The GOP’s Tax Reform Baseline
President Trump began his sales pitch on Wednesday for tax reform, and it’s not too much to say the Republican majority in Congress hangs on success. One big question is whether the party will let itself be held hostage by processes that favor higher taxes and more spending as it did on health care.
Outfits like the Center on Budget and Policy Priorities have been ringing alarms that Republicans are trying to hide the cost of their tax plan “in a seemingly arcane maneuver.” At issue is the budget baseline, a benchmark for predicting how much tax revenue will flow into the Treasury. Gaming the baseline has been a bipartisan pastime since Democrats invented it in 1974. But here the question is whether the GOP should surrender $500 billion that could be deployed to reduce tax rates.
The debate is over what assumptions House and Senate Budget Committees should make about the future, which requires rehearsing some history. For years a Christmas tradition in Congress has been to jam through a “tax extenders” package that extends putatively temporary breaks for anything from electric motorcycles to rum from the Virgin Islands.
Yet Congress did not enshrine all of the preferences, which are set to expire at various points in coming years. One of the biggest is “bonus depreciation” for businesses. The question is whether the House and Senate baseline should assume these tax preferences will be extended by Congress—as they have been in the past—or not.
The academic distinction is whether the baseline should be scored under “current law” or “current policy.” The self-styled purists say the budget must be tallied under current law, which would assume that, say, energy credits expire and the extra tax revenue accrues to the government.
The current policy approach makes the concession to reality that Congress will not dump a popular and powerful tax preference such as business depreciation, among other handouts, at least not without larger reform to the tax code. The difference is in the ballpark of $500 billion over 10 years, which is enough to finance a roughly five-percentage point reduction in tax rates for corporations.
One reason this is so important is that a tax plan must be “revenue neutral” to qualify under the Senate’s arcane reconciliation process, which allows the upper chamber to pass reform with a 51-vote majority. Tax writers in Congress must find ways to offset the cost of rate cuts, and succumbing to a current law approach would deprive the GOP of $500 billion that will be spent by government anyway.
All of this is a case study of broader budget dysfunction, and the Heritage Foundation’s Romina Boccia and Adam Michel offer another great example. The Congressional Budget Office’s baseline for spending assumes current policy. CBO predicts that money for highways or other funding from Congress will continue even after an appropriation expires.
Yet not so on tax revenues, which CBO’s baseline scores under current law. The budget gnomes assume that tax cuts will end on the scheduled expiration date, though many if not most are granted a stay of execution. As Ms. Boccia and Mr. Michel point out, the practical effect of the disparate assumptions is to make spending easier and tax cuts harder.
Republicans in Congress are considering the current policy approach, and the left is accusing the GOP of pulling a fast one. Yet the House’s “Better Way” document, which has been on the internet for a year, notes that deploying current policy “more closely resembles historical experience” and does not invent a tax increase that may never materialize.
The GOP ought to press ahead with the baseline that best reflects reality, which in this case is current policy, and it is rich to see anyone who supported the Affordable Care Act deplore budget gimmicks. The test is whether Republicans will work to make the tax overhaul as powerful as possible for economic growth—or fall to the same Washington process traps that scuttled the effort to replace ObamaCare.
Appeared in the August 31, 2017, print edition.