Dynamic scoring won’t make expensive programs any better
As politicians on the Hill grapple with their desire to satisfy constituent demands for more spending while also exercising some judiciousness with taxpayer resources, bridging the gap between the fiscal condition of the nation and the demands for more climate-related investment has become increasingly difficult. A recent news report, though, highlights that some politicians are seeking to use “dynamic scoring” to bolster the expected revenue raised from their environmental policies, similar to what was done for the Tax Cuts and Jobs Act of 2017. Trying to expand the concept of dynamic scoring in this way would be poor policy, and is unlikely to cover costs in the way politicians may expect.
Dynamic scoring of tax and budget policies on its own is a good thing—it highlights the fact that taxes do not affect the economy in a static manner. Cutting or raising a tax will have secondary effects in the economy that also affect revenue raised or lost from other policies. Corporate taxes, for example, are at least partially borne by workers, so cutting corporate taxes may increase payrolls and thus increase revenue from income taxes. Dynamic scoring is, at its heart, simply an understanding that taxes are not stagnant at their point of incidence. This creates an opportunity for policymakers to better understand why some revenue raising mechanisms are better than others.
Dynamic scoring, though, took a lot of flak in 2017, as many politicians erroneously claimed that “tax cuts would pay for themselves.” It is rare for a tax to be so distortive to the economy that its “deadweight loss” is high enough to fully reduce other revenues by an amount greater than the tax itself. But dynamic scoring was an important tool for allowing the tax reform to do more while operating within the confines of the budget reconciliation instructions. The use of dynamic scoring in 2017 allowed for an additional $458 billion in tax cuts, which permitted extra tax relief.
That said, trying to apply dynamic scoring to the potential environmental benefits of a bill is inappropriate. Unlike tax policy, where there’s a clear interactive effect offsetting the revenue loss, environmental policies are less likely to translate into a revenue benefit. The estimated benefit from climate-related policies is typically quantified in terms of the “social cost of carbon,” (SCC) where avoiding one metric ton of emissions is the equivalent of gaining a benefit equal to the SCC. But the SCC reflects the long-term worldwide benefits of carbon reduction, not the benefits to the U.S. Treasury. Further, the SCC is about $51 per metric ton. Many of the proposed policies included in the reconciliation bill, though, can easily have costs that exceed the SCC, let alone whatever positive effect they might have on the budget.
When we confine ourselves to estimating climate policy’s tax revenue—the only component that can offset the budgetary costs of the policy—use of dynamic scoring is likely to fall far short of expectations. The estimated domestic benefit of climate policy under the SCC is between 7 and 23 percent of the global benefit, so in this case between $3.57 and $11.73 per ton, assuming a 3 percent discount rate. Currently, tax revenues are 16.4 percent of gross domestic product (GDP). In plain English, this means the best-case scenario is for each ton of emission abatement to raise between $0.59 and $1.92 of tax revenue.
An earlier R Street analysis estimates that, under unrealistically optimistic assumptions, the Clean Electricity Performance Program (CEPP) and the Production Tax Credit (PTC) together would cost approximately $379 billion while mitigating 2.5 gigatons of CO2 over the life of the program. The revenue increase under dynamic scoring from the program would be between $1.5 and $4.8 billion. The use of dynamic scoring for these programs would thus offset only between 0.4 and 1.3 percent of the total program costs—and that is before considering the negative economic impacts and ensuing revenue loss from levying new taxes to pay for the programs, which would likely wipe out any such gains.
Aside from the incongruence of the math, there is also a good philosophical reason to avoid exercising dynamic scoring to pay for non-tax related initiatives. Politicians in general are rarely judicious in explaining the tradeoffs of their preferred policies, and frequently wave away concerns about the costs of policies by referencing “job creation,” or some other benefit that is always supposed to exceed the costs. The purpose of the treasury, though, is to pay for genuine needs that a government is supposed to address, and taxes are the tool that pays for necessary governmental services. If Congress transitions from pursuing policy by identifying a need for collective action to trying to identify policies that can meet cost-effectiveness thresholds under dynamic scoring, then the government could turn into an increasingly restrictive bureaucratic enterprise.
Some programs, such as the Loan Programs Office or the Export Import Bank, are revenue-positive on the balance sheets—but this does not mitigate the fact that these programs can diminish the role of private enterprise and consumer choice in efficiently allocating capital for American prosperity. Rather, we view the revenue-positive aspects of these programs as evidence that they are more efficient than alternative efforts to achieve the same policy objectives, but they are justified by the identified need for governmental policy—not their budgetary nature. A policy may raise money, but that does not by default make it worthwhile.
At the end of the day, Congress will need to reckon with a challenge like climate change the way it should all collective action problems: by identifying the value to be gained from addressing it and determining the most fiscally responsible policies that achieve that value. Budgetary gimmicks will not turn a bad or inefficient policy into a good one, and therefore discerning how much money to spend on climate change is a fundamentally flawed approach. Instead, legislators need to be identifying which policies get the most emission abatement for the least cost, such as a carbon price or regulatory reform to expedite clean energy growth. In short, we should not turn to dynamic scoring as an opportunity to justify inefficient climate policies.
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