We will be hosting a call tomorrow at 2:30 PM on tax reform draft legislation being released by Ways and Means Chairman Kevin Brady. Get the details here.
A central battle in the upcoming tax reform debate will be between fiscal hawks and their dovish counterparts in Congress. To make that point, Senator Bob Corker (R-TN) made the first of many splashes recently, when he declared that he would not vote for a tax reform bill that added “one penny” to the deficit.
That declaration would, on its face, suggest any tax reform bill is DOA.
However, dangling above the Gentleman from Tennessee’s words is an asterisk indicating “terms and conditions apply.”
Republican leadership plans to use two tools to bridge the gap between reduced revenue caused by tax cuts and an increased tax base created by eliminating a plethora of deductions and credits.
- Use dynamic scoring
- Ignore tax extenders
Dynamic Scoring. At the start of the last Congress in 2014, House Republicans adopted a new rule known as “dynamic scoring.”
Dynamic scoring allows the Congressional Budget Office (CBO) to take into account macroeconomic effects when establishing a budgetary score for proposed legislation. The rule states:
An estimate provided by the Congressional Budget Office under section 402 of the Congressional Budget Act of 1974 for any major legislation shall, to the extent practicable, incorporate the budgetary effects of changes in economic output, employment, capital stock, and other macroeconomic variables resulting from such legislation.
For tax bills, the new rule makes the same requirement of the Joint Committee on Taxation (JCT). Budgetary effects are defined as changes in revenues, outlays, and spending.
The rule applies to “major legislation.” Major legislation is defined in the rule as that for which a CBO estimate is required and has an impact greater than 0.25 percent of the concurrent estimate of gross domestic product. It is important to note – very important actually – that the definition of “major legislation” can be waived by the Chairman of the House Budget Committee and, if applicable, the House member that is Chairman or Vice Chairman of the JCT.
Clearly, House leadership had in mind tax reform – a stated career goal of House Speaker Paul Ryan (R-WI) when shaping that rule.
As a practical matter, dynamic scoring means that the entire value of tax cuts in the plan expected to be released tomorrow - does not need to be offset - making it just a bit easier to meet Senator Corker’s demands
Tax Extenders. Also making it easier for fiscal hawks to at least say they are not increasing the budget deficit are the perpetually extended tax provisions. The CBO and the JCT treat the “tax extenders,” as they are known, as expiring on schedule.
That never happens.
Congress has repeatedly renewed provisions like the railroad track maintenance credit. As such, any tax reform bill that aims to make permanent tax extenders will be treated by the CBO and the JCT as increasing the deficit. In the real world of politics, however, the deficit will be increased by the inevitable Congressional reprieve.
To the extent any of the tax provisions are made permanent (and you can find a complete list here) most, if not all fiscal hawks are willing to forego any budgetary offsets as a way of acknowledging reality.
Using these two tools, all but the most aggressive fiscal hawk can probably find a way to balance the federal books during tax reform.
Call with questions.
JT & Emily
