A Senate tax reform bill that initially eschewed budgetary gimmicks finally succumbed to the pressure to play with the numbers so that the bill could pass muster with legislative rules and procedures.
The modified version of the chair’s mark of the Tax Cuts and Jobs Act, released late November 14, would apply a December 31, 2025, expiration date to all the individual income tax changes, except for the shift to the chained consumer price index and the effective repeal of the Affordable Care Act’s individual mandate.
That includes sunsetting the passthrough business tax changes as well as the estate tax repeal. And beginning in 2020, it would sunset several alcohol-related provisions, like a reduced excise tax rate on breweries, and a new tax credit for businesses that offer paid family and medical leave.
The mark also includes an unusual trigger provision, which would repeal six business-oriented revenue-raising provisions starting in 2026 — the same time several of them are set to go into effect — if overall federal revenues exceed a specified level by that point.
The triggered provisions are:
a scaled-back net operating loss deduction beginning in 2023;
a limitation on the deduction of business meals;
a reduced deduction for global intangible low-taxed income that would take effect in 2026;
a reduced deduction for foreign-derived intangible income effective in 2026;
a higher tax rate on base erosion payments of taxpayers with substantial gross receipts effective in 2026; and
the replacement of the expensing of research and experimentation costs with a variable amortization approach, also effective 2026.
The research and experimentation provision is similar to language in the House bill (H.R. 1), which had been incorporated from a proposal made by former Ways and Means Committee Chair Dave Camp to replace expensing of research and experimental costs under section 174 with five-year amortization for costs incurred domestically, and 15-year amortization for research conducted outside the United States.
The Senate provision would take effect later than in the House bill, applying to expenditures after 2025 instead of 2022 in the House bill — and is expected to raise $62.1 billion in the last two years of the budget window.
All told, the Joint Committee on Taxation’s estimate (JCX-57-17) of the modified mark projects the net budgetary effect of the Senate bill in 2027 would be $30 billion more in revenue and trending higher, which indicates the bill would satisfy the Senate Byrd rule’s prohibition against reconciliation legislation increasing deficits beyond the budget window, which is 10 years for this legislation.
Much like the provisions with sunset dates, the triggered provisions work to make the bill appear more Byrd rule-compliant, though they operate in a different way.
The trigger appears to mirror mechanisms used more frequently at the state level, in which a state phases in tax cuts or other reforms once it meets a designated fiscal target, said Rebecca Kysar, a visiting professor of law at Fordham University School of Law and a professor of law at Brooklyn Law School.
This strategy provides governments with “some degree of predictability in their revenue stream while also letting an increase in revenues be designated for tax relief,” said Kysar, who added that it was interesting to see the approach being discussed at the federal level.
Kysar explained that the trigger applies to provisions that are included in the bill to make it easier to comply with the Byrd rule, because the provisions increase revenue in the out-years after the 10-year budget window. For example, the provision limiting the NOL deduction to just 80 percent of taxable income beginning in 2024 would enable lawmakers to take revenue credit for future tax increases “that you hope never go into effect,” she said, adding, “This is a typical maneuver.”
“Congress is saying that 'we will undo them if it turns out we don’t need them,'” Kysar said.
Republicans have repeatedly expressed confidence that their tax reform plan will spur significant economic growth. Trump administration officials like Treasury Secretary Steven Mnuchin have often said that they are confident the growth from this plan will offset the $1.5 trillion deficit-increasing tax cut through a combination of around $1 trillion or more of revenue from growth over a decade and another $500 billion if using a current policy baseline.
That rhetoric is reflected in the trigger provision, as staff at the Committee for a Responsible Federal Budget (CRFB) indicated to Tax Analysts. The trigger specifies that if cumulative federal revenues exceed $27.49 trillion between fiscal year 2018 and fiscal year 2026 by $900 billion — the ninth year of the bill — then the business tax increases tied to the trigger will be repealed.
That $27.49 trillion figure is $1.35 trillion less than what the Congressional Budget Office projected in June 2017 that revenue would be — $28.837 trillion. But in the scenario imagined by Republicans, nine years of economic growth would yield $900 billion and nine years of a current policy baseline would save an additional $450 billion, leading to a bill that is deficit neutral — a strategy that could win over some fiscal hawks in Congress, like Sen. Bob Corker, R-Tenn.
Although the inclusion of gimmicks in general adds uncertainty to a bill, including the tax trigger mitigates that effect somewhat, according to Kysar, because it “sets forth the path of the law if conditions are met.”
“If it turns out revenues increase dramatically — and that’s something that will be more apparent as the end of the budget window approaches — then you don’t have to worry about the threatened tax increases going into effect,” she explained. And even if those targets aren’t met, lawmakers can still pass legislation to repeal or delay the tax increases, she added.
The decision by Senate Republicans to keep the business provisions permanent and write the bill so that the individual income tax changes expire makes sense, said Kysar, because temporary business tax cuts would undercut the business investment incentives. But it will also “exacerbate a growing perception of unfairness in the plan,” which Senate Democrats have already started to highlight.
Greg Leiserson of the Washington Center for Equitable Growth also pointed out that the trigger would, with the exception of the amortization of research expenses, only apply to modifications to underlying policies proposed in the original version of the Senate bill. Even so, he told Tax Analysts that it is “bad policy” and could have been avoided if Republican lawmakers had instead pursued a bipartisan approach that didn’t require passing a bill through the budget reconciliation process.
And while the JCT scored the modified mark as increasing the deficit by $1.41 trillion over 10 years, the CRFB wrote in a November 15 blog post that it “masks the $515 billion of gimmicks the bill contains and doesn’t include interest costs” resulting from the higher debt.
The true cost of the bill, according to the CRFB, is closer to $2.2 trillion over a decade, after assuming that the expiring tax provisions or triggered provisions don’t take effect as written in the legislation.
Martin A. Sullivan and Nathan J. Richman contributed to this article.
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