As conversations about the $550 billion Bipartisan Infrastructure Framework and President Joe Biden’s $2.2 trillion American Jobs Plan (AJP) ramp up on Capitol Hill, Senate Democrats are planning to offset some of their infrastructure spending by using dynamic scoring— a budgetary practice that many of them criticized in the cost estimates of the 2017 Tax Cuts and Jobs Act (TCJA).
While it’s great that Democrats are finally embracing dynamic scoring, this method should become standard practice in the legislative process for proposals with a significant impact on spending and taxes, and not just for the large spending increases in the forthcoming infrastructure package.
Most states and government agencies still use static scoring which assumes that tax changes have no effect on important macroeconomic measures. Back during the debate over the TCJA, NTUF’s Andrew Wilford outlined two major problems with static scoring. Wilford found that the “practical effect of static scoring is that it makes ‘tax and spend’ economic policy appear to be more appealing by not acknowledging the harmful effects high taxes have on the economy.” The second problem he identified is that “policies friendly to the American taxpayer are made to look less practical” because “static scoring of tax cuts shows only lost revenue.”
On the other hand, dynamic scoring accounts for the macroeconomic feedback of taxes, representing how people modify their behavior in response to new policy. Dynamic scoring estimates how changes in tax policy will affect key economic factors such as jobs, wages, people, federal revenue, investment, and GDP. This accounting tool provides policymakers with more complete information about the real-world consequences of their policies and how changes in fiscal policy will affect economic growth.
This scoring method is better suited for determining the outcome of changes to tax rates rather than spending hikes because there is more research and reliable data about the economic impact of changes to tax policy than there is for targeted spending increases. Use of dynamic scoring can also highlight how different policies will impact growth, as the Congressional Budget Office found that private investment had twice the rate of return than public investment did.
Starting in 1997, for informational purposes, the House of Representatives adopted a rule encouraging the use of dynamic scoring for “major legislation.” The rule was later strengthened in subsequent years to require dynamic scoring for major tax bills and mandatory spending bills that cause a change in revenues, outlays, or deficits of more than 0.25 percent of GDP. Prior to this, the CBO did not incorporate macroeconomic effects into its 10-year or 20-year cost estimates for major legislation.
Now, Democrats hope to use dynamic scoring to make the cost of the infrastructure legislation appear less pricey since dynamic scoring represents a $56 billion offset. NTUF’s Andrew Wilford and Demian Brady recently documented how gimmicky many of the proposed offsets for the bipartisan infrastructure package were, undoubtedly making dynamic scoring appear even more appealing.
Dynamic scoring is also gaining traction outside of Washington, D.C. A few weeks ago, Arkansas adopted dynamic scoring on tax proposals. Act 876 becomes effective Jan. 1, 2022, and will allow the General Assembly to hire a consultant economist to perform dynamic fiscal impact analyses. Members of the Arkansas legislature recognized it was time to adopt dynamic scoring when they found a mistake in the governor's proposed income tax cut plan before the 2019 session.
While Arkansas is one of the few states to adopt dynamic scoring, this is a step in the right direction. Dynamic scoring is a valuable accounting tool that provides policy makers with more accurate predictions of future government revenue, allowing for them to make better policy decisions.
If policymakers are going to rely on tax offsets to fund major proposals, then they owe it to the American taxpayers to understand the full impact of new legislation. Since private sector investments receive a greater rate of return, alternatives should be considered so that taxpayers are getting the best bang for their buck. Dynamic scoring should become common practice for states and government agencies in order to gain a complete understanding of how changes in tax and fiscal policy will affect the economy.