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A 'Pay-Go' Full of Loopholes

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Wednesday, July 22, 2009; 8:49 PM

There is less than meets the eye to the Democrats' "pay-go bill," the lavishly touted gesture toward fiscal responsibility that the House passed on Wednesday.

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The pay-as-you-go measure, known as pay-go and endorsed by President Obama, was hailed by Rep. George Miller of California, the head of the Democratic Policy Committee, as a device that will force Washington to "make tough choices" and "help bring our fiscal house in order."

Other sponsors, such as Budget Committee Chairman John Spratt and Majority Leader Steny Hoyer, who genuinely worry about the flood of red ink inundating the government, were more modest in their claims. They acknowledged that by itself, the bill will do nothing to cure the giant budget deficits, but they said it might deter Congress from "digging the hole deeper."

Its key provision requires that any new tax cut or entitlement increase be paid for by an offsetting reduction in other programs or a tax increase. If, for example, you want to guarantee child care for every working mother or provide her with a payroll tax cut, you would have to find savings or revenue elsewhere of equal size.

When the Democrats controlled Congress back in 1990, they passed a similar law and it helped establish the kind of discipline that led briefly to balanced budgets in the Clinton administration.

When the law was about to expire in 2002, the Republican majority let it die, figuring that its absence would make it easier to pass more of the tax cuts recommended by President Bush. Deficits mushroomed.

In the 2006 election, the Democrats took over and the first thing they did was restore pay-go as a rule of the House and Senate. This year, Obama encouraged them to make it a law, hoping it would give him more power to enforce it.

It could do just the opposite. The bill says that at the end of the year, if Congress has spent more on new entitlements or tax cuts than it has saved, the president can roll back or sequester the excess. But the Congressional Budget Office, the official scorekeeper, warned in a July 14 memo that, as introduced, the bill might allow spending to increase -- and by a staggering amount.

"In effect," it said, "that rule would allow the Congress to enact legislation that would increase deficits by an amount in the vicinity of $3 trillion over the 2010-2019 period without triggering a sequestration."

The reason is that the bill exempts from pay-go all of the spending involved in Medicare physician payments and all of the revenue dependent on estate and gift taxes, the alternative minimum tax for individuals and the administration's plan to continue the middle-income tax cuts of 2001 and 2003.

That is not the only giant loophole in this version of pay-go. Unlike the one enacted in 1990, it is not accompanied by any multiyear cap on discretionary spending. That means the 40 percent of the budget reflected in annual appropriations bills for ongoing or new government programs does not have to be paid for.

When I asked Hoyer about the budget office report and these big exemptions, he said, "They are right." But he defended the exemptions as necessary to get the bill approved. If the Medicare payments and the tax breaks that may be coming were not exempted, he said, they would certainly be given waivers this year -- and that would set a bad precedent for the process.

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