Paygo Won’t Affect Higher Education Tax Credit

Yesterday, the U.S. Treasury Department issued a report on the American Opportunity Tax Credit, a $2,500 income tax credit for college students’ higher education expenses that was included in the American Recovery and Reinvestment Act of 2009. The report is the Obama Administration’s opening salvo in the push to make the tax credit permanent. Under current law, the credit is only a temporary expansion through 2010 of the less-generous Hope tax credit. There has been a flurry of media attention over the report, including extensive information about the number of people claiming the credit, their incomes, and the value of the benefit. But one point made in an article in The Hill stood out among all the rest. The article states that if Congress makes the tax credit permanent, it “would cost $58 billion over 10 years… [and] would have to be offset under pay-as-you-go rules.”

That last part about the pay-as-you-go rules has caused confusion and a little bit of panic within the education policy community. Extending the American Opportunity Tax Credit would reduce revenues by about $11 billion a year compared to $5 billion a year under the permanent Hope tax credit. If Congress offset that cost, lawmakers would have to raise other taxes or cut spending by the same amount. That could put other education programs on the chopping block, as was the case when Democratic leaders proposed rescinding funds for the Race to The Top competitive grant program to offset the Education Jobs Fund enacted this summer.

Yet there’s absolutely no chance that the cost of making the America Opportunity Tax Credit permanent will have to be “offset under pay-as-you-go rules.” Paygo is perhaps the most misunderstood part of the federal budget process and it trips up a lot of education reporters, advocates, and even U.S. Senators.

The first thing to remember is that there are now two types of Paygo rules – the first is a rule that the House of Representatives and the Senate have imposed on themselves, and the second is a federal law signed in 2010 that the executive branch enforces. There are some key similarities and differences between the two types of Paygo rules which are briefly discussed below. But keep in mind that both types of Paygo rules can be waived or turned off without consequence whenever Congress chooses to do so.

Both Paygo rules are a means to prevent Congress from passing legislation that would increase the budget deficit over the next five and 10 years. The rules apply to bills that affect taxes or mandatory spending (like student loans and part of the Pell Grant program) but not annual appropriations bills. By that exemption alone, nearly all federal education programs are excluded from Paygo. Simply put, Paygo requires that Congress “pay for” new spending or tax cuts – but not appropriations bills – by reducing spending somewhere else or increasing taxes on something else to avoid adding to the deficit over the next five and 10 years

What happens if a piece of tax legislation comes before the Congress that does increase the deficit? Under the first type of Paygo rule, any Representative in the House or any Senator can raise a point of order because the legislation violates Paygo. But any member of Congress can also move to waive Paygo so long as a majority agrees in the House and a two-thirds majority agrees in the Senate. Essentially, Congress can opt to ignore the first type of Paygo rule as they see fit.

Under the second type of Paygo rule – the one in federal law – once a bill is signed into law, the amount by which it increases the deficit is added to a “scorecard” that the Office of Management and Budget tallies. At the end of each congressional session (effectively each year), if the scorecard has a balance on it, the President must issue an across-the-board cut in federal spending programs by the same amount, excluding all programs subject to appropriations and approximately 150 other programs including the Pell Grant. But Congress can also write into any piece of legislation that violates the Paygo law something like this: “Any balances that are placed on the Paygo scorecard as a result of this legislation are hereby set to zero.” That is, Congress can always change the Paygo law, even on a case by case basis to avoid an across-the-board cut in spending.

If Congress extends the American Opportunity Tax Credit it would likely add the measure to a massive “tax extenders” bill when lawmakers return after the November 2^nd election for a lame duck session. That bill is expected to include an extension of some or all of the expiring 2001 and 2003 Bush era tax cuts and probably dozens more expiring tax benefits. The cost of the legislation in terms of forgone revenue under Paygo will be at least $300 billion a year. You can bet Congress won’t try to offset that amount with spending cuts. Instead they’ll include those magic words to just turn off Paygo.