Senate Approves Statutory Pay-Go Rule

On January 28, by a 60 to 40 vote, the Senate approved legislation that would create a statutory budget “pay-go” rule. Under the rule, automatic spending cuts would kick in if Congress passed a new spending program or tax cut without fully offsetting it. The Senate pay-go rule was added as an amendment to a bill increasing the national debt limit that also passed the Senate January 28.

The Senate created four exceptions to its pay-go rule:

• Congress could reinstate the estate tax, for up to two years, without offsetting the last revenue cost. This exception is predicated on a reinstatement revenue cost equal to two years worth of an estate tax top rate of 45 percent and a per individual exemption of $3.5 million. Congressional tax writers could change the top rate, the exemption amount, or any other estate tax rule without triggering a need to identify offsets so long as it stays within this specified revenue amount.

• Congress can patch the alternative minimum tax (AMT) for up to two years without triggering the need for offsets.

• Medicare reimbursement rates to doctors may be adjusted upwards for five years without the need for offsetting revenue being.

• “Middle class” income tax rates—set to expire at the end of this year and then revert to higher rates in effect prior to 2001—could be permanently extended, without offsets.

The House and Senate must now reconcile their respective versions of a “pay as you go” rule. The already-passed House statutory pay-go bill differs from the Senate bill primarily by exempting all four of the above carve outs without regard to time or monetary limits. Negotiations are ongoing among the House and Senate leadership and President Obama. A new pay-go rule is expected to land on the President’s desk relatively soon.

The statutory pay-go rules now passed in both houses are tighter than current pay-go rules, which are a function of the House and Senate rules of procedure. The statutory approach adds some teeth to enforcement of fiscal discipline. While most NAIFA members philosophically support budget fiscal discipline, NAIFA members should keep in mind that there is an inherent risk to life insurance, annuities, pensions and employer-provided benefits that comes from rules that generally require new spending and new tax cuts to be offset.

NAIFA Staff Contact: Michael Kerley, Senior Vice President – Federal Government Relations, at (703) 770-8155; or Dani Kehoe, NAIFA Outside Counsel.