The Byrd Rule: Kicking-the-can-down-the-road government

A while ago someone thought it would be a good idea to require that tax or government spending changes (aka budget change) without a sunset provision (an expiration date) be passed with three-fifths Senate majority (or 60 votes).

Technically, a budget change without sunset provision can pass if the opposition doesn’t raise a point of order against the bill (which then requires the 60 votes to overcome), but that rarely happens.

A budget change with a sunset provision, however, can pass with simple majority in the Senate. This rule is referred to as the Byrd Rule. According to this Wikipedia article, it rule originated in 1985 and was modified in 1990.

Since it is rare that Republicans or Democrats hold the 60 votes in the Senate necessary to overcome the point of order, many budget changes get passed with a sunset so it can pass with a simple majority.

Many good-sounding, well-intended actions of government have unintended consequences.

The intention with the Byrd rule was to prevent government from making long-lasting budget changes without a strong majority. If Congress signs-up for something that costs a lot of money, they’d either need to be really sure they want to make that change, ensured by the three-fifths majority, or they’d force to come up for extension or go away.

The Byrd Rule sounds similar to the trick individuals use to keep from making impulse purchases. When you really want something, give yourself a cooling off period and see if you still want it in a week. If so, it’ll be there.

However, the Byrd Rule has a bad unintended consequence.  The Byrd Rule treats tax cuts the same as a spending increase, as having a cost. There’s much wrong with that (like recognizing a revenue reduction as a cost), but the bad consequence is that this builds in automatic, recurring political bargaining chips.

To recap, because of the Byrd rule, tax reductions are usually passed with a simple majority and a sunset provision, instead of being made permanent and risk requiring a three-fifths majority.

As the expiration dates for all the past legislation with sunset provisions approaches, politicians salivate as they get to rehash all the old arguments again and use their approval for extending the goodies as leverage for getting some of their other agendas passed (like raising taxes on select groups).

That’s why the “Bush Tax Cuts” for everyone, keep coming up for renewal. Before the Byrd Rule, Congress would change tax rates and those changes would hold until a future Congress decided to change them again.

The Byrd Rule has resulted in a government that spends a great deal of time deciding whether to kick the can down the road, as was done again last night with the fiscal cliff deal.

For example, without the Byrd Rule, the “Bush tax cuts” would have ceased being referred to as such about 2 years after they were initially passed, at which point they would have become known as the regular tax rates.

That wouldn’t preclude future Congresses from further changing the tax code. But, any change they wished to make would be justified and framed against those rates.

We would be less inclined to confuse the issue by treating the “Bush tax cuts” as temporary changes that cost the government lots of money over the past decade.

The truth is, NOBODY knows if those tax cuts actually cost the government anything. Did you know that Federal income tax collections grew for several years after the passage of the ‘costly’ “Bush tax cuts”, reaching record heights in 2007?

When someone says that the “Bush tax cuts” cost government $X over the past decade, they’re making an assumption that the economy would have happened the same as if the tax rates were never changed, or close to it. But, we have no idea if that assumption is correct.

Tax rates have incentive effects. Lower tax rates can result in more economic activity over time since individuals get to keep more of the value they produce. Higher rates can result in less, because they keep less of it.

What’s the solution? Get rid of the Byrd rule. Let’s stop kicking-the-can down the road.

 

Garrett Jones on EconTalk

I enjoyed the recent EconTalk podcast with guest Garrett Jones.

Here are some of his observations. On the changing role of government:

Jones: And after a crisis hits, it just changes the kind of government we have. We now have a government whose job it is to repay this enormous amount of debts. Of explicit and implicit liabilities. That is now what our government is for.

The challenge for government:

Jones: I would love to see the United States tackle its long-term entitlement crisis. In some way it makes it clear to people that the Fed government is not on the hook for everybody’s health care forever. These incredibly open-ended commitments really have to be–they are going to get curtailed one way or the other. I’m certainly in the camp of thinking that the U.S. government is not going to default, either explicitly or through inflation. But sooner rather than later would be really nice.

‘Open-ended commitments,’ is a great way to put it. It’s easy as politicians to promise these open-ended commitments because it costs them nothing. It’s easy for voters to vote for these open-ended commitments because they sounds really good.

And, the political behavior that I believe every voter should be tired of:

Jones: I think these one-year fiscal fixes are appalling. And I don’t just mean that because it’s fun to complain about it. But I think it really does hurt the government’s planning–makes that inefficient–and I think it hurts the private sector’s planning. It makes that inefficient. This is both–whether you are a Keynesian or a supply-sider, you should be appalled by this. And it’s only the politicians who need re-election, of both parties, who really don’t want to just take a hit and sign something that lasts for 5, 10, 15 years.

No joke. One of the worst things that could have happened in politics was the Budget Act and Byrd Rule modified in 1990.

As usual with government actions, the intent of these were good, but they have generated disastrous unintended consequences. This one being setting up a government that is in never-ending kicking the can down the road mode.

These rules require that a change in law and tax code that does not have a sunset provision (a time when it automatically expires and goes away with 10 years, for example), must have 60 votes in the Senate. Any law change with a sunset provision only requires a simple majority.

The intent was to make sure that any costly legislation would either need a super majority approval (meaning it’s something a lot of people want done) or an automatic expiration date that will cause a future Congress to re-evaluate the law to see if it’s something they would like to extend.

But, from my understanding, this has had two negative consequences. First, many big changes are made with a sunset provision in order to meet the simple majority requirement. Since it’s difficult for either party to get a super majority control in the Senate they settle for using sunset provisions to a law in order to pass it on a simple majority.

This is a recipe for kicking the can down the road. Since many laws in the past 15-20 years have been passed with a sunset provision, Congress now spends a good deal of time and energy determining whether to extend these things when they come up for expiration. The “Bush Tax Cuts” are a perfect example.

Politicians love these, because they can use these expiring laws as leverage to get their new changes done, which leads to endless and unproductive (for citizens) back-scratching. Want me to vote to extend the Bush Tax Cuts? Okay, vote for my  health care proposal. Or some such.

Second, this sunset provision applies to tax law changes and treats reduction in tax rates as a ‘cost’, even if the reduction helps invigorate the economy generating more government revenue in the future.

The result is we get tax law changes with sunset provisions that guarantee political drama every time they are set to expire. Instead of having Congress debating only incremental changes to an underlying stable tax code, we have debates for incremental changes on top of the ever shifting sands of the expiring provisions and folks who are even more uncertain of what their tax situation will look like a year from now.