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Posted September 21, 2007

Temporary-Effect Legislation, Not Permanent Legislation Facilitates Fiscal Responsibility, Yin Says


Professor George Yin, recently named the inaugural Edwin S. Cohen Distinguished Professor of Taxation and Law, argued that temporary-effect legislation rather than permanent legislation facilitates fiscal responsibility in Congress during his chair lecture in Caplin Pavilion, Sept. 12.

As chief of staff of the congressional Joint Committee on Taxation from 2003-05, one of the most influential tax positions in the country, Yin acquired a deeper understanding of tax law and the process behind tax legislation. Yin oversaw the five senior members of the Senate Finance Committee, the five senior members of the House Ways and Means Committee, and a staff of other lawyers and economists.  

“When the Congress decides which federal programs to support in a given year, it faces a task not unlike the one children encounter when they walk into their favorite candy store: so many choices, so little time and money,” he quipped.

Each year, Congress decides which federal programs to support and is responsible for tracking its spending. Records are used to help Congress make smarter decisions and for the public to keep tabs on where the money is going. According to Yin, most congressional spending plans are approved annually, forcing lawmakers to reevaluate them year after year. Until recently, most tax plans were adopted permanently, which means the law stays in effect until it is modified or terminated by Congress. Conversely, temporary-effect legislation carries an expiration date unless extended by congressional action.

Most observers would argue for permanent laws for the sake of stability or predictability, Yin explained. “They might see a role for temporary legislation if the policy outcome were particularly controversial or uncertain,” he said. But, Yin took the opposite position. Because of the budget rules, which place a constraint on the total amount spent during a ten year budgetary period, members of Congress have come up with creative, and questionable, techniques to pass expensive legislation. By delaying the effective date of the legislation, or terminating or sunsetting it before the end of the window period, law makers can reduce the cost of legislation to a fraction of what it would have cost had it spanned the entire budgetary window period, while still complying with budget rules.

These practices have drawn criticism, however. “To these critics, what was done was like replacing five dollar price tags in that candy store with two dollar ones, thereby allowing a child to buy more candy no matter what the budget constraint,” Yin said. Some critics have suggested banning the practice of phasing in or sunsetting legislation. Whether one is for this type of legislation or against, they have missed the point, Yin said. “From the broader perspective of promoting greater fiscal responsibility, which is the goal of congressional budget rules, both proponents and opponents of the recent legislation have overlooked the real budgetary impact of the legislative practices. The budget process should provide a mechanism that conveys to law makers the true cost of their legislative activity before they act.”

Knowing the true cost would allow law makers to make more informed decisions and allow the public to hold them accountable for their choices. If, for example, legislation extends beyond the window of the budgetary period, it’s possible that some of the true cost will not be accounted for in the budget process. Additionally, law makers wouldn’t have to face the consequences of a bad choice. On the other hand, if the effect of legislation expires before the end of the budget period, the true cost of the legislation is official and can be taken into account. “The real point, it seems to me, is what I refer to as the unaccounted for costs,” Yin said. “When congress enacted the Medicare legislation in 2003 no single member of Congress is on record as having approved a 21.1 trillion dollar program. No single member of congress has to go to his or her constituents and say I voted for such an increase in federal spending and yet that is precisely what they did. According to the record, if you will, they voted for a 400 billion dollar bill because that’s the official cost.”

Yin cited Thomas Jefferson’s preference for temporary laws “as a way to prevent the dead hand of past generations from controlling the rules for current and future ones.” But, he added that James Madison pointed out that there would be chaos if rules continually changed. Yin leans towards Jefferson's point. “Temporary-effect legislation could be enacted in a way to achieve considerable stability and predictability if the Congress were to give priority to those attributes.”

Critics of Yin’s thesis suggest that tax incentives are more effective if adopted permanently. “A temporary provision may be as effective or more effective than a permanent provision. Even if a provision is intended as a long term incentive, passage of a temporary law may not be much different from enactment of a permanent law that is frequently changed.” Additionally, temporary laws result in more responsible fiscal decision making, which improves the efficiency of incentives, Yin explained.

Temporary legislation should curb the cost of influencing legislative results, particularly lobbyists and campaign contributors. “Greater use of temporary-effect legislation should arguably reduce costs incurred by the private sector to influence legislative outcomes. The reason is that the temporary nature of the legislation reduces the value of the legislative product and therefore the amounts private sector groups would be willing to pay.”

The Edwin S. Cohen Distinguished Professor of Taxation and Law Chair is named for Edwin S. Cohen, a 1936 graduate of the Law School and member of the faculty from 1964 until 1985. Cohen took off four years from teaching to serve as the Secretary of Treasury, where he played a significant role in the passage of major tax reform legislation. He continued to teach a tax seminar at the Law School until 2004. When Cohen died last year at the age of 91, the Chair was created in his honor. Generous contributions from Cohen and his son, Edwin C. Cohen ’67 and Cohen’s former students add up to a $1.6 million endowment that funds the Chair.
• Reported by Emily Williams