"Paygo" rules, once a little-known budget technicality, are now proving to be the main impediment in reaching a budget resolution for FY 2005, which begins on October 1, 2004.

Previously, paygo rules were a requirement that applied equally to increases in mandatory (mostly entitlement) spending or tax cuts. Increases in spending or decreases in revenue could not be passed unless they were offset or paid for by decreases in other spending, increases in other revenue, or with a 60-vote "super" majority in the Senate. The purpose of the paygo rule requirements was to enforce budget discipline, which provided that in order to increase spending (whether in programs or through tax expenditures) the increases had to be paid for.

In order to easily extend previously passed tax cuts, legislators and the administration are insisting that paygo rules apply only to mandatory spending and not to tax cuts. Some of the tax cuts looking to be extended include, the "marriage penalty," the child tax credit, and the expansion of the 10 percent tax bracket (seen as benefiting the middle-class.) Republicans have made no secret of their desire to pass even more tax cuts (including cuts to the wealthiest Americans) without having to offset the cost. This administration’s efforts have been concentrated on making sure that paygo rules only apply to mandatory spending and not to tax cuts because it is really committed to cutting more and more taxes. Unfortunately, when the administration cuts taxes they are really cutting off the flow of federal money to social service programs.

Advocates of tax cuts favor paygo rules only apply to spending programs, not to tax cuts. But others are concerned about the size of projected deficits, uncertainty about the cost of the war in Iraq, spending needs that will increase exponentially during the next few decades for Social Security retirement benefits and health care, and the costs of tax cuts already passed by this administration in 2001, 2002, and 2003. Even for members of Congress who are not concerned about the service cuts made necessary by the tax cuts (or who celebrate the goal of shrinking government to the size it can be “drowned in the bathtub”), growing budget deficits are an incentive to extend budget discipline of offsetting both mandatory spending and tax expenditures.

A variety of compromises are being considered -- applying paygo to tax cuts for three years; exempting the three middle income tax cuts that expire this year; and/or, exempting any tax cuts included in the protected reconciliation amount. Nevertheless, there has been no final agreement. While discussions will continue this week, it is likely that Congress may proceed to the appropriations process without a budget resolution (which they may do after May 15). The failure to pass a resolution is seen by some as an improvement over any budget resolution likely to pass. (For more on this point of view, see the Center on Budget and Policy Priorities analysis.) However, it should be noted that the discretionary spending limit might be only $814 billion set in the FY 2004 resolution, and not the proposed budget resolution limit of $821 billion, unless a new limit is agreed upon. The failure to pass a budget resolution, into which language raising the debt ceiling could be quietly included, will also force a politically embarrassing debate on raising the debt limit, currently at $7.384 trillion. That limit is likely to be exceeded sometime this summer, and must be extended in order not to push the government into default on its debt. Many experts think that if a budget resolution is not achieved by May 15, there will be no budget resolution -- the first time in thirty years that a Congress controlled by the majority has failed to pass a resolution.

In the meantime, On April 28, the House passed H.R. 4181 making the expiring "marriage penalty" benefit permanent. In a small victory for low-income families, the tax cuts were extended to families who file for the Earned Income Tax Credit. However, the bill has no offset for its $105 billion cost over ten years, as estimated by the Joint Committee on Taxation. Families with incomes below $40,000 will only receive only 8 percent of the marriage penalty benefit when it is fully in place in 2010. This week, the House is also expected to consider permanent extension of the child tax credit and expansion of the 10 percent income tax bracket -- again without offsetting the cost.