Experts Discuss the ‘Bottom Line’ for Tax Reform

Republicans secured the trifecta of the presidency, House, and Senate, and many experts predict that tax reform — including extension of the 2017 Tax Cuts and Jobs Act’s (TCJA, P.L. 115-97) expiring provisions — will come in the form of reconciliation legislation. The discussion has now turned to how the many campaign trail tax cuts promises will be paid for.

What is reconciliation?

Reconciliation is a special legislative process where Congress passes a budget resolution containing instructions for congressional committees, and then a reconciliation bill containing committees’ legislative proposals.

Reconciliation would allow Republicans to fast-track tax legislation — debate on a reconciliation bill is limited to 20 hours and the bill can pass with just a simple majority in the Senate.

However, even reconciliation bills may require 60 votes in the Senate if a member raises a “point of order.” A point of order could include a contention that the bill violates the underlying budget resolution’s spending and revenue targets or that it violates another budget rule. (More on those here.)

Specifically, under the “Byrd rule,” reconciliation bills are limited in scope to changes in law needed to implement the budget resolution and cannot increase the deficit for periods beyond those covered in the budget resolution. They also cannot change spending or dedicated revenue for Social Security.

A balancing act.

There are “two primary issues that Republicans will be trying to balance, much as in 2017,” said the Tax Foundation’s Will McBride during a November 15 webinar. Those include “a desire to boost economic growth” and “a desire to keep the deficit impact to a minimum.”

The Committee for a Responsible Federal Budget’s Maya MacGuineas noted that in the lead up to the election, both candidates were proposing “very, very large tax cuts; very high spending increases; and not nearly enough offsets.” They also “were talking about adding trillions of dollars to the debt instead of bringing the national debt down,” MacGuineas told an audience at the American Institute of CPAs (AICPA) National Tax Conference on November 11.

As far as what a minimal deficit impact might look like, McBride said “that’s unknown.” The number was $1.5 trillion over 10 years for the 2017 TCJA, he explained, despite a push in the House for a deficit-neutral bill. “The Senate picked the $1.5 trillion number through a negotiation … over those competing concerns about economic growth and impact on the debt,” said McBride.

MacGuineas noted that the incoming Trump administration, too, contends it will “find growth that will offset all of these costs and all of these promises.” But the “big question” she said, is, “Is that possible?”

“If you cut taxes massively, and if you even increase spending on top of that, you will grow the economy short term,” posited MacGuineas. But “it’s basically impossible” for a short-term “highly stimulated economy” to pay for tax cuts “over the longer term for a sustained level of 3-4% growth over 10 years.”

An escalating deficit.

Beyond whether economic growth can offset tax cuts, McBride noted that times have changed since the TCJA was enacted. We’re now in a “much more precarious situation” as far as the deficit, he explained. Whereas the public debt was about three-quarters of the U.S. economy in 2017, it’s now about 100% of GDP — and the deficit is “heading higher every year” on “an unsustainable trajectory.”

Given escalating debt, that “points to a deficit number” that is less than the TCJA’s $1.5 trillion, said McBride. That’s a “180-degree change from what we had heard on the campaign trail, particularly from Trump,” he added.

And with some of the promised tax cuts potentially costing $1 trillion or more each, McBride said “it’s going to be interesting to see how that set of proposals survive in a reconciliation process.”