The price and practicality of pay-go

One of the most highly touted changes made by House Democrats in the 110th Congress was the reinstatement of pay-go rules. And if recent action by the Senate holds true, that body will follow suit and re-impose pay-go restraints on itself as part of this year’s Budget Resolution.

Why is this seemingly “inside-the-Beltway” provision the subject of so much attention?

For those who need a refresher course, pay-go refers to a budget process enforcement mechanism that requires Congress to pay for tax cuts or increases in spending on mandatory programs with revenue increases or mandatory spending cuts.

Why is the issue so important to the new majority?

To begin with, Democrats believe it is a proven tool in achieving fiscal discipline. They point to pay-go as a major component in creating budget surplus during the 1990s. Pay-go also lets members demonstrate that they are serious about addressing the federal deficit and achieving fiscal discipline in a way that makes sense to folks back home. Pay-go requires real money whenever revenues are reduced or spending is increased.

What’s the practical impact of pay-go?

In the recent action on minimum wage, the House passed a straight wage increase, but the Senate added $8 billion in tax cuts. The Senate could have sent $8 billion in tax cuts to the House without paying for them. But in order for it to get the votes in the Senate and to have any chance in the House, they offset the tax cuts by increasing taxes on a number of fronts.
Some of the tax increases were relatively narrow; others were quite broad in their reach.

All well and good, you say, but how will the Democratic leadership deal with the political reality of having to live and legislate in a pay-go world?

Pay-go will make it harder to increase spending, cut taxes and extend some of the tax cuts that are scheduled to expire over the next several years.

Again, the minimum-wage legislation is illustrative. The Senate passed an $8 billion package — the House countered with a package that barely got to $1 billion.

The House package received overwhelming bipartisan support in both the Ways and Means Committee and on the floor. Why? Because pay-go creates winners and losers. When the “pay-fors” in the Senate bill created a split between the Chamber of Commerce, the National Manufacturers Association, the insurance industry on one side and the National Federation of Independent Businesses and the National Restaurant Association on the other, members’ enthusiasm for tax cuts was tamped down.

The same dynamic will recur on the spending side — pent-up demand for spending will run headlong into the difficult task of finding offsets.
This is both good and bad. It’s good because it puts a brake on the demands for tax cuts and spending increases, but bad for the industry that becomes the source of the offsets.

That’s why the minimum-wage bill serves as a wake-up call to many on K Street. Any industry that is the subject of hearings/investigations or is a potential source of funding for a politically popular program or tax cut had better be vigilant.

It is fair to say that a lot of people were caught off guard by the Senate action on minimum wage. Many were banking on a strategy that relied on the Senate to serve as a backstop for legislation coming from the House. But on minimum wage, the traditional dynamics were reversed. The Senate was the driving force in the tax-cut/tax-increase dynamic, and the House served as the backstop.

While it may have been enough in the past for lobbyists to advance their clients’ proactive agenda, the world of pay-go requires that they make sure that their clients don’t become the source of revenues to offset the costs of tax cuts or spending increases.

If the House’s response to the Senate tax package is any indication, setting up the distasteful choice of goring someone else’s tax ox to pay for tax cuts may achieve the purpose of reining in the appetite for tax cuts.

Crawford is a senior government-relations adviser in King & Spalding’s Government Advocacy and Public Practice Group. He previously was chief of staff to Rep. Nancy Pelosi (Calif.) in her capacity as House Democratic Leader.