There have been a lot of questions swirling around the Cut-As-You-Go (CUTGO) provision that the House Republicans included in the rules package for the 112th Congress and how it differs from the existing Pay-As-You-Go (PAYGO). The bottom line is that CUTGO takes a weak budget balancing tool and makes it weaker. It is PAYGO-lite.

Essentially the Republican proposal would largely maintain PAYGO rules that make mandatory spending increases be offset with mandatory spending decreases. However, the portion of the old rule that required revenue reductions be offset would be jettisoned (under PAYGO offsets could mix and match, mandatory spending offset by tax increases or vice versa). Neither proposal affected increases to the discretionary spending baseline – which has been a concern of TCS.

There is another wrinkle. Statutory PAYGO will still be in effect, however, it works differently than the rule. The rule essentially required that each bill be offset (self-contained). The statute requires OMB to keep track (PAYGO Scorecard) of all legislation and at the end of congressional session tally it up and determine if a PAYGO violation over a 5 or 10 year period has occurred. If one has they sequester non-exempt funds to offset the violation over the time period. Accounts protected from sequester include Social Security, Railroad retirement benefits, fed emp. retirement and disability, vets, net interest, refundable income tax credits, Medicaid, CHIP, SNAP, SSI, TANF, UI, some low-income programs. Phew. Also, emergency spending and debt service.

The 111th Congress also exempted a variety of spending and tax breaks from being considered either under the statutory or rule PAYGO. Medicare Physician payments, estate and gift tax changes, alternative minimum tax, the Bush “middle class” tax cuts were all exempted.

So in many ways, both the PAYGO rule and statute were swiss cheese (separately the House also waived PAYGO rules for the Farm Bill and the Stimulus in addition to the other established waivers). Ironically, some of the proposals Democrats highlight as not being offset by CUTGO were also exempted under the PAYGO rule: extending (part) of the Bush tax cuts; AMT relief, Estate tax relief. Interestingly, it does not appear that Medicare Physician payments are exempted, although the cost of repealing the Health Care reform law (which would have mandatory spending implications) is waived. More importantly (since it is virtually certain the full repeal will fail), any reforms to the reform law would have to be deficit neutral. It is not clear exactly how the statutory PAYGO and CUTGO will interact, but an implication could be that if Congress passes big (non-exempt) tax cuts, they could have statutory PAYGO implications, which could mean trouble for mandatory programs that Republicans like.

In reality, even before all the extenders and other extraneous provisions passed on the end of year tax bill, PAYGO was a dead man walking. CUTGO just put PAYGO out of its misery.

Interestingly, one big controversial initiative of the previous Republican majority would have been stymied by CUTGO – Medicare Part D, the prescription drug benefit. This massive increase in mandatory spending was not offset. So CUTGO isn’t entirely toothless.

But for fiscal discipline, CUTGO is another step in the wrong direction by not making all the tax expenditures justify themselves, but all the biggest tax breaks were waived anyway. Bottom line is Congress and the White House needs to work together to come up with real solutions that yield a saner tax a code and puts the nation on a sounder fiscal footing.

There were some good rule changes as well, including eliminating the “Gephardt Rule” that enable debt limit increases to be automatically be adopted when the budget resolution passes – on an issue this important a separate vote is critical. Additionally, 40-year spending estimates for programs would be required (this would expose programs with a spending bubble outside of the 10-year window) and there were new transparency measures.

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