Tax System Challenges of Odd Budget Processes

Congress has passed H. J. Res. 45, the Statutory Pay-As-You-Go Act of 2010 (2/4/10). While it sounds good - basically, tax cuts should be offset by certain types of spending cuts or other tax increases, it has an enormous whole in it. PAYGO won't apply to tax changes that are considered part of "current policies."

Here is the section of the resolution: "ADJUSTMENT FOR CURRENT POLICIES.
(a) Purpose- The purpose of this section is to provide for adjustments of estimates of budgetary effects of PAYGO legislation for legislation affecting 4 areas of the budget--
(1) payments made under section 1848 of the Social Security Act (referred to in this section as `Payment for Physicians' Services');
(2) the Estate and Gift Tax under subtitle B of the Internal Revenue Code of 1986;
(3) the AMT; and
(4) provisions of EGTRRA or JGTRRA that amended the Internal Revenue Code of 1986 (or provisions in later statutes further amending the amendments made by EGTRRA or JGTRRA), other than--
(A) the provisions of those 2 Acts that were made permanent by the Pension Protection Act of 2006 (Public Law 109-280);
(B) amendments to the Estate and Gift Tax referred to in paragraph (2);
(C) the AMT referred to in paragraph (3); and
(D) the income tax rates on ordinary income that apply to individuals with adjusted gross incomes greater than $200,000 for a single filer and $250,000 for joint filers."

These are some costly provisions - 2 years of the AMT patch (2010 and 2011) and reinstatement of the tax cuts for individuals with income under $250,000 ($200,000 if single).

This doesn't really seem quite honest. It also enables Congress to enact lots of tax cuts that are not paid for. This means the deficit will go up as will the debt and interest expense and someday, someone will have to raise taxes to pay for this. Enacting PAYGO with big holes in it is like someone saying they are going to only spend within their income level, while at the same time running up their credit cards to pay for extra spending.

I was really thinking that the high cost of keeping any of the 2001/2003 tax cuts would cause Congress to have to enact some major (or at least significant) reforms of the income tax. Such reforms would "mask" the reality that when the tax cuts expire after 2010, there is, in effect, a tax increase for everyone. Reform could have included a thorough review of all special deductions, credits and exclusions to see if any are not needed or can be cut back to better meet their intended purpose and to be made more equitable.

This deceptive PAYGO provision is really a way to run up an already high deficit and debt, and avoid the tough job of modernizing and improving our federal tax system.

What do you think?