• 11 September 2009

Temporary-Effect Legislation, Political Accountability, and Fiscal Restraint

George K. Yin - University of Virginia School of Law

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The proper duration of legislation has become highly controversial ever since the enactment of many temporary tax laws during the George W. Bush Administration.  Most observers believe that passage of “temporary-effect” legislation—laws with an explicit expiration date or “sunset” feature—permits the cost of legislation to be misrepresented and allows its proponents to escape the discipline intended by the congressional budget process.  Under this view, fiscal discipline is protected if Congress enacts so-called “permanent” legislation.

This Editorial takes the opposite position and shows that, barring estimation error, the legislative process accounts completely for the costs of temporary-effect legislation but not permanent legislation.  Consequently, enactment of temporary-effect rather than permanent legislation promotes political accountability and may result in greater fiscal restraint.

The Editorial first explains why the criticism of temporary-effect legislation stems from an understandable, but mistaken, focus on the short-term budget effects of legislation.  It then shows that, from the standpoint of promoting fiscally responsible decisions, temporary-effect legislation is preferable to permanent legislation both at the time policy choices are initiated and when they are renewed.  The nation’s rapidly deteriorating fiscal situation, due in part to the economic crisis of 2008 and 2009,1 highlights the importance of understanding the budgetary effects of these legislative practices before Congress approves further deficit-increasing changes in the areas of health care, climate change, or other entitlement or tax programs.

The Budget Accounting Treatment of Temporary-Effect and Permanent Legislation

For budget accounting purposes, the cost of proposed new spending and tax legislation is the difference between the amount of government revenues or outlays that would occur with the legislation and the amount that would occur without the legislation.  The latter amount is known as the “baseline,” and is determined by applying current law to the relevant economic (and other) variables projected to occur during the budget period being considered.  Baseline estimates generally assume that permanent laws will continue forever but that temporary laws will expire as scheduled.

The baseline cost of an entitlement or tax program may be projected to increase over time even in the absence of any expansion or change to the program.  This is because baseline estimates must assume that “laws providing or creating direct spending and receipts . . . operate in the manner specified in those laws . . . and funding for entitlement authority is . . . adequate to make all payments required by those laws.”2 Thus, for example, if due to anticipated economic or demographic changes, participation in a tax or entitlement program is expected to increase in the future, the baseline cost estimate of the program must reflect that increase.

Congress typically agrees each year to a limit on the cost of new legislation passed that year.  Importantly, the budget limit applies only to the costs projected to occur during the “budget window period”—generally, only the five or ten years following the legislation.  Given this limitation, political debate naturally centers around whether legislative practices and budget accounting rules result in an accurate measurement of the costs of proposed legislation within the budget window period (such costs are referred to in this Editorial as the “official cost” of the legislation).

Supporters of legislation have long used various techniques to reduce the official cost of legislation and thereby enhance its likelihood of approval.  One technique is to delay the start of the legislation until late in the budget window period or gradually phase in the legislation’s effect.  Because this technique has the potential disadvantage of delaying the realization of benefits produced by the legislation, lawmakers sometimes employ an alternate technique of allowing the legislation to begin immediately but then terminating or “sunsetting” its effect prior to the end of the budget window period.  By using either or both of these techniques, supporters can reduce the official cost of legislation to a fraction of what it would have been had the legislation been in effect throughout the entire budget window period.

Although these techniques have been used for a number of years, the extent and frequency of their use in the tax area grew dramatically beginning in 2001.  In that year, Congress approved major tax cut legislation, virtually all of whose provisions expired nine months before the end of the budget window period.  In addition, it phased in or delayed the effect of many of the provisions.  These two steps significantly reduced the estimated total cost of the legislation over the budget window period.  Much the same occurred in 2003 when Congress passed another major tax cut.

Many analysts sharply criticized these practices.  According to these critics, the practices enabled the Bush Administration and Congress “to hide the true budgetary costs” of the policy changes and thereby “avoid the constraints imposed by the budget rules.3 One observer went so far as to label these techniques “Enron-style accounting” that caused “the official budget projections [to be] universally seen as unreliable and even fraudulent.”4 The observer concluded that the “[2003] bill’s true cost . . . will be close to double its ‘official’ cost.”5 To prevent these misrepresentations, some have suggested barring the practice of sunsetting legislation in certain circumstances or requiring such legislation to gain supermajority support before it is approved.

Critics are surely correct that the motivation behind many of the delayed effective dates, phase-ins, and sunsets of recent tax legislation has been a desire to shrink the official cost of legislation taken into account for budget purposes.  Since budget rules provide consequences that depend upon that official cost, political advantage can be gained by manipulating this amount.  For the same reason, opponents of the legislation have generally focused on this same official cost.

But from the broader perspective of promoting fiscal responsibility, both proponents and opponents of the recent legislation have overlooked the real budgetary impact of these nontraditional legislative practices.  The budget process should provide a mechanism that conveys to lawmakers the true cost of their legislative activity before they act.  This information not only enables lawmakers to make more informed decisions but also permits the public to hold lawmakers accountable for their choices.  But the true cost of legislation is not necessarily the “official cost” used for budget purposes; rather, the true cost includes the budgetary consequences of the legislation throughout the entire period that the legislation remains in effect.  Since the “official cost” incorporates only the budget consequences falling within the budget window period, it systematically understates the true cost of any deficit-increasing legislation extending beyond that period.  Thus, when proponents of permanent legislation go on record as having approved the official cost of such legislation, they escape responsibility for the full budgetary impact of their action.  By contrast, barring estimation error, the official cost of legislation not extending beyond the end of the budget period is its true cost, so lawmakers who support such legislation must therefore internalize the full budgetary consequences of such legislation.

These observations mean that at least from the standpoint of promoting political accountability and fiscal restraint, legislation whose effects extend beyond the end of the budget period, such as “permanent” legislation, generally should be disfavored, whereas legislation whose effects end no later than the end of the budget period, such as temporary-effect legislation, generally should be favored.  The following Sections illustrate this principle’s application both at the time policy choices are first adopted and at the time they are later continued.

Initial Adoption of Policy Choices: The Medicare Prescription Drug Legislation

The greater budget transparency of temporary-effect rather than permanent legislation when policy choices are first adopted is starkly illustrated by considering the passage of the Medicare prescription drug legislation in 2003.  Early on, the President and congressional supporters agreed that this legislative effort should cost no more than $400 billion over the ten-year budget window period.  To fit within that constraint, Congress created a “doughnut hole” in the benefit structure to remove any federal subsidy for an intermediate level of prescription drug spending and delayed the start of the basic benefits until January 1, 2006, with only limited transitional assistance provided prior to that time.  Importantly, however, unlike most of the tax laws passed in 2001 and 2003, the effects of the new Medicare prescription drug law were not sunset.  Rather, the bill was enacted as a “permanent” change in the law.6

As it turns out, much controversy surrounded the $395 billion ten-year official cost estimate of the final Medicare legislation, and the estimate was eventually revised upward by $41 billion.  But the significance of this error pales in comparison to the real misrepresentation of the legislation’s budget consequences.  The “true” cost of the Medicare prescription drug benefit, meaning the present value of all future costs obligated by the new program, has been estimated by the Medicare trustees to be $17.2 trillion.  Thus, enactment of the Medicare law represented a huge new financial commitment by the federal government—one which no member of Congress ever was required to endorse.  The budget process, which is supposed to provide information to Congress so it can make responsible choices about the nation’s priorities and to the public so it can scrutinize those choices effectively, therefore failed in the case of the Medicare legislation, because the process disregarded any budgetary effects occurring after the budget window period.  In contrast, had the Medicare legislation been enacted instead as temporary-effect legislation, the true cost of the legislation would have been equal to its official cost (barring estimation error).  Congress, therefore, would have acted with full knowledge of the law’s budgetary implications and subjected itself to full scrutiny from the public for its choice.

Continuation of Policy Choices: The R&E Tax Credit

The contrasting budget accounting treatment of temporary-effect and permanent legislation is also important when policy choices are continued, and is illustrated by considering the tax credit for research and experimental activities (“R&E tax credit”).  In 1981, Congress approved a new R&E tax credit to provide an incentive for certain research activities.  Congress provided that the credit would sunset at the end of 1985 after being in effect for 4.5 years.

The R&E credit has proven to be extremely popular and remained in effect, with only minor changes, for virtually the entire period since 1981.  After its initial term, the life of the credit has been regularly extended, generally in one- or two-year increments.  Indeed, even though there is no suggestion that its initial temporary term was in any sense a budgetary gimmick, the credit is often pointed to as the poster child for fiscally irresponsible “sunset” provisions.  Yet by adopting the credit as a temporary measure and then extending it only in short-term increments, Congress has had to take its cost into account in the legislative process for every one of its over twenty-five years of existence, a period far longer than that of any budget window period thus far.  As a result, legislators regularly have had to struggle with finding an acceptable offsetting change to “pay for” an extension of the credit.  Even where no offset has been found, the extension has theoretically displaced other spending initiatives or tax expenditures in the same manner in which the continuation and expansion of discretionary spending programs compete with and displace one another.

Moreover, as experience with and data about the R&E credit have accumulated, the estimates of the cost of continuing the credit—currently more than ten times the cost estimated in 1981—can be expected to be more and more accurate.  Thus, because of the temporary nature of the credit, Congress has been confronted by, and has had to take into account in the legislative process, current and increasingly accurate information relating to the cost of continuing the program.

Contrast the budget accounting treatment of continuing a permanent tax or spending program.  In that case, the cost of continuation largely disappears from the legislative radar screen because continuation occurs as a result of legislative inaction rather than legislative action.  Moreover, by approving a program as a “permanent” change, Congress modifies the budget baseline to incorporate its cost in all subsequent years, including any growth in costs resulting from increased participation in the program or other factors not due to legislated changes.  Thus, enactment of permanent measures makes any continuation of the program beyond the initial budget window period appear to be cost-free.

Proposals made by the George W. Bush and Obama Administrations to change the baseline to disregard the temporary nature of the 2001 and 2003 tax cuts demonstrate how important this budget accounting difference is.  If the baseline were changed to treat these tax cuts as if they had been enacted as permanent law (despite the sunset clause), it would allow a continuation of the cuts beyond 2010 to appear to be cost-free and thereby facilitate their extension.  In 2007, in response to the Bush Administration’s proposed change to the baseline rules, then-CBO Director Peter Orszag explained why this change would be a form of bait-and-switch that would substantially undermine the integrity of the legislative process:

[S]coring expiring provisions as entailing no budgetary cost after their expiration, but then assuming their extension in the baseline, would cause the costs of extending those provisions to “disappear” from the process—which would substantially undermine its integrity.7

Despite this criticism, in 2009, the Obama Administration’s Office of Management and Budget (OMB), headed by Dr. Orszag, made precisely the same proposal as the Bush Administration to change the baseline.8 In a remarkable display of chutzpah, the OMB captioned this proposal as a “Return to Honest Budgeting.”9 The Obama Administration proposal would allow a total of $3.5 trillion in costs to disappear from the budget process during just the next ten years.10 In other words, during the current period of rapidly growing deficits and debt, this amount of additional spending (or lost revenue) could be approved without any member of Congress or the Administration having to take responsibility for it.

Dr. Orszag’s initial criticism of the Bush Administration proposal was correct.  Moreover, the reason he offered shows equally well why the current budget accounting treatment of permanent legislation substantially undermines the legislative process.  Permanent legislation is scored as entailing no budgetary cost after the end of the budget window period even though the baseline assumes continuation of the legislation forever.  Thus, the costs of such legislation after the end of the budget window period “disappear” from the legislative process in exactly the same manner as Dr. Orszag’s example, with the same deleterious effect on the integrity of that process.

Passage of Permanent Legislation Permanently Distorts Budget Process Information

The adoption of a permanent program permanently distorts the information provided by the budget process even if the program itself, as a result of subsequent congressional action, turns out to be only temporary (or, indeed, never goes into effect).  Although this phenomenon is derivative of effects already discussed, the consequence is so counterintuitive as to merit a brief, separate discussion.  The impact is also very important:  It means, for example, that the $16.8 trillion of Medicare prescription drug program costs for which no lawmaker has ever been held accountable has permanently distorted budget accounting by that amount even if the program itself is curtailed or repealed in the future.

The phenomenon is illustrated by considering legislation affecting a tax law provision concerning the allocation of interest expense between domestic- and foreign-source income.  In 2004, Congress liberalized this provision to provide a cut in taxes but deferred the effect of the change until 2009.  The estimated cost of the liberalization during the applicable ten-year budget window period (FY 2005-2014) was about $14 billion.  In 2008, prior to the liberalization going into effect, Congress delayed its effect for two years until 2011.  However, because the baseline for FY 2009-2018 assumed that the new liberalized law would be in effect as a result of the 2004 legislation, the two-year delay in this tax cut was estimated to raise about $8 billion in revenues.  In 2009, in approving health care legislation, the House Ways and Means Committee agreed to an additional delay of the tax cut until 2020, producing a further estimated increase in revenues of about $26 billion.11

If the Ways and Means Committee proposal becomes law, the net budget effect of the three changes would be an estimated increase in revenue of $20 billion ($14 billion revenue loss from 2004 legislation plus $8 billion and $26 billion revenue increases from 2008 and 2009 legislation), most of which would be used to finance the cost of health care reform.  But the interest allocation rules would not have been changed at all by this legislation—taken together, all of the legislation would leave the law (until 2020) precisely where it was prior to 2004.  Thus, the estimated $20 billion increase in revenues resulting from the “changes” to those rules cannot be an accurate reflection of the budget impact of the legislation.  No program would have been started, modified, or cancelled as a result of the legislation; the $20 billion would simply be the byproduct of how the budget accounts for the delay of a program that has not yet gone into effect.

Moreover, this misrepresentation can be repeated over and over again.  For example, if the 2009 Ways and Means Committee bill is enacted (delaying the effect of the 2004 liberalization until 2020), Congress could later delay it again, thereby “raising” billions more in revenue to finance other spending or tax cuts.  Again, all of this would occur despite the absence of any change whatsoever to the interest allocation rules.

The reason for the misrepresentation is the “permanent” nature of the 2004 amendment to the interest allocation rules.  As permanent legislation, it changed the baseline for all succeeding years even though Congress was charged with just a small portion of the cost of the change—the $14 billion loss in revenues estimated to arise during the forthcoming ten years.  Thus, subsequent delays in the effect of the 2004 amendment effectively credit Congress with an amount for which it was never charged in the first place.  This example shows how enactment of permanent legislation permanently distorts the information provided by the budget process even when the legislation itself turns out to be only temporary or, as in this case, never goes into effect at all.   The budget treatment of permanent legislation allows Congress to generate fake cost savings or revenue increases whenever it wants.  Congress simply has to pass permanent spending increases or tax cuts that are never intended to go into effect, and then to vote repeatedly to delay the start of such programs.


In early 2009, in one of the first laws passed under the new Obama Administration, Congress extended for 4.5 more years an entitlement program providing health insurance benefits to children.  The law, however, was approved under a special budget rule that accounted for its cost as if the extension were permanent.  Hence, even as lawmakers expressed concern about the daunting fiscal challenges facing the nation, they approved a new program whose true cost may far exceed the official cost revealed in the legislative process.  Congress may soon take similar action if it passes permanent health care or climate change legislation or converts Pell Grants from a discretionary program into a permanent one, as recommended by the President.12

This Editorial has shown that after taking into account the budget accounting rules in the legislative process, it is preferable to pass temporary-effect rather than permanent legislation to promote political accountability and fiscal restraint.  Barring estimation error, the full cost of legislation is revealed to Congress and the public when temporary-effect, but not permanent, legislation is adopted and continued.  The budget implications of these legislative practices should be understood clearly before Congress undertakes major reforms of entitlement and tax programs.dingbat



Copyright © 2009 New York University Law Review and George K. Yin. All rights reserved.

George K. Yin is Edwin S. Cohen Distinguished Professor of Law and Taxation at University of Virginia School of Law.

This Editorial is an updated and abbreviated version of George K. Yin, Temporary-Effect Legislation, Political Accountability, and Fiscal Restraint, 84 N.Y.U. L. REV. 174 (2009).

  1. In the eighteen months between December, 2007 and June, 2009, the twenty-five-year fiscal gap estimated by the Congressional Budget Office (CBO) under its “alternative fiscal scenario”—a plausible set of projections incorporating widely expected policy changes—almost doubled from 2.8 to 5.4 percent of GDP. Cong. Budget Office, The Long-Term Budget Outlook 7 box 1-1 (2009) {hereinafter CBO, 2009 LONG-TERM OUTLOOK}; CONG. BUDGET OFFICE, THE LONG-TERM BUDGET OUTLOOK 6 box 1-1 (2007) {hereinafter CBO, 2007 LONG-TERM OUTLOOK}. The fiscal gap is the amount of spending reductions and/or revenue increases that would need to be carried out immediately in order to preserve the same debt-to-GDP ratio at the end of a given period (in this case, twenty-five years) as existed at the beginning of the period. It is a measure of the change needed to avoid unsustainable increases in government debt. CBO, 2009 LONG-TERM OUTLOOK, supra, at 5, 7. Under the alternative fiscal scenario, CBO’s 2009 estimate showed the nation reaching its historical peak debt-to-GDP ratio (previously attained during World War II) by 2026, or five years earlier than its 2007 estimate. Id. at 16; CBO, 2007 LONG-TERM OUTLOOK, supra , at 11.
  2. 2 U.S.C. § 907(b)(1) (2006).
  3. William G. Gale & Peter R. Orszag, Sunsets in the Tax Code, 99 TAX NOTES 1553, 1557 (2003).
  4. Press Release, Ctr. on Budget & Pol’y Priorities, Senate Appears Poised to Approve Tax Cut with Actual Cost of $660 Billion (May 15, 2003), http://www.cbpp.org/5-15-03tax-pr.pdf (internal quotation marks omitted).
  5. Id.
  6. Although there is no specific expiration date for the program, the legislation contains a “soft budget trigger” which could stimulate changes to the program should its costs prove to be greater than anticipated. The conditions for this trigger have occurred, but Congress has repeatedly turned it off, including most recently, for the entirety of the current 111th Congress.
  7. Perspectives on Renewing Statutory PAYGO: Hearing Before H. Comm. on the Budget, 110th Cong. 18 n.10 (2007) (statement of Peter R. Orszag, Director, Cong. Budget Office).
  10. Id. at 121 tbl.S-5. The total takes into account certain tax and spending provisions in addition to the 2001 and 2003 tax cuts that would also have their baseline treatment changed. See also OMB, FY 2010 BUDGET, supra note 8, at 265 tbl.17-2 (showing slightly revised estimates of effect of proposed baseline change on tax provisions).
  11. See Amendment in the Nature of a Substitute to H.R. 3200 Offered by Mr. Rangel of New York, 111th Cong. § 443(a) (2009), available at http://waysandmeans.house.gov/media/pdf/111/catext3200.pdf (proposing to delay liberalization of interest allocation rule until 2020); STAFF OF JOINT COMM. ON TAXATION, 111TH CONG., ESTIMATED EFFECTS OF CHAIRMAN’S AMENDMENT IN THE NATURE OF A SUBSTITUTE TO THE REVENUE PROVISIONS OF H.R. 3200, THE “AMERICA’S AFFORDABLE HEALTH CHOICES ACT OF 2009,” SCHEDULED FOR MARKUP BY THE COMMITTEE ON WAYS AND MEANS ON JULY 16, 2009, at 2 (Comm. Print 2009), available at http://www.jct.gov/publications.html?func=startdown&id=3572.
  12. See OMB, FY 2010 BUDGET, supra note 8, at 217, 219.

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