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Questions Raised on Budget Window Extension for Tax Reform

Posted on May 13, 2017 by Dylan F. Moroses, Stephen K.Cooper

Although some Senate Republicans have expressed interest in extending the 10-year budget window under reconciliation to simplify revenue-neutral tax reform, several stakeholders who spoke to Tax Analysts May 11 questioned the move.

Without precedent and a high level of confidence in Congressional Budget Office projections beyond 10 years, switching from a 10-year to a 20-year budget window is more about “exploiting budget rules to make it easier to cut taxes and not providing better information to policymakers,” said Ed Lorenzen, senior adviser for the Committee for a Responsible Federal Budget. Lorenzen suggested that extending the budget window could make tax reform easier by reducing the restrictions under reconciliation rules.

Senate rules require that legislation approved under reconciliation not have a budgetary effect outside a 10-year time frame. An early proponent of extending that time frame was Senate Finance Committee member Patrick J. Toomey, R-Pa., who recently argued in a Bloomberg View opinion piece that while “Congress has traditionally used a 10-year time frame . . . nothing in the law prevents us from using a 20- or even 30-year time frame.”

In an email, Lorenzen explained, “If Congress passed a budget resolution with a 20-year budget window and reconciliation instructions for tax reform, it could in theory pass tax reform that reduces revenues, increases the deficit, and avoids violating the Byrd rule by having the tax cuts sunset after 20 years instead of being required to have them sunset after 10 years (or shorter depending on specifics such as [the] corporate rate cut, which has revenue losses for years later).”

One GOP tax aide told Tax Analysts that Republicans intend to pass 10-year tax legislation through reconciliation, rather than by means of a timing extension.

Describing the potential flexibility, Senate Budget Committee Chair Michael B. Enzi, R-Wyo., said the budget reconciliation period does not have to be 10 years, and even suggested it could be as short as one year. He added that lawmakers can take action on tax reform using the fiscal 2017 reconciliation legislation until the fiscal 2018 budget resolution is agreed to by a House and Senate conference.

Senate Finance Committee member Mike Crapo, R-Idaho, expressed interest in learning whether an extension would help lawmakers draft revenue-neutral tax reform legislation, but said he has to examine how they would go about doing that.

"I'm open to looking at every option that we have, so in that sense, yes; but I don't want to create the impression it's something that I'm looking to try and get [done]," Crapo said.

Lorenzen described the mechanics on how it might be achieved, saying, “Depending on the details of tax reform, a plan could result in a significant revenue loss in the first few years that gradually diminishes and then becomes revenue-positive several years in the future.” He said that would be feasible under the House Republican tax reform blueprint because it includes provisions such as expensing, which has a “large near-term revenue reduction that diminishes very little over time,” and the elimination of interest deductibility, which “raises very little up front, but a lot more over time.”

But while the budget window is a useful mechanism to make tax reform easier through the budget reconciliation process, it remains hypothetical, Lorenzen said. And changing the window does nothing for rules already in place, referred to as “pay as you go” rules, which require that legislation be deficit-neutral over five- and 10-year windows, he said.

“Those rules would not be changed by a budget resolution using a 20-year window," Lorenzen said. “Ironically, many Republicans have criticized [pay as you go] for only requiring deficit neutrality over five and 10 years, because it allows legislation which increases the deficit now offset by savings several years in the future. Using a 20-year window for tax reform would make that problem worse.”

A couple of Senate Finance Committee Democrats were unsurprised that Republicans were considering the move, but they explained that GOP taxwriters have already committed to passing tax reform legislation using budget reconciliation rules.

Senate Finance Committee member Sherrod Brown, D-Ohio, said that opening the budget window to more than 10 years could be a way to manipulate long-standing Senate rules. "I think they know they can't get anything done partly because of their ineptitude, partly because of their extremism, and there are no efforts to work with us, so they're trying to figure out other ways," Brown said.

Senate Finance Committee member Robert Menendez, D-N.J., similarly considered the idea irresponsible. "I'm not a big fan of that," he said, calling the potential move "incredible dynamic scoring" and an exercise in fiscal irresponsibility. Menendez added he was unaware of any precedent for budget forecasting beyond a decade.

The governing law, the Budget Act of 1974, forbids a relevant tax bill from increasing the deficit beyond the time frame contemplated in the enabling budget resolution. But it does not limit the duration of that time frame.

Follow Dylan Moroses (@DMoroses3244) and Stephen Cooper (@ScoopOnTaxes) on Twitter for real-time updates.