[*PG863]PATHOLOGIES AT THE INTERSECTION OF THE BUDGET AND TAX LEGISLATIVE PROCESSES
Abstract: Recently, Congress utilized a new gimmick in its budget legislative process. Under “pay as you go” (PAYGO) budget rules, Congress had used the repeal of installment sale reporting for certain taxpayers to “pay for” revenue-losing provisions in its budget deal with the administration; the following year, however, Congress “repealed the repeal” of the installment sale provision, enabling new spending and tax cuts not included in the earlier budget deal and not paid for with appropriate offsets. Although such gimmicks are not uncommon, the installment sale episode reflected pathologies engrained at the intersection of the current federal budget and tax legislative processes. This Article examines those pathologies, their origins, and their effects on federal tax and budget policy. The Article then reviews the installment sale episode as a breach of Congress’s contract with itself, emblematic of the pathologies and the harm they cause to genuine policy considerations. As Congress considers the future of its budget offset rules, this Article also suggests reforms that would re-emphasize the democracy-oriented goals of the budget legislative process.
Gimmicks are an unfortunate reality of a modern federal budget legislative process that offers participants opportunities to play games with numbers. Whenever a new legislative program is considered, lawmakers must assess its budgetary impact. To do so, they must adopt certain economic assumptions. As an initial matter, lawmakers look at [*PG864]baseline projections—the amount of revenue “that would be raised or spent without new legislation.”1 Next, legislators calculate a score—”the amounts by which the legislation would change projected future revenue or spending.”2 Because the Office of Management and Budget (OMB), the Congressional Budget Office (CBO), and the Joint Committee on Taxation (JCT) all prepare official sets of numbers on budgetary impact, participants in the process have at least three sets of numbers to work (or play) with.3 According to budget expert Allen Schick, “The assumptions are where political opportunism and manipulation thrive.”4 He adds, “When an interest group lobbies Congress for a tax cut or spending increase, it no longer suffices that the proposal be palatable to members of Congress; it is also necessary that the proposal get a favorable score. Quite a few former budget or appropriations committees’ staff members now provide expert advice on how to structure legislative proposals to influence the score.”5
Other gimmicks include timing and accounting tricks. For example, proponents may suggest a delay in the imposition of costs imposed by new legislation to future years outside the budget window so that the costs are technically outside the time frame requiring an offsetting increase in revenue.6 With regard to accounting, Congress uses [*PG865]cash-flow, rather than present value accounting. This permits Congress not to take future costs into account until they are actually paid-out, as opposed to assessing the present value of anticipated future costs.7 Finally, proponents may get around the congressional budget rules altogether by convincing the executive branch to adopt new spending programs through agency regulations.8
Regrettably, the by-product of this budget gamesmanship is a dramatic reduction in genuine tax policy consideration. Because much major tax legislation is now routinely included in omnibus budget legislation,9 the tax and budget legislative processes are increasingly linked. In 1995, Professor Michael Graetz lamented that “[t]he political focus on balancing traditional tax policymaking concerns for improving equity and economic efficiency has been subordinated in recent legislation to reflect the overriding goal of insuring specific annual revenue effects of proposed tax policy changes over the ‘budget period.’”10 If anything, the problem has worsened since 1995. Lawmakers are more driven to get the budget numbers to “come out right” than they are to satisfy any traditional tax policy objectives of horizontal or vertical equity, efficiency, economic efficiency, or simplicity.
Not long ago, the participants in the budget and tax legislative processes played a new and different game. Unlike the gimmicks with numbers just described, the players this time followed all the technical rules. When the budget numbers didn’t work out the way Congress wanted them to, Congress simply changed them. Through blatant manipulation of formal rules, the players effectively unraveled part of an omnibus budget deal altogether after the fact. Both budget and tax policy suffered as a result.
In this recent episode, Congress first enacted an amendment to the Internal Revenue Code that disallowed installment sale reporting [*PG866]to certain accrual method taxpayers.11 This repeal of installment reporting for accrual method taxpayers was projected to increase federal revenues over a ten-year period from 1999 through 2010 by over $2 billion.12 In turn, this revenue increase was explicitly used under “pay as you go” (PAYGO) budget rules to “pay for” numerous extensions of expired and expiring tax provisions.13 Under PAYGO rules, any new legislation calling for increases in direct spending or tax cuts must be paid for by new legislation with offsetting decreases in direct spending or tax increases.14
Almost before the ink was dry on the President’s signature enacting the new installment sale provision into law, Congressman Bill Archer, Chairman of the House Ways and Means Committee introduced legislation to override it.15 Congress voted to repeal the new provision retroactively, instructing that the Internal Revenue Code should be applied and administered as if the installment provision had never been enacted in the first place.16 Under PAYGO rules, the retroactive repeal of the installment sale provision lost federal revenue and, absent an offsetting revenue increase, should have triggered a mandatory sequester of government funds. No problem. Congress simply directed the OMB, responsible for the sequester, to change the sequester balance to zero.17 When the dust settled, Congress had agreed to use the repeal of installment reporting for accrual method taxpayers to pay for the cost of other tax cuts, but when the invoice arrived to pay for the tax cuts, Congress never paid the bill.
Although the Nielsen ratings surely would not have jumped, this legislative move might well have been incorporated into an episode of the old “Twilight Zone” television series. To be sure, the provision in[*PG867]volved was relatively minor and, therefore, received little public attention. Nevertheless, the legislative process resulted in a new law. Congress and the administration had agreed to a budget deal, which included new spending and accompanying offsets to pay for the spending. Part of the budget deal was that this installment change would be used under the budget rules as an offset to pay for other provisions in the bill scored as revenue losers. Early in the year following the overall budget “deal,” Congress repealed the installment sale provision as a stand-alone measure. Moreover, the President went along and signed the stand-alone repeal measure. The Internal Revenue Service and the public were told to pretend that it never happened. In the end, proponents of the new spending and tax cuts got their pet programs through without paying for them with an appropriate offset.18
This recent episode leaves one wondering just what went wrong. Literature regarding interest group influence suggests that lobbying efforts to block legislation in the first place are more likely to succeed than efforts to repeal legislation already enacted.19 If the tax consequences were so adverse to taxpayers, where were the small interest group lobbies during initial consideration of the controversial provision and why didn’t they block its passage? Were the interest groups simply asleep at the wheel? Why did President Clinton sign the bill, retroactively repealing the provision he had so recently signed into law?
In fairness to the affected interest groups, Congress, and the President, short provisions contained in a long and complex piece of tax legislation might easily slip through the cracks unnoticed. Moreover, Congress sometimes does make honest mistakes. It is not unusual for Congress to enact technical corrections legislation shortly after enacting complex tax legislation. On the other hand, one of the major functions of interest groups in the tax legislative process is to pore over proposed legislation and to uncover provisions, however small, that would adversely affect interest group members.
The recent episode offers important lessons regarding the process through which Congress works out differences in statutory language that emerge from the House and the Senate at conference. In addition, it offers valuable lessons about the legislative budget proc[*PG868]ess. It should come as no surprise that politicians will manipulate procedural and other rules in order to achieve desired results. At the same time, the results achieved in the recent installment sale method episode, at least, made a mockery of legislative budget process revenue offset requirements.20
One explanation for the recent installment sale episode may be that the strict legislative rules regarding the budget process were adopted in response to periods of dramatic federal deficits. The rules were designed to impose systematic fiscal restraints upon a Congress that otherwise seemed unable to control itself, believing that it could continue to lower taxes and to increase spending without significant economic consequence. Some have suggested that such fiscal constraints are not as important in periods of budget surplus. The installment sale episode occurred during a surplus period in which Congress might not have felt as compelled as it otherwise would to live by its strict budget rules. If strict offsets are necessary in times of budget deficits, but not in times of budget surplus, perhaps some fine-tuning of the rules is necessary to take these differences into account.
As of this writing, the statutory PAYGO rules have “sunset,” or expired, as applied to new legislation enacted for fiscal year 2003 and thereafter.21 The Senate recently agreed to a temporary renewal of PAYGO rules until April, 2003, and several other bills have been introduced that provide for longer extensions and strengthening of PAYGO rules.22 The President’s budget documents for fiscal year 2003 indicate a willingness to continue to work within the confines of [*PG869]PAYGO.23 In the meantime, Congress has been unable to pass a concurrent budget resolution for 2003.24
In the installment sale episode, Congress bypassed PAYGO sequester requirements simply by directing the OMB to set mandatory sequester amounts to zero. This is a congressional process sometimes referred to as “directed scorekeeping.” One purpose of this Article is to use the recent installment sale reporting episode to expose devices, including directed scorekeeping, which I consider pathologies at the intersections of the current rules for the budget and tax legislative processes. Budget and tax matters are among the most important political choices that legislators make on behalf of the voting and taxpaying public. In a democratic government, it is important for such decisions to be transparent and open and for legislators to be fully accountable. Although there was nothing illegal or technically improper about the process used in the installment sale episode, much of it consisted of deals worked out behind closed doors. The process was far from open and transparent. Indeed, it took me weeks wearing the hat of an investigative reporter simply to reconstruct the events that transpired. Quite simply, this is not the way to make budget and tax laws. The process is badly flawed in many ways. As Congress rethinks the budget offset rules in general and PAYGO in particular, this is an especially appropriate time to consider reforms.
Part I of this Article provides a brief background on the applicable budget and budget offset rules.25 Part II describes the manipulation of the process involved in the recent installment sale reporting amendments.26 Part III seeks to identify the process pathologies that [*PG870]led to the problem and to suggest some reforms related to the PAYGO process.27
In general, the legal academy in the taxation area tends to focus more on the substance of tax laws than on the legislative process that created them. Perhaps the explanation lies in a fundamental fear of stomach distress.28 More likely, however, the tax academy simply has not regarded the tax legislative process as sufficiently distinct from the legislative process more generally to warrant close inspection. That said, a number of legal scholars have focused on the tax legislative process. Some scholars have used a public choice analysis to explore the role of interest groups in the development of tax legislation.29 Others have focused on doctrines of statutory interpretation, many of which look back to the legislative process underlying the statute at issue, particularly as applied to tax legislation.30 Remarkably few, how[*PG871]ever, have written about the intersections between the budget and tax legislative processes.31 This is somewhat surprising given the increasing dominance of the budget process in determining the outcome of major tax initiatives.
The President now routinely uses the State of the Union address each January and his presentation of the executive budget to Congress each February to showcase major tax initiatives. Although tax legislation can still be enacted in the course of normal legislative affairs, most major tax legislation now appears in response to the President’s budget as part of an omnibus budget reconciliation package. As a consequence, tax bills must comply with reconciliation procedures. Moreover, even if the budget resolution does not contain reconciliation instructions, through fiscal year 2002, tax legislation was required to comply with PAYGO offset procedures included within statutory budget rules. Some version of these rules is almost certain to be extended into the future.32 In this budget world, lobbyists advocating tax benefits for their clients can no longer simply argue the merits of their particular programs. They must be prepared to look at all of the proposed revenue raisers and losers. They must fend off competing predators seeking the same scarce revenue resources allocated to the tax-writing committees and/or find weak groups with existing benefits that can be eliminated.
The Internal Revenue Code has a reputation for being excessively complex. Virtually all major calls for tax reform pursue the elusive goal of simplicity. As a relative newcomer to the legislative budget process, it strikes me that the budget rules are even more complex than the Tax Code. As one budget observer noted, “Congress has . . . created a massive piece of legislation which is understood by almost no one, and which can be interpreted and manipulated by the majority to its political advantage.”33 In the course of my research, I have found precious little that provides an accessible explanation of the [*PG872]interplay among the component parts of the rules for the tax and budget legislative processes. One of the goals for this Article is simply to provide an accessible explanation of the basic budget rules as they apply to tax legislation. Having struggled in my own research to sort out the differences among the use of the reconciliation process, internal point-of-order rules, and the statutory PAYGO rules, I believe I can provide a service by offering a basic account of the interplay of these rules. I hope to do so by focusing on the major aspects of the provisions without getting lost in the minutia. Moreover, without such an initial account, it will be difficult to meet my larger objectives of describing what is wrong with the process, and how it might be improved. The sections that immediately follow discuss the congressional budget rules, with a particular focus on those relevant to tax legislation.
The complex modern budget process, which began with the Congressional Budget and Impoundment Act of 1974 (CBA),34 represents one of an increasing number of new and innovative procedures for enacting major legislation.35 The first step in the congressional budget process is for the President to submit a budget for the next fiscal year to Congress on or before the first Monday in February.36 In a sense, this executive budget operates simply as the first move in a complex chess match with Congress. Congress need not adopt the President’s recommendations. Nevertheless, the President’s budget serves as an important starting point for negotiations and ultimate congressional action on the budget.37 The President’s budget frequently includes proposals for major tax initiatives, either to cut or to [*PG873]increase taxes. For example, shortly after taking office in 1981, President Reagan managed to push through a major set of tax and spending cuts.38 President Reagan’s budget for fiscal year 1982 called for further major tax and spending cuts.39 President Clinton’s fiscal year 1994 budget, on the other hand, called for major tax increases to reduce the deficit.40 Tax legislative proposals in the President’s budget generally are quite specific and detailed. As one budget expert observed, however, “[o]nce Congress becomes involved, it usually exercises considerable independence, altering the volume or composition of taxes to suit its preferences. Even when it meets the President’s revenue target, Congress does so in its own manner.”41
Prior to 1974, Congress did not formally prepare a budget of its own, but simply responded to proposals set forth in the presidential budget. In its first major budget act, the CBA,42 Congress established its current House and Senate budget committees along with the CBO.43 The CBO was to serve as a neutral counterpoint to the executive branch’s OMB.44 “The major purposes of this Act were to reassert [*PG874]the congressional role into budgeting, to add some centralizing influence to the federal budget process, and to constrain the use of impoundments.”45 The Act provided timetables for budgetary action and, most important, established procedures for Congress to generate a budget of its own. The budget timetables call for both chambers of Congress to complete action on a concurrent budget resolution by April 15th,46 although the deadline is virtually never met.47 The concurrent budget resolution is not law and does not provide specific details regarding how money is to be raised or spent. Rather, the budget resolution serves as a fiscal blueprint or framework within which Congress makes its substantive decisions on revenue and spending. “As a blueprint, the status of the budget resolution varies from year to year. In some years it strongly influences budgetary decisions; in others it has very little impact.”48
The modern federal budget process is essentially broken into two large budget “packages.”49 One deals with discretionary spending programs, which require annual appropriations. The other deals with permanent direct or mandatory spending programs. Tax legislation and entitlements fall within the latter category. Once tax laws are enacted, they remain in place until Congress chooses to amend or repeal them. Another increasingly common technique in tax legislation is to build in sunset provisions, under which a substantive tax law will expire at a specified date unless it is reenacted.50 Taxation, then, is a fundamental part of the direct or mandatory budget process. Because [*PG875]tax legislation falls under the direct spending part of the budget, the discussion that follows will focus primarily on that portion of the budget, rather than on discretionary spending or annual appropriations.
Statutory rules call for a concurrent budget resolution setting appropriate revenue and spending levels for the next fiscal year and at least four ensuing fiscal years.51 Historically, budget resolutions have covered five-year periods. More recently, however, Congress has exercised its authority to adopt a longer, usually ten-year, budget.52 The congressional budget resolution itself first includes aggregate total revenues and spending and the amounts by which the totals should be changed. In major deficit years, for example, the budget resolution might call for a particular increase in revenues over a period of ten years.53 In surplus years, the resolution might call for decreased revenues. The budget resolution also includes aggregate total new budget authority and outlays.54
Another required part of the congressional budget is a “tax expenditure” analysis. Professor Stanley Surrey was the first to identify the concept of a “tax expenditure.” He observed that the federal tax system really consisted of two parts, the first of which was the basic structure necessary to implement the individual and corporate income tax.55 The second part of the tax system was actually a series of government expenditures “grafted on to the structure of the income tax proper.”56 The tax expenditure concept recognizes that any tax deduction or credit really is a cost to the federal government. When the government provides these tax breaks, it effectively “spends” federal money. This spending should be taken into account in the budget process. Put slightly differently, the tax expenditure idea is [*PG876]that “certain provisions of the tax laws are not really tax provisions, but are actually government spending programs disguised in tax language.”57 Although the concept itself is not especially controversial, arriving at a mutually acceptable definition of what constitutes a tax expenditure has proven quite intractable. Congress now recognizes the tax expenditure concept to the point of requiring that estimated levels of tax expenditures be reported in the congressional budget resolution.58 Perhaps as a result of the disagreements over the proper definition of a “tax expenditure,” however, the statute says nothing further about the role that the tax expenditure budget should play. For the moment, some suggest that the list is largely useful to “funding predators” looking for offsets to pay for new tax breaks. If a lobbying group can convince Congress to repeal or cut back someone else’s tax expenditure, they can make room for their own pet provision.59
In addition to stating aggregate spending, the budget allocates total budget authority and outlays among twenty functional categories with respect to both discretionary and direct spending.60 A joint explanatory statement accompanying the conference report on the budget resolution is required to allocate spending totals to congressional appropriations committees.61 The appropriations committees then suballocate amounts within their subcommittees with authorizing or spending jurisdiction.62 Because most of the allocated budget authority with regard to direct or mandatory spending goes to fund existing programs, entitlements, and tax breaks, most direct spending will occur without any further legislative action from authorizing committees.63 To the extent that the budget resolution calls for increases or decreases in direct spending, the authorizing committees will report new legislation recommending changes to existing programs, entitlements, or tax laws. The budget resolution provides no [*PG877]details regarding how revenues are to be raised or how the new budget authority or outlays are to be spent.
Once Congress has decided on its overall objectives in the budget resolution, the reconciliation process is designed to provide an enforcement mechanism and impose some self-discipline to assure that committees responsible for the various pieces of the overall plan follow through by developing substantive legislation that comports with the plan. Under the CBA, Congress may, but is not required to include reconciliation instructions with the concurrent budget resolution.64 Although the budget reconciliation rules were included in the original CBA in 1974, they have only come to be used with frequency in more recent years.65 If the budget resolution simply calls for continuing revenues and spending programs at the same levels as in the prior fiscal year, no changes in substantive legislation and, therefore, no reconciliation instructions are necessary. Reconciliation instructions generally are used only when the budget resolution calls for changes in existing revenue or spending laws. As one budget expert noted:
The extent to which the budget resolution seeks change can be measured by the scope of its reconciliation instructions. A resolution that does not contain reconciliation merely accommodates the status quo; one that has such instructions seeks to change existing law. The broader the scope of reconciliation—the more committees subjected to it and the more dollars involved—the greater the importance of the resolution in setting Congress’s agenda and revising budget policy.66
Reconciliation instructions give deadlines by which specific committees are directed to come up with proposed legislative changes [*PG878]that accomplish objectives provided for in the budget resolution. Failing such deadlines, the budget committees themselves are authorized to draft legislation that complies with reconciliation instructions. Not surprisingly, authorizing committees almost never fail to meet the deadlines. Because revenue laws virtually always are involved in the budget process, the House Ways and Means Committee and the Senate Finance Committee likewise are virtually always subject to reconciliation instructions. These two committees will sometimes be the only committees involved in the reconciliation process. For example, the concurrent budget resolution for fiscal year 2000 directed the Republican-controlled Senate Finance Committee to report a reconciliation bill proposing legislative changes necessary to reduce revenues by $765 billion for the period of fiscal years 2000 through 2009.67 The Republican-controlled House Ways and Means Committee was subject to similar directives.68 Thus, the committees were given the happy task of spending federal dollars, something lawmakers love to do. On the other hand, the lawmakers were not given a free ride. Unfortunately, other budget offset rules required them to find spending cuts or tax increases to pay for their compliance with the happy reconciliation instructions.
Whether they are directed to one or to multiple committees, reconciliation instructions provide no specific instructions as to how the budget objectives are to be achieved. Committees simply are instructed that their proposed legislative changes must increase or decrease revenues by specified amounts. Thus, committees are free to make trade-offs among programs within their jurisdictions to meet their reconciliation obligations. Although budget offset rules offer more latitude, the tax-writing committees generally have operated under a “rule requiring that every reduction in tax be offset by a matching revenue raiser in the same bill.”69
Once the authorizing committees have drafted substantive legislation pursuant to reconciliation instructions, they then submit the legislation to the budget committees. House and Senate budget [*PG879]committees are responsible for compiling the legislation submitted by all committees that were subject to the instructions into a reconciliation bill. The budget committees, however, are not permitted to make any substantive changes in the legislation reported from the authorizing committees. The respective budget committees in the House and Senate will then report the reconciliation bills to the House and Senate floors for consideration. These bills are referred to simply as reconciliation bills, or sometimes as “omnibus” reconciliation bills. The term “omnibus” can be somewhat arbitrary and lacks a precise definition.70 One widely used definition is simply “[l]egislation that addresses numerous and not necessarily related subjects, issues, and programs, and therefore is usually highly complex and long . . . .”71 Budget reconciliation bills are among the most common omnibus packages.72
The instincts of the American public and lawmakers in Congress are always to want more spending for particular programs without increasing taxes to pay for them. The concurrent budget resolution sets macrobudgetary objectives, but it is not law and is not binding. Given the natural inclination of lawmakers to want to provide programs to constituents, it might be easy for legislators to ignore their previous decisions on macrobudgetary objectives when the time comes to consider microbudgetary considerations on individual programs. Congress attempts to keep itself honest through a complex series of procedural points of order.
For example, once Congress has completed action on a concurrent budget resolution, it is not in order to consider any legislation that would cause total or aggregate budget authority or outlays to exceed amounts provided for in the budget resolution or for revenues [*PG880]to be less than that called for in the resolution.73 Any legislation that would cause a particular committee to exceed amounts allocated to it under the budget resolution is similarly subject to a point of order.74 With respect to reconciliation legislation in particular, statutory budget rules provide that any amendment that would increase outlays or decrease revenues is out of order unless the amendment simultaneously includes offsetting provisions that would cause the amendment overall to be revenue neutral.75
Constraints imposed by the budget resolution, reconciliation instructions, and the point-of-order enforcement rules can severely limit committee flexibility. For example, proposed legislation to increase revenues above the aggregate amount permitted in the budget resolution would be subject to a point of order even if it was designed to offset increases in direct spending and was, thereby, revenue neutral in its overall effect. To avoid these problems, budget resolutions often include specific provisions for reserve funds. Creation of a reserve fund generally grants authority to the Budget Committee Chair to change a legislative committee’s budget allocation under specified conditions.76 For example, the congressional budget resolution for fiscal year 2000 included a reserve fund permitting the Budget Committee Chair to reduce spending and revenue aggregates and revise committee allocations for legislation that reduced revenues as long as the legislation would not increase the deficit or decrease the surplus.77
Despite the bite of the numerous budget point-of-order rules, their potency is diminished to the extent that the rules can be waived. In the House, a budget point of order can be waived by simple majority vote. In addition, the House may consider budget legislation under a rule from the Rules Committee that waives budget points of order. In other words, the House may decide in advance that it will debate the budget legislation under a procedural rule that disallows budget points of order.78 Such House rules must pass by simple majority vote.79 Point-of-order enforcement rules prove to be far more cumbersome in the Senate, where most can only be waived by a three-fifths vote or sixty members of the Senate.80 This supermajority requirement for waiving Senate points of order obviously makes it harder for the Senate to unravel the budget deal worked out through the budget reconciliation process.
Reconciliation bills in the Senate are privileged in numerous other ways also designed to ease and speed up passage of the budget. Unlike other legislation in the Senate, which is subject to unlimited debate and, therefore, the threat of potential filibuster, both budget resolutions and budget reconciliation bills in the Senate are subject to statutory time limits. Debate on the concurrent budget resolution is limited to no more than fifty hours81 and debate on reconciliation bills is limited to twenty hours.82
Statutory budget rules also alter another unique feature of the Senate. In the normal course of legislative affairs, senators are free to offer nongermane amendments to any pending legislation. Unique to the Senate, this nongermaneness privilege is used to strategic advantage, particularly by minority members who would otherwise have [*PG882]difficulty getting their legislation to the floor. For example, any individual senator can introduce a huge piece of major legislation as a nongermane amendment to a completely unrelated bill. Special procedural rules applicable in the Senate with regard to the concurrent budget resolutions and reconciliation bills, however, provide that “[n]o amendment that is not germane to the provisions . . . shall be received.”83
A somewhat related procedural rule applies during Senate floor consideration of reconciliation bills. Known as the “Byrd Rule,” after Senator Byrd who first proposed it, the rule creates a point of order challenging material “extraneous” to the reconciliation instructions. As budget observer Allen Schick observed,
Because there is a strong possibility that a reconciliation bill will pass once it is initiated, it is an attractive vehicle for provisions that are unrelated to the budget. In response to this problem, the Senate adopted the “Byrd Rule,” which restricts the inclusion of extraneous matter in a reconciliation bill.84
The meaning of “extraneous” can be complex, ambiguous, and often depends on controversial rulings from the Chair. Included among the definitions of extraneous is any amendment or provision that would increase the deficit without an offsetting provision in the same title.85 As with the other Senate points or order, the Byrd Rule can be waived only by a three-fifths vote.
The original budget rules of the CBA were process rules that were outcome-neutral. Over time, the reconciliation process came to be used to force Congress to stick to the macrobudgetary decisions made [*PG883]in the budget resolution. Still, as budget deficits grew, Congress found these rules to be inadequate. The shift from process-oriented rules to more outcome-oriented rules began with the Balanced Budget and Emergency Control Act of 1985, commonly known as Gramm-Rudman-Hollings (“GRH”).86 GRH included strict targets for reducing the deficit. Automatic procedures for meeting the targets were declared unconstitutional87 and Congress responded by amending the statute to ensure its constitutionality.88 If Congress failed to meet deficit targets, GRH triggered across-the-board sequestrations, dramatically reducing congressional discretion and threatening severe impact on major government programs. As Wildavsky and Caiden noted about GRH, “Here we have a procedure that almost every member of Congress believed was foolish, if not stupid; that everyone who knew anything about it thought could be improved upon in five minutes; yet it received majority support in both Houses and was signed by the President.”89 Not surprisingly, GRH was a failure. In 1990, Congress shifted from dreams of balancing the budget to the more manageable self-imposed expenditure controls. Again, Wildavsky and Caiden colorfully described the shift:
The journey from GRH to the Budget Enforcement Act (BEA) evokes the grand themes of budgeting in our time—ideological dissensus so deep the opposing sides make minute measurements of outcomes, a deficit octopus so entangling that its grip can be loosened but not cut through, and a temporary truce based on the common desire of politicians to create a process that will not automatically stigmatize them as failures. Thus they moved from budget balance, which they could not achieve, to expenditure control, which they had a fighting chance to attain.90
PAYGO fiscal constraints built into the budget process were originally designed to control federal spending and reduce federal deficits. The rules apply broadly to revenue and entitlement laws,91 seeking to ensure that new legislation will, on net, be deficit neutral.92 PAYGO rules do not require reexamination of past policy decisions.
The PAYGO rules require that new tax legislation be “revenue neutral.” In other words, new tax or entitlement legislation cannot increase costs to the government. Although the 1990 Budget Enforcement Act first codified and mandated the “neutrality” principle, this was not the first time that Congress operated under such a principle. In fact, the landmark Tax Reform Act of 1986 was developed around the principle that the legislation would be both revenue neutral and distributionally neutral. In other words, the 1986 Act was designed to raise no more revenue than it cost, but was also designed so that the burden or incidence of taxation remained neutral with regard to taxpayers at different income levels. Codification of the PAYGO rules in 1990 was an indication that Congress did not trust itself to comply with the “revenue neutrality” principles voluntarily established in earlier years. The PAYGO rules included apparently harsh sequestration devices to force Congress to do the right thing.93 Although the Joint Committee on Taxation regularly provides distribution tables to tax-writing committees concerning the distributional impact of proposed legislation, the PAYGO rules apply only to revenue [*PG885]neutrality and do not also demand that legislation be distributionally neutral.
Although the emphasis of most discussion on PAYGO rules is on the statutory requirements adopted by the 1990 Budget Enforcement Act, the Senate also has internal PAYGO mechanisms. Since 1994, the Senate has imposed internal PAYGO requirements on itself through point-of-order rules incorporated into yearly budget resolutions.94 The internal PAYGO point-of-order rule in the Senate can only be waived by a three-fifths vote.95
The Budget Enforcement Act of 1990 imposed statutory spending caps with regard to discretionary spending, and statutory PAYGO budget offset rules applicable to tax legislation and other direct spending legislation.96 Unlike the reconciliation rules and the Senate’s internal PAYGO procedure, which are merely internal rules enforceable only through procedural points of order, the statutory PAYGO rules are enforceable through mandatory sequestration provisions.97 The OMB maintains a PAYGO “scorecard,” keeping track of the cumulative effect of all new legislation subject to PAYGO require[*PG886]ments. If the result at the end of a congressional session is a net cost, OMB must sequester nonexempt direct spending to offset the cost.98
The PAYGO rules initially applied only through fiscal year 1995, but were extended through fiscal year 1998 by the Omnibus Budget Reconciliation Act of 1993.99 PAYGO was again extended through fiscal year 2002 by the Budget Enforcement Act of 1997.100 Prior to the terrorist tragedies of September 11, 2001, it appeared that the previously unthought of federal budget surpluses would continue. During that period, some Republicans were calling for repeal of PAYGO rules.101 As of this writing, the United States is again facing deficits as Congress considers whether to extend PAYGO. An extension of PAYGO rules in some form now appears likely.102 Even administration officials have publicly announced that President Bush would accept an extension of PAYGO requirements.103
President Bush’s preference, as expressed in the Fiscal Year 2003 Budget, would be to substitute the existing concurrent budget resolution with a joint budget resolution that would have the force of law and would set overall levels for discretionary spending, mandatory spending, receipts, and debt.104 Congress is unlikely, however, to yield budgetary authority to the President to such a dramatic extent. After [*PG887]all, the very point of the first major budget act in 1974 was for Congress to assert its independence in a budget process that had been disproportionately controlled by the executive branch.105 In fact, Allen Schick went so far as to describe the 1966–1973 period of difficult congressional-presidential relations leading up to the CBA in 1974 as the “Seven-Year Budget War”106 and the CBA itself as the “Congressional Budget Treaty of 1974.”107 Given this history, congressional approval of a joint budget agreement with the force of law would be surprising.
As an alternative, the President’s budget concedes in advance that his administration would support “PAYGO requirements that would carry out the 2003 budget’s proposals for mandatory spending and receipts.”108 Testimony on budget policy uniformly seems to support an extension of PAYGO-type fiscal disciplines.109 Even Republican members of Congress have testified in favor of maintaining the PAYGO rules.110
The technical language of the PAYGO statute states that “[t]he purpose of this section is to assure that any legislation . . . affecting direct spending or receipts that increases the deficit in any fiscal year covered by this Act will trigger an offsetting sequestration.”111 Given that the statutory language makes no specific reference to surplus, debate has ensued over whether PAYGO rules apply in budget surplus [*PG888]years.112 Most commentators believe that the PAYGO rules do apply to surplus years as well as deficit years.113
When Congress began to work with its first surpluses under PAYGO in the late 1990s, then-OMB Director Jacob Lew announced the OMB position that “PAYGO does apply when there is an on-budget surplus.”114 As noted by the General Accounting Office (GAO) in its recent report on budget enforcement, Congress should clarify the issue of PAYGO’s application to surplus years in the event that PAYGO is extended.115 Whether or not PAYGO should apply to budget surplus years is a normative question, which will be considered further in the final section of this Article.116
Along with many other things, the modern presidential budget generally includes an extensive package of revenue proposals, some of which raise and others which lose revenue. The Treasury Department often publishes a voluminous document to accompany the budget. With respect to each proposed change, the Treasury Department describes current tax provisions, explains the reasons for changing them, and describes the President’s tax legislation proposal.117 In a [*PG889]similar vein, one should start with a basic understanding of the state of existing law before the events began in order to understand the budget game that was played out in connection with the recent installment sale provision episode. The section that follows offers a very brief description of the state of the law before the first coin toss.
When a taxpayer engages in a sale or exchange of property, the Internal Revenue Code118 requires that the entire gain or loss be reported, unless otherwise provided in Subtitle A.119 Absent a special exception, a taxpayer who sells property in exchange for an installment or promissory note would be required to report the full gain in the taxable year of the sale, computed as the full face value of the note minus the adjusted basis in the property sold.120 The installment sale provisions of � 453 recognize the potential hardship imposed upon installment sellers who would otherwise be required to report the entire gain from a sale of property even though receipt of some or all of the proceeds from the sale was delayed. Installment reporting under � 453 permits these sellers to include a portion of the taxable gain as each payment is received, thus spreading the taxable gain over the life of the note.121
Installment reporting seems eminently sensible for cash method taxpayers, who generally report their income when it is “actually or constructively received.”122 In fact, some may wonder why a special provision permitting installment reporting was necessary for cash method taxpayers in the first place. After all, if cash method taxpayers report income when it is actually received, one might think the cash method taxpayer should be taxed as payments are received. Under our tax system, however, income is defined as an economic benefit or an accession to wealth.123 The economic benefit or accession to wealth [*PG890]from an installment sale is not the receipt of payments on the note. Rather, receipt of the installment note itself is the economic benefit, triggering a full recognition of gain or loss. Thus, absent the special anti-hardship rules in � 453, a cash method taxpayer would be required to report the full gain from the sale upon receipt of the note.
Consider now the taxpayer who uses an accrual method of accounting. This includes most business taxpayers. In fact, many business taxpayers effectively are required to use the accrual method of accounting by � 448, which disallows use of the cash method to C corporations and partnerships that have a C corporation as a partner, among others.124 Under the accrual method of accounting, “income is to be included for the taxable year when all events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy.”125 Under this definition, the accrual method effectively is an accelerated method of accounting. Instead of reporting income when it is received, as a cash method taxpayer would, the accrual method taxpayer reports income in the year in which the taxpayer becomes entitled to receive it. Unlike cash method taxpayers, accrual method taxpayers routinely report income in advance, even though their actual receipt of income is delayed.
The use of installment reporting upon a sale of property arguably is inconsistent with the accrual method, which requires taxpayers to report income when they are entitled to receive it, regardless of when they actually receive it. The buyer’s signature on an installment contract, along with the buyer’s delivery of a promissory or installment note, presumably is the event that fixes the seller’s right to be paid under the accrual method.126 Nevertheless, accrual method taxpayers had been using the installment method without interference, until Congress enacted the � 453(a)(2) in 1999.
President Clinton’s budget proposals for fiscal year 2000 included a proposal to disallow installment reporting for accrual method taxpayers.127 In support of his position, the President argued that “[t]he installment method is inconsistent with an accrual method of accounting and effectively allows an accrual method taxpayer to recognize income from certain property using the cash receipts and disbursements method. Consequently, the method fails to reflect the economic results of a taxpayer’s business during the taxable year.”128 Treasury Department testimony before the Senate Finance Committee further portrayed the installment sale provision as one among several proposed “measures that are principally designed to improve measurement of income by eliminating methods of accounting that result in a mismeasurement of economic income or provide disparate treatment among similarly situated taxpayers.”129 This description portrays the measure as a correction or loophole closer. As a correct interpretation of tax policy and tax accounting principles, accrual method taxpayers theoretically should not have been reporting installment payments under the installment method in the first place. Thus, the administration simply was advocating reparation of a flawed Tax Code provision.130 It also happens that the administration projected that the repeal or “correction” would increase federal revenue.131
[*PG892] From this point on, the proposed repeal of installment reporting for accrual method taxpayers took some interesting twists and turns and ultimately became a pawn in complex negotiations over the budget for fiscal year 2000. The story begins with the Republican leadership’s efforts to enact $792 billion in tax cuts, largely through extensions or expansions of existing tax breaks. The House and Senate both passed the $792 billion legislation extending the tax breaks despite President Clinton’s announced intentions to veto it.132 In the first round, both the House and Senate versions of the bill, as well as the ultimate version after conference, included Clinton’s proposed repeal of installment method reporting for accrual method taxpayers.133 In fact, the Republican Congress expressly used the installment sale provision as one of several revenue offsets to pay for their tax cuts.134
Although Congress presented the President with a bill including numerous provisions that he favored, the Republican tax cuts included in the bill were simply too bloated for him to accept. Backed by a five-piece brass band playing taps, the President vetoed the legislation as promised.135 In his veto message, Clinton lamented that Republicans were using a risky tax cut to undermine the fiscal discipline that had helped create recent budget surpluses. More significantly, he complained that the
bill would not meet the Budget Act’s existing pay-as-you-go requirements, which have helped provide the discipline necessary to bring us from an era of large and growing budget deficits to the potential for substantial surpluses. It would [*PG893]also automatically trigger across-the-board cuts (or sequesters) in a number of Federal programs.136
The President did, however, suggest that he was willing to negotiate on a smaller bill that he might be willing to sign.137
In symbolic tit-for-tat shortly after the presidential veto, the Republicans sponsored a vote unanimously rejecting President Clinton’s proposed revenue-raising provisions.138 In a second vote, a motion to bring the vetoed legislation to the Senate floor to force a vote to sustain or override the veto was successfully tabled.139 Now on the second time around, Senate Finance Committee Chair William Roth and House Ways and Means Committee Chair Bill Archer immediately began work on a smaller package of tax break “extenders.”140 In order to comply with the mandates of the budget reconciliation process and PAYGO, however, any tax breaks had to be offset with revenue-raising provisions to “pay for” the extenders. Again, one of the largest revenue-raising offsets included in the Senate bill was the repeal of the installment method for most accrual method taxpayers, expected to raise approximately $2 billion over ten years. The challenge for the Senate, however, was that the offsets were likely to be “vehemently opposed by House Ways and Means Committee Chair Bill Archer.”141 The Senate ultimately passed The Tax Relief Extension Act of 1999, including the installment method repeal in Title II, along with other revenue offset provisions.142 The original House tax bill, on the other hand, did not include the installment provision.143 The administration was heavily involved in last-minute negotiations on the final confer[*PG894]ence package that went back to both chambers.144 White House negotiators apparently convinced House Republicans to leave the Senate installment sale repeal provision in the final bill as a revenue offset in exchange for some of the revenue-losing tax extenders the Republicans wanted.145 In the final conference, the House ultimately agreed to include the installment sale repeal, which ultimately became � 536 of the Ticket to Work and Work Incentives Improvement Act of 1999.146 This provision was clearly part of the PAYGO offset package necessary to pay for the revenue-losing tax extenders.
Almost before the ink was dry on the President’s signature on the Ticket to Work and Work Incentives Improvement Act, efforts were underway to repeal the installment sale repeal provision. Complaints quickly developed from small businesses, which argued that requiring them to report immediate taxable income from an installment sale would adversely affect their ability to sell business assets. Lobbying groups came crawling out of the woodwork to complain on behalf of the small businesses.147 Interest groups began extensive letter-writing campaigns, a bill was introduced to repeal the provisions, and hearings were scheduled.148 Congressman Bill Archer wrote a letter to President Clinton asking him to “direct the Treasury to issue immedi[*PG895]ate guidance providing relief for small businesses and include a legislative relief provision in [the] fiscal 2001 budget proposal.”149
At hearings on the proposed retroactive repeal, even the Treasury Department conceded that the new provision would impose harsh burdens on some small businesses. Although the Treasury Department did not support outright repeal of the controversial provision, Treasury representatives agreed to work with Congress toward “a legislative solution to alleviate this unforeseen impact of the provision.”150 The Treasury Department ultimately did respond with a Revenue Procedure announcing that “the Commissioner of Internal Revenue will exercise his discretion to except a qualifying taxpayer with average annual gross receipts of $1 million or less from the requirements . . . to use an accrual method of accounting for purposes of purchases and sales of merchandise.”151
In the Installment Tax Correction Act of 2000, Congress ultimately voted to “repeal the repeal” of installment accounting for accrual method taxpayers retroactively. In sharp contrast to the huge budget legislation of which the original repeal was a part, the Act is remarkably brief:
SECTION 1. SHORT TITLE
This Act may be cited as the “Installment Tax Correction Act of 2000.”
SECTION 2. REPEAL OF MODIFICATION OF INSTALLMENT METHOD
(a) In General.—Subsection (a) of section 536 of the Ticket to Work and Work Incentives Improvement Act of 1999 (relating to modification of installment method and repeal of installment method for accrual method taxpayers) is repealed effective with respect to sales and other dispositions occurring on or after the date of enactment of such Act.
(b) Applicability.—The Internal Revenue Code of 1986 shall be applied and administered as if that subsection (and the amendments made by that subsection) had not been enacted.152
[*PG896] This legislative language is really quite remarkable. Congress is essentially saying, “We were just kidding, folks. Let’s just pretend it never happened.” What makes this all the more remarkable is that the retroactive repeal of � 453(a)(2) passed in the House on December 15, 2000, under a suspension-of-the-rules procedure, without ever having been reported by committee, and passed in the Senate on the same date by unanimous consent.153 The House suspension of the rules procedure generally enables the House “to act quickly on bills that enjoy overwhelming but not unanimous support.”154 In addition to the formal House Manual rules, however, the Speaker of the House generally is guided by party rules. Both the Democratic Caucus and the Republican Conference have adopted party rules under which bills should be bipartisan, have strong committee support, and cost less than $100 million before being considered under suspension-of-the-rules procedures. The Republican Conference, for example, provides that “[t]he Speaker shall not schedule any bill or resolution for consideration under suspension of the Rules which . . . has not been cleared by the minority, was opposed by more than one-third of the committee members reporting the bill, or exceeds $100 million in authorizations, appropriations, or direct spending.”155 The House apparently waived this rule in considering the over $1 billion “Correction Act” under a suspension-of-the-rules procedure. Moreover, President Clinton, who had originally proposed the installment sale reporting change, quickly and quietly signed the repeal into law on [*PG897]December 28, 2000.156 The Joint Committee on Taxation projected revenue loss from the “Correction Act” at $1.1 billion for 2001, with total revenue losses over the period 2000–2010 projected to be over $2 billion.157
The final results represent a troubling end-run around the rules of the budget and tax legislative processes. Under PAYGO rules, any revenue losses must be offset.158 Tax-writing committees generally operate under rules that match revenue losers with revenue offsets in the same bill. The 1999 Ticket to Work Act was no exception, including one Title of “Tax Extenders” and another Title of “Revenue Offsets.” To be sure, manipulative devices to get around PAYGO are nothing new. The devices used this time around, however, would make even the Mad Hatter from Alice in Wonderland proud. Within fifteen days after the close of the legislative session, OMB is required to issue a final sequestration report including sequester requirements from PAYGO violations.159 In compliance with this obligation, OMB estimated that the Installment Sale Correction Act repeal would reduce receipts by $2.3 billion over the period 2001–2005, which would ordinarily mandate a sequester.160
Congress, however, had beaten OMB to the punch. By legislative fiat, Congress had already declared that “the Director of the Office of Management and Budget shall change any balance of direct spending and receipts legislation for fiscal year 2001 . . . to zero.”161 This is a [*PG898]congressional move known as “directed scorekeeping.” Congress first said, “We were just kidding, folks. We never did enact that revenue offset provision even though it paid for over $2 billion in tax cuts.” Here it said, “We’ll just call that $2.3 billion a zero for PAYGO purposes and go home for the holidays.”162 Ever compliant, OMB ended its sequester report with the following: “NOTE: Pursuant to P.L. 106–554, the pay-as-you-go balances that would result in a sequester for FY 2001 will be set to zero in OMB’s final sequestration report.”163 Because the directed scorekeeping that set OMB’s PAYGO scorecard to zero predated the stand-alone installment repeal measure, Congress was able to vote for the stand-alone repeal with assurance that it would not be required to offset the cost under PAYGO rules. The stand-alone Installment Tax Correction Act should have triggered a PAYGO sequestration, but never did. In other words, Congress truly got its tax cuts without ever having to pay for them.
The federal budget process serves two major functions. First, it serves as a promoter of government missions that are high on the government agenda. Second, the budget process operates as a constraint upon spending.164 At any given time, the focus of budget policy concern may shift between its promoter and constraint functions depending upon economic conditions and the views of the political party in [*PG899]power. As a general rule, however, most policy debate about the budget process seems to focus upon its constraint functions.
The power of the purse is so momentous that, unlike other legislation, the Constitution requires that all revenue bills originate in the House.165 The Founders thought of the House of Representatives as closer to the People, more representative of their views, and thus, as the more “democratic” of the two chambers of Congress.166 Federalist Paper No. 58 observed, “This power of the purse may, in fact, be regarded as the most complete and effectual weapon with which any constitution can arm the immediate representatives of the people, for obtaining a redress of every grievance, and for carrying into effect every just and salutary measure.”167
Given the importance of the budget as a matter of national policy, I was surprised to discover that most of the literature on the budget process jumps right into the process itself with precious little consideration of larger policy objectives. The material that follows seeks to fill that gap by offering a brief examination of background budget policy principles before turning to a specific analysis of what made the recent installment sale episode so troubling.
The GAO annual budget reports are among the few sources I have uncovered that discuss background policy objectives. With very little elaboration, the GAO reports submit that the budget process should:
1.provide information on long-term budget impact;
2.provide information on important macro trade-offs;
3.provide information to make trade-offs among different national policy needs or missions;
4.provide for enforceability, accountability, and transparency.168
The first three of these goals can be grouped together, for my purposes at least, as “information-related” goals. The fourth criterion listed above actually contains a number of discrete policy objectives [*PG900]that should be broken into distinct components. As a group, I will refer to these criteria as “democracy-oriented” goals. In practical terms, the information-related goals may be the most important concerns for budget policy analysts. For purposes of this Article, however, my primary concern is with the democracy-oriented goals. The following sections of the Article consider the importance of these latter goals as applied to the budget process generally and examine the ways in which these goals were violated in connection with the installment sale case study in particular.
One of the major milestones in federal budgeting over the past two centuries169 was the President’s Commission on Budget Concepts, which introduced the notion of a unified budget in 1967.170 In its chapter on Purposes of the Budget, the Commission pronounced:
The budget is the key instrument in national policymaking. It is through the budget that the Nation chooses what areas it wishes to leave to private choice and what services it wants to provide through government. When enacted, the budget expresses the decisions of the Nation’s elected representatives . . . .
. . . .
Budget formulation is a highly political exercise in the American democratic system, and it should not be otherwise. It is therefore essential that the budget be understandable, at least in broad outline, to as many of the public and their elected representatives as possible. Wise fiscal policy and wise choices for individual federal programs depend, in the final analysis, on public and congressional understanding of the budget.
. . . .
While the public cannot be expected to become familiar with all the details and intricacies of the budget, it must be [*PG901]able to participate intelligently in the big decisions that come to focus there . . . .171
My focus in this Article is on the democracy-oriented goals that will best serve the public in understanding and participating in the budget process. In addition to the goals identified by the GAO, I add the goals of openness and durability. By isolating the democracy-oriented goals from the information-related goals, I do not mean to suggest that information is unrelated to the democracy function. For the most part, however, I see the information-related goals as important to budget analysts and policymakers dealing with the day-to-day creation of the budget. That said, however, simplified versions of this information must be available to the public as well so that the democracy-oriented goals can be fulfilled.172
According to the GAO, enforcement is simply “a mechanism to enforce decisions once they are made” and “requires a system for tracking outcomes and tying them to actions.”173 Once Congress has agreed to a budget resolution, these are the mechanisms such as points of order, spending caps, and PAYGO rules that hold it to its word. Congress has committed itself to these enforcement mechanisms either by internal rules or statute.174 I consider the proper functioning of these enforcement tools as one of the democracy-oriented goals of the budget process. Once Congress has promulgated a concurrent budget resolution, the electorate can and should expect its representatives to stick to that budget according to the budget enforcement rules.
Those responsible for the federal budget should ideally account on two dimensions: (1) for the cost of budget commitments and enforcement actions taken; and (2) for the cost of unexpected events.175 Because the power of the purse is given to the People, they should [*PG902]expect a reasonable accounting from Congress. Scoring and costing rules, projections on revenue impact, and similar rules are designed to provide such accountability. These two dimensions of accountability, referred to by the GAO, might more accurately be labeled economic accountability. In effect, our legislators act as our bookkeepers and we expect them to keep faithful accounts.
Another notion of accountability should be distinguished as political accountability. This concept focuses on legislators’ responsiveness to the electorate. Thus, “accountable decisionmakers pay attention to the wishes of the people because they can be held responsible for policy outcomes at election time. Furthermore, the decisions of an accountable political entity are more legitimate and thus more deserving of respect by the governed.”176
A final key goal mentioned by the GAO is that the budget should be transparent, that is, it should be “understandable to those outside the process.”177 This can be a complex goal, sometimes requiring simplicity, but at other times demanding “no hidden costs” or “few surprises.”178 The GAO language on transparency bears quoting in full:
Transparency is important because the budget debate is critically important—not because of the numbers in it but because it represents a statement about collective priorities and collective action. In a democracy, the debate about these priorities should be made as understandable as possible. If even reasonably dedicated citizens cannot understand the budget document or the budget debate, there is little accountability.
If the budget debate is to be accessible to the American people—or to any significant subset of the population—consideration will have to be given to simplifying the structure of the budget, streamlining the process, and reducing the number of translations required to get from one part of the process to another. . . .
. . . .
[*PG903] Citizens cannot be expected to feel a stake in the budget debate—a debate that will affect all our lives and our national future—or to accept decisions made by others without basic information. At a minimum citizens need to know how much money the federal government takes in—and how—and on what funds are spent.179
The notion of transparency reflected here includes several components. At a minimum, it incorporates the right of the public to information about the budget process in general and to information about the specifics regarding any particular budget. Moreover, that information should be offered in a simple format so that citizens who choose to do so are able to engage in informed debate about the collective policy choices reflected in the budget debate.
Transparency goals clearly overlap or intersect with several others. Although the primary focus of my discussion is democracy-oriented goals, transparency surely requires that information be available to the public. The first of the specific GAO information-related budget goals was that the budget process should provide information on long-term budget impact.180 This information is important to budget analysts and some understandable version of the same information should also be available to the public.181 As the GAO suggests,
The President, the Congress, and the public need to think about the longer term when making choices about the composition of federal activity. This is true for at least two reasons: (1) each generation is in part custodian for the economy it hands the next and (2) some changes must be phased in over long periods of time.182
Thus, the public is entitled to information about the long-term implications of budget decisions. In addition, the public should have access to information enabling it to understand and consider the trade-offs [*PG904]between the appropriate amounts of investment and consumption and the relative priority of competing national policy missions.183
Transparency goals also overlap with accountability goals. If citizens cannot even understand the budget, their legislators have not been very responsive. As Professor Garrett also points out, “In the budget context, transparency is particularly important because individual decisions can be lost in the midst of detailed and obscurely worded omnibus bills. In the absence of visibility, accountability is virtually impossible.”184
To the goals mentioned in the GAO reports, I would like to add two related democracy-oriented goals. First, and related to the goal of transparency, the budget process should be open. If the public is to understand fully and to participate in its power of the purse, it stands to reason that decisions should be made openly and not behind closed doors.
Second, the federal budget is the fundamental process through which the nation makes its decisions about taxing and spending. It is important for stability and for public morale that the budget process rules be reasonably durable. Of course, Congress can change budget process rules by amending the statutory provisions addressing budget process and by internal amendments to House or Senate rules relating to the budget process. I refer to these as formal budget process changes, which can, and should, be carefully considered through a system of periodic reforms in which the public fully participates. Even here, durability concerns mandate that major reforms not be considered too frequently.
A second type of budget process change involves congressional use of different procedural rules from one annual concurrent budget resolution to the next or congressional waiver of budget process requirements. I refer to these as informal budget process changes. I contend that frequent use of such devices violates democratic principles of durability, and thus, such devices should rarely be used. Once Congress has settled into a procedural pattern with respect to its concurrent budget resolutions, it should continue that pattern absent strong reasons to depart from it.
The installment sale episode violated the goal of proper democratic use of budget process enforcement tools in numerous ways. By enacting the Installment Tax Correction Act as a stand-alone measure, the Senate effectively bypassed point-of-order rules that would ordinarily apply in the consideration of reconciliation legislation, particularly rules applicable to changes that would cause the legislation to violate principles of revenue neutrality. Overcoming these points of order typically requires a three-fifths vote in the Senate. On the other hand, because the stand-alone Installment Tax Correction Act was presented to the Senate as an ordinary piece of legislation, it required only a majority vote.185 Whatever one may think of the Senate supermajority vote requirements as a general principle, I contend that an end run around the existing requirements for isolated pieces of legislation in this fashion is unacceptable.
In addition to violating its own internal budget enforcement rules, Congress also effectively broke statutory budget law. When Congress set the PAYGO scorecard to zero, thus avoiding an otherwise mandatory sequester of funds under the federal budget process rules, it violated its own statutory budget enforcement rules. My argument here is not that Congress acted illegally. Congress created the PAYGO regime by statute and it apparently “violated” the same regime by statute. Congress here enacted a bizarre and wacky, but still legitimate, statute in which it used directed scorekeeping to instruct OMB to ignore the mandatory PAYGO sequestration rules and to pretend that the figure to be used for sequestration purposes was zero. If Congress can make the law, it can repeal it. In effect, and in a very indirect manner, Congress repealed mandatory PAYGO rules for fiscal year 2000. My contention is that as a matter of democratic principle, the legislators have not stuck to the terms of their original bargain. They changed the terms of the deal at the last minute and they did not en[*PG906]force the concurrent budget resolution as it was written. The public can and should expect more from their elected representatives.186
The cost of the stand-alone installment sale provision in terms of projected revenue loss was actually $2.3 billion. By directing the OMB to set the PAYGO scorecard to zero, this cost was eliminated from the budget.187 I expended considerable effort, with the assistance of a reference librarian, to trace the steps through which this accounting device occurred. Clearly, the ordinary citizen would not easily have had access to this information. The installment sale episode thus illustrates a significant violation of economic accountability.
The installment sale provision raises interesting questions about accountability to the electorate in the budget and tax processes. Interest groups surely play a major role in both of these legislative processes. The initial repeal of installment reporting for accrual method taxpayers was intended to close a perceived loophole and, theoretically, was in the interest of the taxpaying public at large. The measure was viewed as horizontally equitable;188 it also happened to raise federal revenue. Arguably, then, Congress was most responsive to the taxpaying public when it first repealed the installment reporting for accrual taxpayers. In the end, when Congress eliminated the repeal, it was responding to heavy lobbying pressure from small business interests. The repeal of the repeal ultimately can be viewed as a special interest measure that ultimately lost revenue from the budget. Congress violated the goal of political accountability.
Perhaps the key violation reflected in the installment sale case study is in the principle of transparency. The installment sale provision was a small piece of a large omnibus budget package and did not receive much attention. Many legislators themselves were unaware [*PG907]that the installment sale provision was even in the omnibus legislation in the first place.189 Even with my years of personal expertise in teaching and researching in the tax area, it took me days of research and “investigative reporting” to track down the events that transpired in connection with the Installment Sale Correction Act.190 Contrary to GAO’s description of the transparency goal, the installment sale story included several surprises and hidden costs.191 Obviously, understandable information was not available to permit the public to engage in debate on the installment sale measure.
A related major concern with the installment sale episode is its lack of openness. As just mentioned, the provision was a small piece of legislation buried, and probably lost from view, in a large omnibus budget package. More significant to the democracy-oriented principle of openness, however, most number gimmicks are out on the table for all to see at the outset. For example, lawmakers have increasingly used techniques to delay the imposition of costs so that they are outside the relevant budget window while speeding up receipts so that they are within the budget window. Also, because several different staffs prepare budget numbers, lawmakers often play the numbers game, using the numbers that best serve their case.192 In each of these cases, however, the gimmicks are used from the start and open to public scrutiny and challenge.
In contrast, the installment sale case study was closed from beginning to end. The installment sale provision that was initially included in the omnibus budget bill was inserted at the last minute behind closed doors as part of a compromise between negotiators for the administration and House Republicans.193 The subsequent Installment Sale Correction Act was a stand-alone measure done after [*PG908]the entire budget deal had already been worked out. This stand-alone measure unraveled part of the budget deal after the fact. In addition, the separate measure through which Congress directed OMB to set the PAYGO scorecard to zero was also arranged after the budget deal had already been worked out. Neither of these deals was on the table at the outset available for public scrutiny. Moreover, the directed scorekeeping legislation makes no specific reference to the installment sale provision. It would be difficult for the general public to put the pieces together and figure out that the offsets agreed to as part of the budget deal to cover the cost of tax cuts had never been paid.
The installment sale episode raises two durability issues. First, as to the tax provision itself, Congress passed a law, which the public thought would be effective, and then retroactively repealed it as if it had never existed.194 This circumstance is obviously confusing and difficult for taxpayers and should be avoided. Congress passed a law that lived but for a brief moment and then disappeared.
Second, whenever Congress directs the OMB to set the PAYGO scorecard to zero, it is repealing PAYGO as a practical matter without technically repealing PAYGO from the statute. This permits Congress to have its cake and eat it too. It can comply with PAYGO when it suits its purposes to do so and simply direct OMB to set the scorecard to zero, thus avoiding the PAYGO sequester, when it wants to avoid PAYGO. Although Congress sets the scorecard to zero through a proper statute presented to the President and signed into law, I contend that such actions violate democratic principles of durability, transparency, and openness.
A final concern with the stand-alone installment sale provision is that it is inconsistent with the fundamental logic of the budget process in the first instance. The idea of the congressional budget process as it was established by the CBA in 1974 was to set up a comprehensive, unified budget process and to encourage coordination and centralization.195 As a former director of the CBO and his co-author described it, “[I]t is not clear that the procedures of the pre-1974 era [*PG909]should be dignified with the label ‘process.’”196 The CBA was designed to eliminate the old fragmented, piecemeal approach, which constrained Congress’s ability to make comprehensive policy. The stand-alone Installment Tax Correction Act harkens back to the old piecemeal approach and is entirely inconsistent with fundamental underlying notions of the federal budget process.197
Over different periods in congressional history, the relative power of individual rank-and-file members, committees, committee chairs, and party leaders has varied. Particularly since the 1994 sweep when Republicans took control over the House of Representatives, the balance of power has shifted to party leaders.198 The Republicans incorporated numerous changes, such as allowing the Speaker to handpick committee chairs, rather than basing chairs on seniority.199 Internal reforms frequently permit party leaders to bypass committees to move legislation directly to the floor.200 Scholars have suggested that the budget process will continue and strengthen the shift in power away from the rank-and-file members to the party leaders. The installment sale case study confirms this view.
With respect to the budget process in particular, Professor Garrett identifies three features that strengthen the power of the majority party. First, she argues that the centralized framework of the budget process gives increased power to the political party, another centralizing institution.201 Second, she argues that the reconciliation process shifts power away from committees and allows leaders to manipulate the process.202 Finally, she contends that the budget rules set the stage for stalemates, which are often resolved through summit negotiations. Summit negotiations typically involve party leaders at the expense of individual members of Congress or committee chairs.203 Reconciliation procedures that severely limit floor activity in the Senate204 may reduce the autonomy and power of substantive committees, [*PG910]causing those committees to report legislation different from what they would have chosen if they had the power to shape the legislation themselves. “[T]he majority party and the President . . . exert greater control over the shape of the budget resolution and overall fiscal policy than any other entities.”205 Naomi Caiden observed these tendencies even earlier in a 1984 article describing the budget as broken into two large packages dealing with discretionary and mandatory spending. She noted that “[t]he trend toward budget packages also has a marked effect on budgetary politics in Congress. It strengthens the hand of the congressional leadership which sets the agenda for debate through its construction of viable packages.”206
If all of these observations are true about the budget process generally, they are all the more true with respect to the negotiations leading to the last-minute inclusion in conference of the repeal of the installment sale method for accrual method taxpayers as part of the Ticket to Work and Work Incentive Improvement Act of 1999, which led to the almost immediate repeal of the repeal in the Installment Tax Correction Act. Although most rank-and-file members of Congress probably were unaware of the events leading up to the Installment Tax Correction Act, one suspects that party leaders were well aware of all developments. Thus, the installment sale story is consistent with literature suggesting that power has increasingly shifted away from individual members of the House and Senate and even away from committee chairs to the party leadership. Most observers view this shift in power with some alarm.207 In the recent installment sale episode, it appears that the party leadership was well aware of what was going on, and participated actively in the conference negotiations and negotiations with the President. This might not all be so troubling, if the original provision hadn’t been used to offset tax cuts that the rank-and-file were probably well aware of.
Many pieces of tax legislation, both large and small, are enacted as part of the budget process. The repeal of the installment sale reporting for accrual method taxpayers was no exception. Tax policy[*PG911]makers generally assess tax legislation according to three major policy norms: fairness, simplicity, and efficiency.208 Fairness, or equity, is based upon the notion that tax burdens should be distributed according to one’s ability to pay. It is, of course, the most critical tax policy norm. The notion of ability to pay usually is further broken into two distinct concepts. The first, horizontal equity, demands that those with equal incomes pay equal tax.209 If certain items are omitted from the tax base, taxpayers with those receipts are treated preferentially and the ideal of horizontal equity is violated. Tax policy issues regarding horizontal equity generally relate to the tax base—debates over receipts that are, or should be, subject to tax. Vertical equity, on the other hand, demands that those with higher incomes pay higher tax. Although most agree with vertical equity as a matter of principle, controversy continues over the extent to which those with higher incomes should pay more tax. Tax policy issues regarding vertical equity generally relate to tax rates and tend to be far more controversial.
As initially proposed in the President’s budget, the repeal of installment reporting for accrual method taxpayers was allegedly intended to close a loophole.210 The idea was to improve the measurement of income and to incorporate a tax change that would increase the horizontal equity of the Tax Code. As Treasury Department representatives testified, the measure was, in part, designed to eliminate a method of accounting that was providing “disparate treatment among similarly situated taxpayers.”211 The provision also turned out to be a useful negotiating device from the budget perspective; revenue estimates projected an approximately $2.3 billion revenue increase.212
Soon thereafter, however, tax principles were abandoned as the executive and congressional branches alike used the provision as a revenue-raising offset in the budget game to pay for tax cuts. No one cared much about tax policy. One of the key pathologies at the intersection of the budget and tax legislative processes is that any semblance of tax policy has gotten completely lost. Tax provisions have become a mere pawn in the processes. Professor Graetz complains that the budget process has elevated the significance of estimated [*PG912]revenue impacts of proposed tax legislation and points out that “[a] politician . . . is behaving quite reasonably . . . when her dominant concern in considering tax legislation is making the revenue numbers ‘come out right.’ The diminished capacity of the traditional normative concerns of taxation—fairness, economic efficiency, and simplicity—to influence legislation in this context is not surprising.”213 Economists have raised similar complaints. Gene Steuerle, for example, protests that because Congress started focusing on deficit reduction, it has
operated under a set of rules that typically require increased revenue to accompany expenditure increases, or some amount of tax increase to accompany a deficit reduction package. As a matter of budget policy, these rules have succeeded in gradually reducing the budget deficit, although not as much as desired. As a matter of tax policy, however, the rules have not worked well, and the tax code is again being made more complex and more unfair with the passage of each new act.
. . . .
What the new methods have implied is scant attention to tax policy principles. In many cases there is not even time for hearings on the tax changes being considered.214
The installment sale case is a good illustration of this particular pathology at work.
The most innocent explanation for the retroactive repeal of the repeal episode is simply that the players were genuinely unaware of the magnitude of the impact of the repeal with respect to small business owners. Many rank-and-file members of Congress were caught unaware by the controversy over the installment sale reporting provision. They apparently had no idea of the tax burden that would be imposed by � 536 of the Ticket to Work and Work Incentives Improvement Act. Many lobbyists also claim to have been caught com[*PG913]pletely by surprise.215 For example, in a letter to the Secretary of the Treasury, a small business lobbyist wrote, “Simply put, if the full impact of this provision had been known, it would never have become law in the first place.”216 Bill Archer, then-Chair of the House Ways and Means Committee, reports that in the first round of legislation, the House bill included the installment sale provision because he and his staff were unaware of the impact on small businesses. It was only in considering the second bill after the President’s veto that his staff began to raise questions and he had second thoughts, causing him to insist on deleting the measure from the House bill in the second round.217
Oddly enough, even the Treasury Department itself claims to have been caught somewhat off-guard. After the 1999 Act was passed, lobbying groups began a simultaneous assault on Congress and the Treasury Department. Although the Treasury Department continued to claim that installment reporting was inconsistent with accrual method reporting, Treasury Department representatives conceded that
the extent of the impact of the provision on the sales of small businesses apparently was unforeseen by policymakers and potentially affected taxpayers and their advisors during the legislative process. We now understand that the legislation has imposed financial burdens on small businesses that override the basic tax policy concern. As such, we are eager to work with Congress to provide a legislative solution to alleviate this unforeseen impact of the provision.218
Even if one accepts the “honest mistake” explanation of events, the installment sale episode potentially reveals flaws in the current [*PG914]budget and tax legislative processes that warrant attention. First, in and of itself, the fact that a piece of legislation with such an apparently large impact on a particular interest group could slip quietly through is troubling. Those with an active interest in particular legislation should have an opportunity to participate in the process. At a minimum, legislative efficiency concerns suggest that mechanisms should be in place to insure that interested groups are aware of pending legislation that might affect them and should have an opportunity to speak in advance rather than being forced to lobby for repeal of legislation after it is enacted. Interestingly, the installment sale episode is contrary to expectations from the political science literature, which generally suggests that it is much easier to block legislation from passage than it is to repeal legislation once enacted.219
The installment sale story should raise particular concerns for those who adhere to a deliberative model of the legislative process.220 The installment sale provision squeaked quietly by with virtually no attention at all.221 One might argue that this is a concern with respect to omnibus and reconciliation legislation generally, which incorporates such a large volume of material covering so many different areas of law that it would be virtually impossible for any single member of Congress to be fully informed on the entire bill. Many political scientists and others have made such observations. For example, Barbara Sinclair notes:
[*PG915]Reconciliation bills make a multitude of policy decisions through an abbreviated legislative process in which many provisions receive limited scrutiny. No committee hearings may have been held on the changes included in the legislation. With the committees operating under time constraints, many provisions may have received only perfunctory attention during committee markup; as part of a much larger package, they may have been altogether ignored during the floor debate. In fact, most members may not have been aware of many of them. Yet the provisions in a reconciliation bill are very likely to become law. Simply the size of the package tends to take attention away from any but the most major provisions.222
Although these observations generally are true of all reconciliation or omnibus bills, they are particularly troubling in the installment sale repeal story. As part of a large reconciliation package, the individual installment sale repeal provision was easily overlooked by many, if not most, individual members of Congress. At the same time, however, the measure was used to pay for popular tax cuts. Members didn’t much care how they were getting the desired tax cuts as long as they were assured that they were being paid for by appropriate revenue offsets under the PAYGO provisions. After the fact, however, when they were able to focus their attention on the installment sale provision in isolation, they realized what had been done and happily voted for the stand-alone repeal.
The “honest mistake” explanation of the events that transpired in connection with the installment sale repeal story is likely to be met with a healthy degree of skepticism.223 Given the speed with which the [*PG916]lobbyists and Congressman Archer began their efforts to repeal the provision, it appears that at least the Republican leadership was fully aware of the provision and its impact. The game was simply too skillfully played for most observers to believe that the inclusion of the installment sale repeal provision in the first place was a mere oversight.
Moreover, there were ongoing reports that the installment sale repeal provision was among the largest of the revenue raisers being targeted for use as a revenue offset to pay for the numerous tax cuts included in the form of “extenders.”224 Given these reports, it is also surprising that lobbyists were so quiet until after the bill was passed. There is some suggestion that lobbyists were assured that the provision would be deleted and that they had nothing to worry about.225 Worse still, lobbyists may have been in on the whole complex scheme to let the bill go through and use the provision as a revenue offset, with the assurance that the Republicans had the votes to repeal the provision immediately as a stand-alone measure. Moreover, it appears that party leaders in the end believed that they could comfortably vote for the bill without worrying about PAYGO sequesters. In addition to repealing the installment sale provision, Republicans also knew that they had the votes to bypass the PAYGO rules through a direction to OMB setting the PAYGO scorecard to zero.
As opposed to the honest mistake explanation, the “wink and a nod” explanation suggests that Republican leaders probably knew all along that when they did draw attention to the cost impact of the installment sale repeal on small businesses, they had the votes to repeal the provision retroactively. They may have even told the lobbyists to keep quiet. How wonderful it would be not only to repeal the unwanted installment sale targeted offset retroactively, but get away without ever being required to pay for over $2 billion of the tax extenders. One mysterious question is why President Clinton went along so willingly with his signature at the end of the day. One suspects that [*PG917]additional deals were cut there as well—deals we may never know about.
Some may argue that the installment sale story is a unique and unusual incident. In certain respects, of course, this is true. We are unlikely to see statutes regularly that appear and then disappear like fairy dust as if they had never existed. If this was simply a bizarre aberration, it would not be worthwhile as a case study. Despite some of its unusual characteristics, however, the events that transpired reflect deeper pathologies in the tax and budget legislative processes, particularly with regard to dealmaking that goes into the budget. Tax policy often gets lost along the way as these budget deals are made. The sections that follow consider these pathologies.
Although observers might disagree about whether the costs outweigh the benefits, any observer of the modern budget process would agree that the fiscal constraints imposed by the enforcement of revenue neutrality principles have increased the costs of enacting new tax legislation and have dramatically altered the dynamics of the process.226
Legislative procedural innovations, especially the various offset provisions built into the reconciliation and PAYGO process, dramatically altered the dynamics of interest group activity and conflict. Lobbyists advocating new spending programs or tax cuts have become “funding predators,” each in search of target programs to cut or alternative taxes to increase so as to pay for their new proposals.227 Players in the budget and tax legislative processes cut deals, each laboring to keep the proposed legislation within the confines of complicated budget requirements, while advocating their own interests. The players here are not limited to private interest groups, but include individual members of Congress, congressional party leaders, the President, and high-level administrative officials. Particularly in the context of larger pieces of legislation, more powerful players may be able to slip in offsets to pay for their pet programs, catching the target group off-guard.
[*PG918] Even before PAYGO, Congress agreed in its 1986 tax reform debate that it would enact revenue and distributionally-neutral legislation. This new approach to tax legislation altered the tax-writing process:
Prior revenue bills were often constructed through political logrolling, whereby special interest provisions were added, one to the next, until a winning coalition was achieved. As intended, revenue neutrality converted this process into a “zero-sum game”: each interest was in competition with all others, because “spending” limited tax expenditure revenues to benefit one interest precluded using them to aid another. The fierce competition for available revenues in the tax-reform debate jeopardized any interest that lacked an aggressive inside spokesman for its cause.228
PAYGO, adopted as part of the 1990 Budget Act, simply codified the revenue neutrality principle that Congress informally began in 1986.
All of the players in the PAYGO process are on the hunt for targets that can be used for revenue offset purposes; none of the players is exempt. Testimony from the executive