(Hint: Think accounting, not music!)

If you read my fixed assets management blog on this site (see Bonus Depreciation: Any Chance it will be Made Permanent? at http://sge.bz/1GhdYEO), you will note the mention of “dynamic scoring.” Dynamic scoring, also referred to as dynamic analysis, attempts to take into account how a system will respond to a proposed change. Basically, dynamic scoring predicts the impact of fiscal policy changes by forecasting the economic impact of incentives created by the policy. It is often used when budget policy is being discussed.

Dynamic scoring was adopted by the House of Representatives in January of 2015. It is to come into play whenever a bill is introduced that will have a large impact on spending, revenue or the budget deficit. A “large impact” is defined as a change of more than one-quarter of one percent of the gross domestic product (i.e., the total value of goods and services produced in the U.S. during one year) in the fiscal year covered by the bill.             

Dynamic scoring considers what changes to the economy will be caused by certain tax provisions if they are passed. It is said dynamic scoring evaluates the real-world impact of proposed legislation. If a tax provision promotes economic growth, for example, increased tax receipts should result. When this occurs, even if a tax provision (such as a tax cut) results initially in lower tax receipts and thus, lost revenue, economic growth can counteract that and, in fact, possibly produce even greater revenue.

Critics of dynamic scoring claim its results rely too heavily on what assumptions are made. It is very difficult, after all, to predict with certainty what the economic effect of a tax provision will be. Furthermore, it may very well be that reactions to a policy change may lag behind and, therefore, mask the actual effect of the provision if one doesn’t look far enough into the future.

Static scoring, on the other hand, assumes tax cuts have no change on the economic behavior of those affected. Static scoring is what the Congressional Budget Office and the Joint Committee on Taxation have used in the past. When static scoring is used, the effect of any immediate change is calculated without looking at the possibility of a long-term response.

Because Congress is often supposed to pay for any new tax cuts with either offsetting revenue or other spending cuts, dynamic scoring could make it easier for legislators to pass bills. For example, consider the cost of highway maintenance and the building of new roads. If you simply look at the cost, it may seem prohibitive. However, if you also consider the economic growth that can result from such investments, it becomes potentially easier to pass into law.

Unfortunately, the new dynamic scoring policy passed by the House only applies to tax cuts. It excludes appropriations bills and, therefore, investments, such as improved infrastructure bills, remain outside of its realm.