For discretionary programs—which encompass most defense spending, foreign aid, scientific and biomedical research, infrastructure, education, and the many other activities of government that Congress funds annually through appropriation acts: Congress directs CBO to assume the most recent year’s appropriation, adjusted for inflation.
For revenues and mandatory spending—which includes the “big three” entitlements (Social Security, Medicare, and Medicaid) and plus many smaller entitlements, such as food stamps and unemployment compensation, as well as offsetting receipts—Congress directs CBO to assume that current laws continue unchanged, with two exceptions:
Expiring programs2 (not to be confused with expiring tax provisions) are generally assumed to continue unchanged. Examples are the programs known as Temporary Assistance for Needy Families (the successor to the former program of Aid to Families with Dependent Children) and the State Children’s Health Insurance Program: such programs come up for periodic reauthorization, and it would not be credible to assume their disappearance.
Excise taxes dedicated to a trust fund are assumed to continue. An example is the aviation taxes dedicated to the airport and airways trust fund. Since the CBO baseline assumes that spending under such programs continues, it is reasonable to assume that their taxes continue as well.
For interest costs, Congress directs use of an estimate of the average interest paid to holders of the levels of borrowing and debt that are assumed in other parts of the baseline, using CBO’s estimate of future interest rates.
It is important to understand several assumptions under the standard rules:
the expiration of the 2001 and 2003 tax cuts and of other temporary tax breaks;
the rapid expansion of the Alternative Minimum Tax (AMT) that will apply to more than 40 million tax filers, 10 times today’s number;
the omission of the likely costs of funding operations in Iraq and Afghanistan in the near term; and
congressional agreement to allow physician payment rates in Medicare to fall sharply under that program’s “sustainable growth rate” (SGR) mechanism.