stop the president and Congress from spending more or taxing less; it simply says they have to offset whatever they’re doing with other mandatory spending reductions and revenue increases.

In other words, PAYGO is the federal budget process equivalent of what Polonius famously says to Laertes: “Neither a borrower nor a lender be.”

Even though there was bipartisan support for Gramm-Rudman-Hollings and former President George H.W. Bush’s director of the Office of Management and Budget, Dick Darman, was one of PAYGO’s creators and biggest supporters, in the more than two decades since it was put in place Republicans have generally seethed when anyone said it had to be applied to taxes.

One reason is the GOP position that tax cuts generally pay for themselves and don’t need to be offset. The other reason is that, even if tax cuts don’t pay for themselves, Republicans often think of PAYGO as usurping their right to cut taxes whenever they see fit. As a result, Republican Senators and Representatives have generally shown a witches’ brew (sorry, wrong play) or a combination of sadness and anger whenever PAYGO has been discussed.

Last week’s budget resolution markups demonstrate that the Republican melancholy about the PAYGO rules has gotten much worse.

Even though there is absolutely no disagreement that, compared to what would be collected under current law, it will result in lower 2008 federal revenues by around $60 billion, Republicans insisted that the PAYGO rules shouldn’t be used for the one-year alternative minimum tax fix. They openly criticized Congressional Democrats for even thinking PAYGO should be applied.

But when it became clear that, as they supposedly preferred, an offset was unlikely to be required in the Senate, Republicans criticized Democrats for not following through on their pledge to — drumroll, please — impose PAYGO.

Meanwhile, in discussing whether PAYGO should be applied, Democrats last week seemed to be debating among themselves whether it was nobler for them “in the mind to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of troubles.”

As they did last year when a one-year AMT patch was enacted, many House Democrats were adamant they should apply PAYGO and take arms; that is, to take the political heat from the GOP criticism and do battle to be King of Denmark — I mean, of Fiscal Responsibility. Many of these Democrats feel that Republicans have unfairly seized this title that, because of their devotion to PAYGO, is rightfully theirs.

Senate Democrats, however, were far more inclined not to battle over the offset but instead to suffer in their mind — that is, to handle the criticism they get from not applying the PAYGO rules and instead to move quietly around the Capitol.

The sequel to the current version of Budget Hamlet will come when an extension of the tax cuts enacted in 2001 and 2003 is debated in the next year or so.

These tax cuts were not made permanent when they were enacted. Even though the Bush administration wanted them to be for all time and the Republican-controlled House and Senate very likely would have provided the supermajorities needed to make them permanent, the White House made a decision to have the tax cuts expire in 2010 so the Congressional Budget Act wouldn’t be violated and it wouldn’t have to compromise to get the additional votes needed to overcome the rules.

That decision looked pretty good in the early days of the George W. Bush administration when GOP control of Congress looked like it would last forever and extending the tax changes seemed like a sure thing. But with both chambers now under Democratic control, the PAYGO rules that were not applied in 2001 and 2003 may not be so easy to ignore or waive when a renewal of the tax provisions is considered.

That’s when Bush’s decision to make the tax cuts temporary will, much like the ghost of Hamlet’s father did at Elsinore Castle, come back to haunt the budget process. Permanent law, which is the base for applying PAYGO, assumes that the tax cuts will expire and federal revenues will then increase. That means that extending any of the changes beyond 2010 will result in a loss in revenues compared to what would otherwise occur, and any legislation extending the tax cuts will need to be offset if the PAYGO rules are enforced.

As is the case in Act I: The AMT, this next act will have a very simple plot. If the tax cuts are extended in any way, a decision about applying PAYGO will be needed and will produce the same angst as last week. Some will again say this is just an extension of current law that doesn’t have an impact on the bottom line, and they will demand that no offsets be considered. Others will insist that the budget deficit will be increased unnecessarily and that PAYGO absolutely applies.

Each will criticize the other for fiscal irresponsibility. They will both protest too much, methinks.

Stan Collender is managing director at Qorvis Communications and author of “The Guide to the Federal Budget.” His blog is Capital Gains and Games.

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