What are dynamic scoring and dynamic analysis?
Tax, spending, and regulatory policies can affect incomes, employment, and other broad measures of economic activity. Dynamic analysis accounts for those macroeconomic impacts, while dynamic scoring uses dynamic analysis in estimating the budgetary impact of proposed policy changes.
The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimate the budgetary effects of tax, spending, and regulatory legislation. The resulting scores play a major role in policy deliberations because of congressional budget rules and public concern about the budget.
CBO and JCT recognize that households’ and businesses’ economic activity can be sensitive to changes in policy. An increase in the cigarette tax, for example, will reduce smoking, while new subsidies for health insurance will increase coverage. The agencies account for those behavioral responses in their estimates. Traditionally, however, CBO and JCT budget scores did not account for the secondary impact on employment, gross domestic product, and other macroeconomic measures. The agencies often analyzed those macroeconomic impacts separately in what is called dynamic analysis, but did not include their feedback effects in official scores. An exception is immigration reform scoring: the effects on population and labor force are so direct that CBO and JCT did account for them.
In 2015, Congress adopted new budget rules that required dynamic scoring in certain cases. CBO and JCT now include macroeconomic feedback in official scores if proposed legislation has a sufficiently large budget impact (more than 0.25 percent of gross domestic product in any year in the budget window, equivalent to about $45 billion in 2015) or if one of the budget committee chairmen requests it. These rules cover major tax and mandatory spending proposals; an unresolved question is how these rules might also apply to investments, like infrastructure and education, funded through discretionary spending.
For dynamic scoring, CBO and JCT prepare conventional, nondynamic scores of proposed legislation and then use economic models to identify any short- or long-run effects on the overall economy. The agencies then estimate the budget effects of those macroeconomic feedbacks. The agencies have long done dynamic analyses of major legislation, using multiple models and parameter estimates. A major difference with dynamic scoring is the distillation of those scenarios down to the single set of estimates the budget process requires.
Case study: Repealing the affordable care act
In the first major analysis under the new rules, CBO and JCT analyzed the potential budget effects of repealing the Affordable Care Act (ACA). Including macroeconomic feedback, they estimated that repeal would increase cumulative deficits by $137 billion over the next decade. With conventional scoring, the estimated deficit increase would have been larger, $353 billion (figure 1).
That difference arises because the agencies’ best estimates—subject, they emphasize, to significant uncertainty—suggest that the ACA slightly reduces overall economic activity. For one thing, by expanding Medicaid coverage the ACA allows some people to get health insurance while working fewer hours. For another, by phasing out premium subsidies as individual incomes rise and by levying new taxes, the ACA effectively raises taxes at the margin and thus reduces work incentives.
Reduced labor supply, coupled with other taxes, also reduces capital stock within the 10-year budget window (beyond the window, the ACA’s deficit reductions tend to expand the capital stock). Through its macroeconomic feedbacks, the ACA thus slightly reduces income and payroll tax revenues.
Controversy over dynamic scoring
In principle, dynamic scoring should not be controversial. Policymakers and the public want to know how policy changes may affect the budget, whether through direct behavioral responses or macroeconomic feedback. In practice, however, dynamic scoring has been controversial: Advocates for a tax cut or some entitlement reforms often appear to hope that dynamic scoring will make enacting them easier. Opponents fear the advocates will be right.
In reality, the effect will be more muted. Dynamic scores for tax cuts will include the pro-growth incentive effects that advocates emphasize. But dynamic scores will also account for offsetting effects, such as higher deficits crowding out investment or people working less because their incomes rise. The net of incentive and offsetting effects often yields smaller growth projections than advocates hope. Indeed, dynamic scoring sometimes shows that tax cuts are more expensive than conventionally estimated, usually when pro-growth incentives are not big enough to offset anti-growth effects.
Congressional Budget Office. 2014. “How CBO Analyzes the Effects of Changes in Federal Fiscal Policies on the Economy.” Washington, DC: Congressional Budget Office, November.
———. 2015. “Budgetary and Economic Effects of Repealing the Affordable Care Act. Report of the Chairman of the Senate Budget Committee. Washington, DC: Congressional Budget Office, June.
Hall, Keith. 2015. “How CBO Will Implement Dynamic Scoring.” Presentation given at Heritage Foundation, Washington, DC, June 17.
Joint Committee on Taxation. 2015. “Macroeconomic Analysis at the Joint Committee on Taxation and the Mechanics of Its Implementation.” Report JCX-3-15. Washington, DC: Joint Committee on Taxation.
Marron, Donald. 2015. “Three Things You Should Know about Dynamic Scoring.” TaxVox (blog). February 27.