PAYGO As Explained By ANCOR

published by ANCOR

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As explained by
"PAYGO" refers to automatic, across the board cuts to federal spending.

Specifically, the term (short for "pay as you go") describes a federal budget rule:

If Congress passes tax cuts or increases spending on mandatory programs (e.g. entitlement programs such as Medicare and Medicaid), this cannot add to the federal deficit for more than 10 years.

These are triggered by certain types of legislation, such as the proposed tax reform bills.
If the deficit created by tax cuts or entitlement program spending lasts for more than 10 years, the President must institute automatic, across the board cuts to mandatory programs (except for Social Security and Medicaid). This is known as "sequestration."
How Could the Tax Reform Bills Trigger PAYGO?
There are Two Types of PAYGO:
Senate PAYGO:
Statutory PAYGO:
A Senate-specific rule that would block ("raise a point of order against") any deficit-causing legislation unless it can be waived with at least 60 votes.
The rule described above, which was made permanent by Congress in 2015, after coming in and out of effect since the 1990s.
As written, both the Senate and House tax reform legislation create a deficit of up to $1.5 trillion that lasts more than 10 years, causing PAYGO to take effect.
Tax bill passes
Up to $1.5 trillion deficit over 10 years.
The White House Office of Management and Budget (OMB) averages out up to $1.5 trillion over 10 years and cuts that sum out from the mandatory spending budget for each year.
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
-$150 billion
-$150 billion
-$150 billion
-$150 billion
-$150 billion
-$150 billion
-$150 billion
-$150 billion
-$150 billion
-$150 billion
BUT!!       Congress has ways of circumventing PAYGO.
To avoid Senate PAYGO, the Senate can either:

- Write a provision in the tax reform bill that says it Senate PAYGO does not apply; OR

- Change how the deficit is calculated using "dynamic scoring". This includes assumptions of economic growth that are not usually included in deficit calculations, writing away the deficit.
However, with this particular tax legislation, dynamic scoring and waiver provisions can NOT be used to go around statutory PAYGO.

That is because the current tax bill is going through the expedited budget reconciliation process (which allows a  bill to pass on a simple majority vote). 

Under reconciliation, there are limits on what kind of deficit calculations can be used and how much can be waived away with provisions in bills.
The only way Congress can escape statutory PAYGO for this tax reform legislation is if it writes a separate law stopping the sequester for this bill. 

That will require 60 votes - meaning the GOP will need 8 Democratic votes to waive statutory PAYGO. The forecast for Democratic cooperation is unclear given conflicting incentives to blame the GOP but also protect important programs.
Even if PAYGO is somehow circumvented, the proposed tax cuts would cause a loss of federal revenue.

This would put pressure on Congress to reduce federal spending - making programs like Medicaid vulnerable to future funding cuts even if Medicaid is not subject to PAYGO.
Programs Which Would Qualify for PAYGO Cuts:
Medicare is the program most heavily affected. It could receive a maximum 4 percent cut, equaling roughly $25 billion of the $150 billion per year that would have to be cut from mandatory programs. 

Programs that could be entirely cut out of the budget include:

- Vocational Rehabilitation Basic State Grants;

- The Affordable Housing Program;

- The Social Services Block Grant (which includes Meals on Wheels);

- The Commodity Assistance Program;

and many other programs such as farming support programs.

Medicaid and Social Security are EXEMPT from PAYGO - but the programs would be vulnerable to political pressure to cut spending because of loss revenues from tax cuts.
Sources and Resources:
Tax Policy Center: What is PAYGO?

Committee for a Responsible Federal Budget: How PAYGO Rules Could Affect Tax Reform

The New York Times: The Tax Bill's Automatic Spending Cuts