Senate Republicans are pushing an aggressive timeline to vote on a major overhaul of the U.S. tax code by Friday, but Congress’s official tax scorekeeper is racing, too, and that could pose a problem for the GOP.
The nonpartisan Joint Committee on Taxation plans to release a final estimate of the Senate bill’s impact on the debt as early as Wednesday night. When it does, the deficit hawks who hold the bill’s fate in their hands will be watching closely.
“To me the big issue is how are we dealing with debt and deficit? Do we have realistic numbers?” Sen. James Lankford (R-Okla.) said Monday. Lankford is one of at least four senators who have expressed major unease with how much the tax-cut bill will add to the nation’s $20 trillion debt.
If the report shows a hefty addition to the debt, a few Republican senators might abandon the bill or demand major changes. Republicans can’t afford to lose more than two GOP senators, an extremely thin margin, or the bill will fail.
Even without the tax bill, the United States’ debt is expected to balloon to $31 trillion by 2027 as baby boomers age and the government pays out more for Social Security and Medicare.
The Joint Committee on Taxation, the nonpartisan analysts charged with estimating the costs of any tax bill, has already put out an initial report saying that the Senate GOP plan would add just over $1.4 trillion to the United States’ debt by 2027, bringing the total debt to $32.4 trillion. But President Trump and many Republican leaders say that forecast is too high because it does not account for any growth from the tax bill. The analysis that the JCT plans to release as early as Wednesday would be a “dynamic score” that factors in all the growth that’s expected to come from businesses and families taking their tax savings and spending, saving or reinvesting the money.
The Trump administration contends there will be so much growth that the tax bill will pay for itself entirely, but hardly anyone else is willing to go that far. Nonpartisan economic groups say the tax bill is likely to generate modest economic growth that would pay for a third of the bill’s total price tag, if that. The right-leaning Tax Foundation estimated the bill would end up adding about $1 trillion to the debt after accounting for growth. The Committee for a Responsible Federal Budget says the “true cost” is likely to be over $2 trillion because the country is probably going to have to pay much higher interest in the coming years. (Basically, China and Japan won’t lend the United States money at such cheap rates anymore.)
Republican leaders planned to vote without waiting for the JCT’s dynamic score. That’s what happened in the House when the JCT said it didn’t have enough time to prepare a final estimate. But the JCT is rushing to get one done before the Senate vote.
“Our optimistic estimate for completion of this [dynamic] analysis is late Wednesday,” wrote Thomas Barthold, the JCT’s director, in a letter to Sen. Ron Wyden (D-Ore.).
Almost everyone agrees the JCT won’t show that the bill generates enough growth to fully pay for itself. The question is what the final JCT price tag will be — will it be closer to $1 trillion or $2 trillion? History has shown that tax receipts fell after President Reagan cut taxes in 1981. More recently, the state of Kansas, which cut taxes in an effort to spur growth, has face severe budget deficits and had to borrow substantially more money.
The JCT gave a hint in its letter to Wyden, and it doesn’t sound good for Republicans trying to brush off debt concerns. Barthold said the growth estimate will “assume an aggressive Federal Reserve response,” meaning the JCT thinks interest rates are likely to be a lot higher if the tax bill passes. That increases the costs of repaying the debt, sending the total price tag even higher.
Sen. Bob Corker (R-Tenn.), another vocal critic of the debt, voted Tuesday to advance the tax bill out of the Budget Committee and onto the Senate floor. But he told reporters he had reached a deal with the White House and Senate leaders that addresses some of his concerns.
Corker has been pushing a plan in which, if revenue comes in lower than anticipated in the coming years, higher tax rates would be triggered automatically. It’s unclear whether Corker wants higher rates on companies or individuals. At the moment, the Senate bill makes tax cuts for corporations permanent, while the cuts for families expire after 2025.
Some Republicans say they fully expect the individual tax cuts will be made permanent later on, but that means an even bigger addition to the national debt. The JCT took a look at what would happen if the Senate makes the tax cuts for individuals permanent: It would bring the total cost of the bill to nearly $1.7 trillion.
Budget hawks such as the Committee for a Responsible Federal Budget say that the best plan would be to go back to the drawing board, coming up with a tax policy that doesn’t add a penny to the debt, but that a trigger is a good backup plan.
“The best thing would be to put together a bill that is fully paid for, but if that’s not going to happen, I would definitely take Plan B,” said Maya MacGuineas, president of the nonpartisan CRFB.
While a trigger sounds good in concept, it would be tricky to implement. Tax revenue could come in lower than expected for a wide variety of reasons, including another major recession. If the trigger caused taxes to rise during an economic downturn, it would make a bad situation even worse. MacGuineas said that there are ways to structure the trigger to avoid that painful situation but that it would take time to think through.
The other concern is that such a trigger would bring a lot of uncertainty to businesses and families. Are they getting a tax cut or not? It wouldn’t be as clear with a trigger. The driving force of the Trump tax plan is to reduce corporate taxes in the hope that businesses will take their tax savings and invest more in U.S. factories, research and jobs. But companies are likely to be a lot more hesitant to open the purse strings if they aren’t sure how long the low tax rates will last.
“This [trigger] idea has caught on, and could greatly complicate the bill’s path — and it surely would complicate long-term tax planning if a future tax hike suddenly becomes a possibility,” Greg Valliere, chief global strategist at Horizon Investments, wrote in a note to clients.
The U.S. Chamber of Commerce, among other business groups, is already speaking out against a trigger, calling it “unreasonable” and “unnecessary.”
But the concerns for business have to be weighed against the bigger woes for the U.S. economy if the debt hits an alarming level. Investment bank JP Morgan warned this week that federal deficits are likely to hit $900 billion — or 4.4 percent of gross domestic product — by 2019 if the GOP tax plan becomes law. That would be the largest deficit in the postwar era that wasn’t from a recession.
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