updated 4/23/2007 10:26:18 AM ET 2007-04-23T14:26:18

No tax cuts and no benefit increases that require government borrowing!

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That vow by Democrats upon taking control of Congress has now slowed their own agenda, beginning with efforts to increase the minimum wage and cut interest rates on student loans.

Other Democratic promises also are in peril because Democrats revived the pay-as-you-go - or pay-go, for short - rule that prevailed during Bill Clinton's presidency and helped produce surpluses instead of deficits on the government's books. Among them are boosting health care for poor children, reforming a hidden middle-class tax increase and easing scheduled cuts in Medicare payments to doctors.

A disciplining effect
Under the pay-go regimen, legislation to cut taxes or boost federal benefit programs such as Medicare, Medicaid or a health insurance program for low-income children must be "paid for" with tax increases or other benefit cuts. Issuing government bonds to cover the costs is forbidden.

The idea is to prevent lawmakers from piling on debt to finance tax cuts or new spending programs.

There are ways around the rule - and lawmakers may in fact waive it later this year when addressing the alternative minimum tax and other issues - but it's already having a dampening impact on lawmakers' appetites for deficit-financed tax cuts and big new spending programs.

"Pay-go really has a disciplining effect," said Senate Budget Committee Chairman Kent Conrad, D-N.D.

House and Senate differences
On the other hand, the pay-go rule is a huge headache for lawmakers. In most cases, more time and effort is spent figuring out how to pay for legislation than on its underlying purpose.

That the rule is applied differently in the House and Senate adds another complicating wrinkle. In the Senate, the rule can be waived by a supermajority of 60 senators. That's already a strategy being considered by Senate Finance Committee Chairman Max Baucus, D-Mont., on legislation to bolster children's health insurance and to reform the alternative minimum tax.

"Pay-go provides that you either pay for something or you have to get a supermajority vote," Conrad said. That means "some things will get paid for, some things will get a supermajority vote, some things will go down."

But the House seems to be taking pay-go more seriously and battles with House fiscal purists loom if the Senate waives the rule. House leaders have the option of waiving the rule but have vowed they won't, fearing it might set off a revolt by moderate "Blue Dog" Democrats.

"It's a bigger question mark in the Senate than in the House," said Bob Greenstein, executive director of the liberal-leaning Center on Budget and Policy Priorities.

The difficulty of 'pay-go'
Health insurance companies, drug manufacturers, oil companies and other interest groups that may be tapped by the government to supply the "pay" for the "go" are on edge.

The dynamics of pay-go have been on ample display on a bill to raise the minimum wage from the current $5.15 to $7.25 an hour. Democrats had hoped to have that signed into law by now.

To overcome Republican opposition to raising the federal pay floor, the Senate attached $8.3 billion worth of business-friendly tax provisions. To offset the tax revenue losses, as required by pay-go, the Senate voted to eliminate some tax loopholes and restrict deferred compensation for corporate executives.

A weeks-long deadlock over the tax provisions broke Friday afternoon as the strong-willed chairmen of the tax-writing committees - Baucus and his House counterpart, Rep. Charles Rangel, D-N.Y. - agreed on a compromise. The most controversial "pay-fors" in the more ambitious Senate bill were dropped after intense lobbying, including the restrictions on executive pay. That in itself illustrated the difficulty of pay-go.

Pay-go also forced House Democrats to significantly scale back plans to cut college loan interest rates in half, another key campaign promise. A bill passed in January would cut rates only for the less than one-third of students receiving need-based loans instead of all loan recipients, as originally promised. Lenders are balking because the cost to the government of lower interest for student loans will come out of the subsidies they get in issuing them. The Senate has yet to act on companion legislation.

Major issues still to come
The effects of the pay-go rule promise to have more dramatic effects on bigger ticket items such as reforming the alternative minimum tax, or AMT, and beefing up medical care for poor children through the State Children's Health Insurance Program, known as SCHIP.

House Democrats have signaled that they want to scale back payments to health insurance companies participating in the Medicare Advantage program in order to finance SCHIP improvements. That's going to be a hard sell in the Senate, where managed care companies participating in the Medicare have greater support.

Fixing the alternative minimum tax looms as the most difficult test. The AMT originally was designed to make sure wealthy taxpayers pay at least some tax. But because it was never indexed for inflation, it has begun ensnaring an increasing number of middle-class taxpayers, especially those with several children in high-tax states such as New Jersey, New York and Connecticut.

More than 20 million additional taxpayers are threatened with the AMT next filing season if Congress doesn't act, and they face tax increases averaging $2,000, according to Len Burman, of the Tax Policy Center, a joint program run by the Urban Institute and the Brookings Institution.

Fixing the AMT is terrifically expensive, averaging $50 billion a year or so.

Such eye-popping costs have many observers skeptical Congress will be able to stick to its pay-go promises.

"When push comes to shove it's going to be tough" to live within pay-go, said House Majority Leader Steny Hoyer, D-Md. "We'll have to see, but clearly we want to make a really strong try to do that because we believe the fiscal posture we find our country in is very serious."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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