The Myth of the Current Law Baseline

The Congressional Budget Office (CBO) refers to its baseline as reflecting current law.¹ However, this “current law” baseline is a myth.

What is a baseline and why is it important?

CBO is required to provide Congress with a baseline in its Budget and Economic Outlook by February 15 each year, and it usually updates the baseline once or twice later in the year.

The CBO baseline is made up of projections of revenues and outlays for the current year and next decade (thus covering the 10-year budget window), incorporating a forecast of economic variables. The budget baseline provides a benchmark against which to measure legislative proposals.

The baseline informs lawmakers and the public about the trajectory of fiscal and economic policy. It also informs how the official Congressional scorekeeping agencies, CBO and the Joint Committee on Taxation (JCT), analyze bills under consideration. The cost estimate for legislation depends on the baseline against which it is compared.²

A cost estimate can make or break legislation. Budget enforcement points of order are evaluated using cost estimates. If the cost of a bill is high, it could be politically unpalatable. Conversely, it can be easier for bills with low scores to move through the legislative process.

What are the different types of baselines?

A current law baseline would simply calculate outlays and revenues based on the laws on the books.

A current policy baseline would extend the laws as they are in effect at the time the baseline is calculated. This means that even if a law has a sunset date baked into it, the current policy baseline would presume the program continues rather than terminates.

CBO periodically publishes what it calls an alternative fiscal scenario, which is generally a current policy baseline that assumes tax cuts are extended and certain spending policies are continued.

The official CBO baseline is often described as a current law baseline. However, the CBO baseline is more accurately considered a hybrid of a current law and current policy baseline.

What are the distortions in the baseline?

There are four deviations from actual current law in the baseline that CBO is statutorily required to incorporate: three that make spending look much higher and one that makes revenues look slightly higher than they would actually be if Congress made no further changes in law.

Spending Distortions:

1. Discretionary appropriations are assumed to be continued and grow with inflation each year.³ An actual current law baseline would not assume spending when no budget authority has been provided. This distortion even assumes one-time and emergency funding continues forever. The May 2023 CBO baseline assumed about $18.6 trillion in higher outlays over the FY 2024-2033 period due to this distortion.
2. Direct spending programs larger than $50 million are assumed to be extended beyond their expiration. An actual current law baseline would not assume spending by programs that have expired. Over the next decade, 16 such programs are slated to expire, but assumed to continue in the CBO baseline. The May 2023 CBO baseline assumed about $2 trillion in higher outlays over the FY 2024-2033 period due to this distortion.
3. Entitlement programs are assumed to make all scheduled benefit payments, even if a program’s trust fund and financing are inadequate. An actual current law baseline would only assume spending for benefits that can legally be paid. CBO projects the Social Security Old Age and Survivors Insurance Trust Fund will be depleted in 2033 and the Medicare Hospital Insurance Trust Fund will be depleted in 2035. When these trust funds are depleted, actual benefits that can be paid will be lower than scheduled benefits. The May 2023 CBO baseline assumed about $662 billion in higher outlays over the FY 2024-2033 period due to this distortion.

Revenue Distortion:

1. Excise taxes dedicated to a trust fund are assumed to be continued beyond their expiration. An actual current law baseline would not assume revenues be collected from expired taxes. Under this distortion, expiring taxes that finance the Airport and Airway Trust Fund and the Highway Trust Fund are assumed to continue. The May 2023 CBO baseline assumed about $68 billion in higher revenues over the FY 2024-2033 period due to this distortion.

What are the implications of the distortions in the baseline?

The official baseline incorporates current policy principles for most spending programs but follows strict current law rules for 99 percent of revenues. This inherently biases the budget process in favor of higher spending and higher taxes.

Consider two policy decisions where Congress could pass two new laws. The Tax Foundation estimates that extending the expiring provisions from the Tax Cuts and Jobs Act would increase the deficit by $3.1 trillion over the 2024–2033 period compared to current law.⁴ For context, this deficit impact is less than the actual costs to taxpayers of extending the current level of expiring discretionary appropriations for just two additional years.

However, under the laws governing the budget baseline, preventing tax increases on families and small businesses would be scored as increasing the deficit while continuing discretionary spending at current levels would be scored as deficit reduction.⁵

The same scenario exists if Congress wanted to extend expiring direct spending programs or increase entitlement benefits above what could otherwise legally be paid out of a trust fund. Under the distortions in the baseline, CBO could be forced to say those policies have “no impact on the deficit,” even if they could actually cost taxpayers trillions of dollars.

The obvious implication is that the distortions make it easier to increase spending by hiding the true costs of policy proposals.

Less obvious is how the distortions shift the paradigm even for policymakers who want to spend, in a responsible way, more than what current laws would provide for.

For example, the Social Security Trust Fund is projected to be depleted within a decade. When that exhaustion occurs, the benefits that can legally be paid will fall by about 25 percent compared to what had otherwise been scheduled.

What if Congress wanted to mitigate the impact of the depletion of the trust fund by increasing Social Security benefits by 10 percent above what could otherwise be paid? CBO would be required to score that as a reduction in benefits, even though the benefits assumed in the baseline could never legally be paid.

As another example, the current authorization for the Food Stamp program is set to expire. At that point, no Food Stamp benefits could be paid. Compared to the actual current law, any new Food Stamp benefit higher than $0 would be a spending increase. However, because of the distortions in the baseline, extending benefits at any level less than what was previously provided would be called a “benefit cut.”

What should Congress do?

The mix of current policy and current law assumptions in the official baseline is incongruous, confusing, and distorts policymaking decisions. Congress should pick one standard or the other. Tax policy and spending programs should be subject to the same rules.

Adopt a True Current Law Baseline

Adopting an actual current law standard would make the most sense. A true current law baseline most accurately reflects the consequences of policy enacted by previous lawmakers, respecting Congress’s Article I power of the purse. It is objective and avoids making speculative assumptions about future policy actions. A current law baseline would provide the clearest picture of the choices facing current lawmakers if they either maintain the de jure status quo or make changes in law.

Budgeting is about making tradeoffs, so the rules governing the process should provide transparency about the ramifications of different options. Reforming the baseline to reflect actual current law would make it more obvious that keeping spending high is a policy choice. Thirty percent ($24 trillion, including nearly $3 trillion in debt servicing costs) of the $80 trillion outlays in the official baseline over fiscal years 2024–2033 are only assumed, not actually provided for under current law.6
CBO has little discretion in constructing the official baseline and is directed by law to include the distortions in the baseline. Therefore, to implement reform, Congress should remove the distortions throughout Section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985, which establishes the rules related to official baseline.7 The distortionary assumptions in the baseline that should be removed include:

• Discretionary appropriations are assumed to be continued and grow with inflation each year.
• Direct spending programs larger than $50 million are assumed to be extended beyond their statutory expiration.
• Entitlement programs are assumed to make all scheduled benefit payments, even if a program’s trust fund and financing is inadequate to do so.
• Excise taxes dedicated to a trust fund are assumed to be continued beyond their statutory expiration.

The assumption that discretionary appropriations are continued is by far the largest distortion in the baseline. Ideally, it should end along with the other distortions. However, as a moderate step, the baseline for discretionary programs could be equal to the most recently enacted level (as if extended by a continuing resolution) as proposed by the Zero-Baseline Budget Act of 2021, rather than assuming annual increases for inflation.⁶

Increase Transparency

To increase transparency, the Budget Committees could instruct the CBO to provide supplementary information describing a true current law baseline and how it deviates from the official baseline. Individual Members of Congress could also request this information.

For the cost estimates of legislation that interacts with one of the deviations, such as expiring direct spending programs, expiring excise taxes that go to trust funds, or spending from insolvent trust funds, CBO could be asked to provide supplementary information describing how the bill would be scored against a true current law baseline.

CBO does not prepare official cost estimates for regular appropriations bills due to a loophole in the Congressional Budget Act,⁷ but Members of Congress could ask CBO for information about how much the new budget authority in an appropriations bill would cost against a true current law baseline.

Control Spending

This paper does not advocate that fiscal policy follow either the current law or current policy baseline.

Fixing distortions in the baseline would help fix the disincentives in the current budget process that push spending and taxes higher. Improving the budget process would be a first step towards getting the nation’s fiscal house in order. Better rules and processes are needed tools for achieving this goal, but they are no substitute for lawmakers following through to change policy.

Most importantly, Congress should enact fiscal policies that:

• Ensure fiscal sustainability.
• Appropriately provides for important constitutional priorities such as national security.
• Eliminate taxpayer funding that is:
  • Outside the scope of the Constitutionally enumerated powers of government.
  • Economically harmful.
  • Wasteful.
  • Divisive, counter to American values, or damaging to families, communities, or society.
• Minimize the damage and distortions in the tax code while raising only enough funds to finance legitimate spending priorities.

The notion that the CBO baseline reflects current law is a myth. In reality, the official CBO baseline incorporates current policy principles for most spending programs but follows strict current law rules for 99 percent of revenues. The distortions in the baseline bias the budget process in favor of higher spending and higher taxes. Congress should adopt a true current law baseline, increase transparency, and control spending.