A. Overview of Revenue Estimating Responsibilities
The Joint Committee staff is nonpartisan and serves the entire Congress. The Congressional Budget Act of 1974 ("the Budget Act"), as amended, stipulates that revenue estimates provided by the Joint Committee staff will be the official estimates for all tax legislation considered by the Congress. The objective of the estimating process is to produce accurate, consistent, fair, and impartial estimates that can be relied upon by Members of Congress in making legislative decisions.
Any Member of Congress may request a revenue estimate for a tax proposal or solicit the Committee staff's help in crafting legislation. In 1986, the Joint Committee staff received 474 requests. By 2004, this figure had increased to 3,580. The largest number of requests to date, 7,786, was received in 2007. Since 2007, the number of requests has varied between approximately 6000 and 7000 requests. While the majority of requests are for revenue estimates, the Joint Committee staff also receives requests for distributional, legal, and data analyses. All Requests are treated as confidential. Generally, a response to a request is released only to the Member making the request and the response remains confidential unless the Member decides to make the information public. Confidentiality allows the Joint Committee staff to maintain its nonpartisan role in the legislative process.
When a revenue estimate has been included in a publicly available document (e.g., a revenue table summarizing a markup proposal or the result of a reported bill), the estimate is posted to the Joint Committee website. An estimate is also publicly released in circumstances where the information is of widespread and immediate interest by the Members of Congress (e.g., a tax bill about to be voted upon by the full House or the full Senate).
B. Background on Revenue Estimating and Budget Act Requirements
The starting point for a revenue estimate prepared by the Joint Committee staff is the Congressional Budget Office ("CBO") 10-year projection of Federal receipts, referred to as the "revenue baseline." The revenue baseline serves as the benchmark for measuring the effects of proposed tax law changes. The baseline assumes that present law remains unchanged during the 10-year budget period. Thus, the revenue baseline is an estimate of the Federal revenues that will be collected over the next 10 years in the absence of statutory changes.
In providing conventional estimates, the Joint Committee staff assumes that a proposal will not change total income and therefore holds Gross National Product ("GNP") fixed. The use of fixed economic assumptions does not prevent the Joint Committee staff from taking into account possible shifts in economic activity across sectors or markets and/or changes in the timing of such activity in response to the proposed tax change, so long as GNP remains unaffected.
The Joint Committee staff uses confidential tax return information to prepare revenue estimates. The Statistics of Income Division ("SOI") of the IRS provides large micro-level data sets consisting of carefully sampled and edited tax returns. SOI data provides the primary building block for revenue estimates. In the process of estimating a proposal, other information sources are used frequently. These sources include other government data, survey data, constituent data, and third-party data.
C. The Budget Window and Presentation of Estimates
The Joint Committee staff is required by the budget resolutions to present revenue estimates as point estimates (that is, present one dollar figure rather than a range of possibilities) calculated in nominal dollars. The current budget process also requires the Joint Committee staff to generate revenue estimates of tax legislative proposals over a 10-year period, often referred to as the "budget window." Revenue estimates for each year within the budget window are fiscal year estimates. The budget resolutions require revenue estimates to be expressed in nominal dollars over a fixed period.
D. Behavioral Effects in Revenue Estimates
Although conventional revenue estimates are sometimes referred to as "static," Joint Committee staff revenue estimates take into account taxpayers' likely behavioral responses to proposed changes in tax law. Behavioral effects can be broadly characterized as shifts in the timing of transactions and income recognition, shifts between business sectors and entity form, shifts in portfolio holdings, shifts in consumption, and tax planning and avoidance strategies. See JCX-1-05 for a few specific examples that give a flavor for the issues the Joint Committee staff considers when accounting for behavioral effects in revenue estimates.
E. Compliance, Administration and Enforcement Costs
The Joint Committee staff attorneys, accountants, and economists working as a team examine compliance, administration, and enforcement issues that could affect the timing or amounts of revenues collected as part of the process of understanding how a proposal would operate. When these issues are likely to be important to a proposal, the Joint Committee staff accounts for their effects in the revenue estimate.
The Joint Committee staff uses a variety of sources to determine how compliance, administration, and enforcement issues might affect revenue. IRS compliance studies provide information for issues involving individual taxpayers. The Joint Committee staff also uses information provided by the IRS about their examination, enforcement, appeal, and litigation activities. In some areas, such as tax shelters, the Joint Committee staff is frequently briefed by IRS personnel. Information provided at these meetings helps the Joint Committee staff gauge the likely compliance, administrative, and enforcement effects of particular proposals.
F. Indirect Tax Effects
In estimating the revenue effects of proposed changes to tax law, the Joint Committee staff incorporates the behavioral responses of taxpayers (within the fixed-GNP convention) and any indirect tax effects associated with that behavior. These secondary effects are not the direct result of tax changes. Instead, they arise from changes in taxable income induced by behavioral responses to tax changes.
Indirect tax effects are not limited to changes in tax law, however. Non-tax legislation, either by design or not, may cause changes in taxable income and thereby impact Federal tax receipts. The CBO has responsibility for scoring the budget effects of non-tax legislation, and over time CBO has developed general guidelines for when indirect tax effects are scored and by whom (often in consultation with the Joint Committee staff). Regardless of whether CBO or the Joint Committee staff scores the indirect tax effects, to the extent that these effects are accounted for they are included with the estimate of the bill.
G. Offsets in Revenue Estimates
In estimating the revenue effects of changes in excise taxes, the Joint Committee staff (along with staff at CBO and Treasury's Office of Tax Analysis) generally assumes that the net effect on total Federal tax receipts from an increase in Federal excise taxes is less than the increase in gross excise tax receipts. The difference between the change in excise tax receipts and the change in total Federal tax receipts is referred to as the "income and payroll tax offset." The difference arises from the fact that an increase (decrease) in excise taxes results in a decrease (increase) in income subject to Federal income and payroll taxation. The existence of the income and payroll tax offset for excise taxes has become an established, generally accepted component of revenue estimates for excise taxes. In addition to the offset for excise taxes, the Joint Committee staff (along with staff at CBO and Treasury's Office of Tax Analysis) incorporates an income and payroll tax offset when estimating the effects of changes in payroll taxes. See JCX-1-05 for a more detailed discussion of the income and payroll tax offset with respect to payroll taxes.
H. Distributional Analysis
Distributional analysis is not a legally required task of the Joint Committee staff. However, upon request of Members or committee staff, distributions of certain tax changes are provided as background information. The Joint Committee staff has produced distributional analyses since the early 1970s. The current distribution methodology dates to 1994. Under this method, the Joint Committee staff provides a distribution by current income group, when sufficient information is available, for legislation affecting the individual income tax, Social Security and Medicare payroll taxes, and excise taxes. The current methodology does not distribute corporate income taxes and estate and gift taxes.
The measure used in the distributional analysis is the change in liability (taxes paid) for the taxable year. Liability is measured, whenever possible, after any behavioral response related to the tax change. Compliance issues are also taken into account in the measurement of liability.
The basic unit of analysis is the tax filing unit or return. Changes in tax liability are distributed to taxpayers according to their expanded income. This income classifier begins with Federal adjusted gross income and adds tax-exempt interest, employer contributions for life and health insurance, employer share of Social Security and Medicare payroll tax, workers' compensation, untaxed Social Security benefits, insurance value of Medicare benefits, alternative minimum tax preference items, and excluded income of U.S. citizens living abroad. Yearly distributions in nominal dollars are provided for the first five years of the 10-year budget window.
I. Tax Models
The Joint Committee staff uses several highly developed microsimulation tax models to estimate the revenue impact of changes in tax laws. These are the Individual Model, the Corporate Model, and the Estate and Gift Model. In addition, the staff is beginning to use individual panel-based models. The primary source of tax data for the models comes from the SOI division within the IRS. Some of the models use large micro-data files, while others are smaller and spreadsheet based. Some models reside on a desktop computer, while others reside on "servers" and are simultaneously available to several staff members. With respect to any revenue estimate, the complexity and scope of the model used are determined by several factors including the amount and type of data available, the level of interest in the model, and the level of complexity associated with the questions being asked of the model.
J. Technical Corrections
From time to time enacted tax legislation may not exactly reflect the intent of the legislators. When this occurs, legislators may seek a technical correction to fix the statutory language. The Joint Committee staff does not provide estimates of the revenue effect of technical corrections. This convention stems from the view that the original revenue estimate reflects the intent of the legislation. Therefore, an estimate of the correcting provision would be a double counting of the effect of the original policy.
K. Pamphlets on Revenue Estimating Methodologies
An overview of the current procedures used in the revenue estimating process is provided in Joint Committee on Taxation, Overview of Revenue Estimating Procedures and Methodologies Used by the Staff of the Joint Committee on Taxation, (JCX-1-05), February 2, 2005. The report provides a summary of the revenue estimating responsibilities of the Joint Committee staff; discusses requirements, constraints, and conventions of the revenue estimating process; and presents the estimating procedures and models used by the Joint Committee staff in preparing revenue estimates. The emphasis is solely on methodology and issues associated with the preparation of conventional revenue estimates of proposed changes to the Internal Revenue Code.
See Joint Committee on Taxation, Overview of Work of the Staff of the Joint Committee on Taxation to Model the Macroeconomic Effects of Proposed Tax Legislation to Comply with House Rule X111.3.(h)(2), (JCX-105-03), December 22, 2003, for a discussion of how the Joint Committee staff provides supplemental macroeconomic analysis of certain tax proposals.
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