You can be sure Washington politicians are up to no good when they say they should be allowed to work on tax bills behind closed doors. Shining much-needed light behind those doors might make them think twice before raising our taxes.
The truth is that Congress goes behind closed doors every time our senators and representatives consider how a proposal to cut or raise our taxes might affect the economy. Here’s how it works: Congress requires that its Joint Committee on Taxation (JCT) analyze, or “score,” all tax proposals to decide whether the proposal would help or harm the flow of government revenues.
For years, that scoring has been done in secret. Few outside the JCT know the specific methodologies and economic assumptions committee members use. All we know is that they rely on a “static” scoring method — one that assumes taxpayers won’t change their behavior at all if taxes are raised or lowered. By contrast, virtually everybody outside of Washington, including state governments, Fortune 500 corporations, and private businesses, uses a “dynamic” scoring method, which does assume taxpayers will respond to tax changes — and they’ll do so in fairly predictable ways.
Don’t tune out yet. This affects your pocketbook.
What happens when milk goes from $2 a gallon to $4? Static scoring assumes we keep buying the same amount, no matter what the price. And it also predicts that if lawmakers double our taxes, government will get twice as much of our money.
But dynamic scoring assumes that we aren’t dummies when it comes to milk or taxes. Double the price of milk, and we start drinking less of it. Similarly, when government raises our taxes, we find ways to reduce our taxable income. Then tax revenues go down and government has less to spend, even though it’s taxing us more.
One result of this closed-door tax scoring is that Congress frequently projects either too much revenue from a proposed tax hike or too little from a proposed cut. For example, before Congress cut the capital-gains tax in 1996 from 28% to 20%, JCT projected that government revenues would drop by more than $200 billion. Yet, after the cut, revenues actually increased nearly $100 billion. Total error: $300 billion.
The same thing occurred in 1986 when Congress hiked the capital-gains tax. The JCT predicted government revenues would increase sharply every year for the next five years. In fact, they plunged to less than half what they had been before the increase.
It’s bad enough the scoring is done behind closed doors. But Congress is also getting inaccurate projections on which to base its decisions about our taxes. Is it any wonder, then, that Congress stumbles in the dark when its members can’t see where they are going?
Unfortunately, we pay the price, because static scoring almost always projects lower government revenues when taxes are cut. That’s why Congress in 2001 approved President Bush’s first tax-cut proposals but delayed full implementation for a decade. Meanwhile, we keep paying at the old, higher rates.
Shining light on the scorers is the obvious solution. Fortunately, there is hope that those closed doors are about to be opened, at least a crack. Rep. Bill Thomas (R., Calif.), the new JCT chairman, has directed the committee staff to prepare both static and dynamic projections for all tax proposals. He’s also considering ways to make the scoring process public.
Such transparency in tax policy would make government more accountable. It also would allow outside economists to evaluate the quality of our representatives’ work on tax legislation. That’s something the Heritage Foundation has been trying to do for years. (You can read our research here.)
Yet there are still some in Congress who want to keep the tax-scoring process under wraps. Last September, Sens. Jay Rockefeller (D., W.V.), Bob Graham (D., Fla.), John Kerry (D., Mass.), and Robert Torricelli (D., N.J.), tried to pack a panel advising the JCT staff with opponents of dynamic scoring. The attempt was thwarted when conservatives insisted on adding five pro-dynamic-scoring members to the committee.
Will dynamic scoring always give lawmakers perfect estimates? No. But it will be more accurate than static scoring. Ask House members who recently voted to use dynamic scoring in evaluating spending bills.
On second thought, don’t ask. You should be able to see for yourself.
— Mark Tapscott is director of media services at the Heritage Foundation.