Budget analysts saw few fiscal gimmicks in the Senate tax reform proposal released late November 9, but they expect taxwriters will soon have no choice but to reach into their bag of budget tricks to make it comply with Senate rules.
As described by the Joint Committee on Taxation (JCX-51-17) and related revenue estimates (JCX-52-17), the Senate Finance Committee’s version of the Tax Cuts and Jobs Act mirrors the House tax bill (H.R. 1) by sunsetting its full expensing provision after five years. But in other respects, it favors an approach that makes its proposed changes permanent. It also delays implementation of the corporate income tax rate cut for one year.
The phased-in corporate rate struck Marc Goldwein of the Committee for a Responsible Federal Budget as “a little gimmicky,” because Senate Republicans appear to be “trying to play with budget windows to get their costs down.”
“If you’re measuring nine years of cost over 10 years, you’re getting a false impression of how much the provision actually costs” over the long term, Goldwein said.
But Brian Riedl of the Manhattan Institute said that there are good economic policy reasons for phasing in the corporate rate cut. An immediate corporate rate cut rewards past investment, but if the 35 percent corporate rate is still in effect, it will give businesses taking advantage of the bill’s full expensing provision a substantially higher deduction today because it will be claimed against a higher rate.
“Then, by the time your investment yields a profit five years down the road, you catch the lower tax rate,” he said.
Riedl’s main criticism of the Senate bill was that it phased out expensing. He estimated that the phaseout would save $200 billion over the 10-year budget window, but added that it’s “really bad for investment.” Temporary expensing won’t increase overall investment; it will just accelerate planned investment from later years into the first five years the provision is in effect, Riedl explained.
The Senate bill also avoids relying on “Rothification” of 401(k) plans and individual retirement accounts, despite months of speculation that Republicans would try to shift taxable retirement savings payments into the 10-year budget window to make the bill appear less costly.
But with few obvious revenue raisers, it’s unclear how Senate taxwriters expect the bill to pass muster with the Senate’s Byrd rule, which prohibits reconciliation legislation from adding to the deficit beyond the 10-year budget window.
According to the JCT, the Senate bill’s 10-year cost falls just within the $1.5 trillion limit set by the budget reconciliation instructions. The bill will somehow have to bring the estimated $216.7 billion cost in 2027 to zero in 2028 and beyond. That challenge is exacerbated by the per-year cost trending higher in later years of the 10-year budget window, jumping from $116.5 billion in 2024 to $216.7 billion just three years later.
“They essentially punted right now,” Riedl said of the Senate’s compliance with reconciliation rules. The Senate bill maintains many of the same big revenue-losing provisions as the House bill and offers little in the way of substantial new offsets, and as such, it will likely require “false expirations as the way to comply with the Byrd rule,” Riedl said.
That makes for an “interesting approach,” according to Riedl, that will soon cause headaches for taxwriters.
“Why put out a bill that has all of the great benefits that you know you’re going to have to take away before it gets to the full Senate?” Riedl wondered. “Essentially, you’re teasing and building expectations up that you’re going to have to take away later. It’s better to make those changes before you unveil it rather than to get everyone’s hopes up and then take it away.”
Both Riedl and Goldwein said Senate taxwriters would have to either include major new revenue sources or attach expiration dates to big components of their bill. “They basically need to either let the entire corporate tax cuts expire, or they need to let the individual cuts and the passthrough [cuts] expire, or you need to let just about everything else expire,” Goldwein said.
Goldwein posited that by introducing the bill in its current form, Senate Republicans may be trying to avoid a JCT score showing “how bad for growth a temporary corporate tax cut is.”
Goldwein noted that the JCT established this year that temporary corporate income tax rate cuts have out-year effects. According to the JCT estimate, the corporate rate cut loses only $171 billion in 2027 — still leaving a hole of about $50 billion that would need to be filled for the bill to break even that year. So additional pay-fors or expiration dates would still be needed, he said.
Sunsetting the corporate tax rate would likely be unpopular with lawmakers, and particularly with President Trump, because it would undercut the pro-growth objective, Riedl said, explaining that businesses don’t like the prospect of a corporate tax rate snapping back to 35 percent.
The less economically disruptive option, according to Riedl, would be to sunset provisions on the individual income side.
“When I was working in the Senate, the preferred approach was to take the most popular policies in the plan and make those expire and then dare the Democrats to let them go,” Riedl said. “That would suggest that the individual rate cuts — or even more likely, the doubling of the standard deduction — would have a target on their back for a year 10 expiration.”
At that point, all it takes to make those tax cuts permanent is an extenders bill, Riedl said. “Still, you end up going to temporary policies, and it’s an ugly way to proceed,” he added.
Riedl also believes that the Byrd rule problems are a self-inflicted wound, saying that the House and Senate could have avoided the challenge entirely by adopting a 20- or 30-year budget resolution, rather than a 10-year budget resolution. Sunsetting tax policies 25 years in the future constitutes “an eternity in the tax world,” he said.
Republicans toyed with the idea of longer budget windows, but ultimately decided to stick with the traditional 10-year window.
While ways to get around the Byrd rule are clear, it remains to be determined if enough Republican lawmakers will commit to taking that path.
“Republicans have spent the last few years talking about the importance of the debt,” noted Goldwein. And with a thin margin, particularly in the Senate, for passing a tax reform bill on a party-line vote, Republicans can afford to lose precious few votes.
One outspoken fiscal hawk, Sen. Jeff Flake, R-Ariz., has already signaled his concern with the direction the House and Senate bills are headed. In a November 9 statement, Flake said he remains concerned “over how the current tax reform proposals will grow the already staggering national debt by opting for short-term fixes while ignoring long-term problems for taxpayers and the economy.” He added that he looked forward to working on “fiscally responsible” tax reform with his fellow senators.
Likewise, Sen. Bob Corker, R-Tenn., said in a November 2 statement after the House bill was released that although he supports pro-growth tax reform, “it is my hope that the final legislation — while allowing for current policy assumptions and reasonable dynamic scoring — will not add to the deficit [and] sets rates that are permanent in nature.”
“There are certainly members of both the House and the Senate that want a bill that won’t add to the deficit,” Goldwein said. But he added, “Whether that’s going to be the deciding issue for them over everything else, I can’t say.”
The JCT had yet to release its dynamic score of the House tax bill at press time November 10, but several tax observers said they expect it to show only modest growth.
House Bill Gains a Gimmick
The Senate bill may be mostly gimmick-free for now, but in the meantime, according to Goldwein, the House bill just got worse.
With the adoption of two amendments from House Ways and Means Committee Chair Kevin Brady, R-Texas, during the committee markup, Goldwein said, the bill now relies even more heavily on one preexisting gimmick and introduces a new one.
First, one amendment increased the deemed repatriation tax rates. Although that’s “not fake money,” Goldwein said, it repealed permanent savings and replaced them with the temporary, one-time repatriation tax.
But the bigger gimmick, said Goldwein, is that the bill now calls for getting rid of expensing for research and experimentation after five years.
“Maybe what they’re saying is, we want to have five years of expensing, and then we want to move toward having less expensing. But more likely, the plan there is to just have a $500 billion extenders package,” he said.
Extending expensing for research and experimentation would add $100 billion per year to the bill’s cost, Goldwein said.
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