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The Budget Process: What is PAYGO?

PAYGO, which stands for “pay-as-you-go,” is a budget rule requiring that, relative to current law, any tax cuts or entitlement and other mandatory spending increases must be paid for by a tax increase or a cut in mandatory spending. The legislation must be paid for over two time periods: 1) the period of the current year, the budget year and the ensuing four fiscal years, and 2) the period of the current year, the budget year and the ensuing nine fiscal years.

  • The original PAYGO was part of the Budget Enforcement Act of 1990. In that year, President George H. W. Bush and the leadership of the Congress painfully negotiated a very large deficit reduction package of spending cuts and tax increases. Having accomplished so much, the Congress was concerned that the package would eventually erode, because future Congresses would reverse the spending cuts and tax increases bit by bit. PAYGO helped to prevent this and was supplemented by caps on appropriations and outlays for discretionary programs.
  • Budget experts generally agree that PAYGO worked extremely well from 1990 through 1997. In 1998, a budget surplus emerged by surprise and the discipline implied by PAYGO began to wane. The law officially expired at the end of fiscal 2002.
  • After Democrats won control of the Congress in 2006, the House of Representatives quickly re-instituted PAYGO and the Senate adopted a similar rule with the Budget Resolution for fiscal year 2008. Unlike the version passed in 1990, the new PAYGO is not a law. It is simply a procedural rule. If legislative changes were not fully paid for, the earlier law required a sequester of spending to make up the difference. The new rule does not.
  • Violations of the PAYGO rule are subject to points of order in the House and Senate. In the Senate, points of order against PAYGO violations can be overcome by 60 votes, and when considering particular bills, the House can adopt a rule prohibiting such points of order with a simple majority.
 
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