History Shows that Tax Reform Won't Automatically Trigger Medicare Cuts

The budget resolution passed by Congress sets aside $1.5 trillion over the next ten years for tax cuts. A static score of the House bill projects $1.437 trillion in revenue reductions over a decade and $1.414 trillion for the Senate. Yesterday’s new dynamic score of the Senate bill brings its 10-year “cost” to $1 trillion. These increases in the deficit have raised concerns that passage of the Tax Cuts and Jobs Act will trigger automatic PAYGO spending cuts for Medicare and other mandatory spending programs. However, recent history shows that these claims are baseless. To date, there has never been a sequestration order pursuant to PAYGO.

Under the Statutory Pay-As-You-Go Act of 2010, any changes in revenues or mandatory spending during a fiscal year that increase deficits relative to the Congressional Budget Office’s (CBO) current law baseline would need to be offset through tax increases or reductions in mandatory spending. In a letter to Democratic Whip Steny Hoyer (D-MD), CBO estimated that a generic bill that would increase the deficits by a net of $150 billion per year would exceed the PAYGO limit by $136 billion in 2018, triggering automatic cuts.

The net amount that would be cut under this scenario would be somewhat less than $136 billion. CBO estimated that, due to statutory limits on PAYGO impacts to the program, Medicare outlays would theoretically be cut by $25 billion (from a total of $711 billion for that year under the current baseline). Due to other rules that protect many programs from sequestration, just $85 to $90 billion of the remainder would be cut from non-exempt mandatory programs.

However, the intent of the resolution and the Tax Cuts and Job Act is simply to cut taxes on hard working Americans and incentivize economic growth, not cut Medicare outlays. Republican leaders have countered that Congress would waive the PAYGO rules regarding the automatic cuts.

As Senator Hatch noted, “Congress routinely exempts spending and revenue measures from the PAYGO scorecards. Since the PAYGO statute was enacted seven years ago, 16 laws with estimated budgetary effects on direct spending and revenues included provisions to exclude all or part of the law. Most of those exclusions took place while the Democrats controlled the Senate. So, let’s not try to claim that the legislation we’re debating will surely lead to a Medicare sequestration, because, so far, no law has.”

Congress does need to hold the line on spending, though. On an annual rate since 1940, federal spending has averaged 20 percent of GDP, while the tax receipts flowing into the Treasury have averaged 17 percent. Lawmakers will have to slow the growth in spending, but tax reform won’t automatically trigger cuts.