One Tax Reform Hurdle to Watch

As House Republicans ponder whether the Senate’s tax reform blueprint would drive deficits to an untenable level, another potential issue with the Senate approach is tied to Congress’ procedural rules.

Budget concerns.

Early Saturday morning, the Senate passed its amendment to the House budget resolution, 51-48 — a step forward toward tax reform via reconciliation. But the Senate’s version contrasts starkly with the original House measure, leaving many budget-conscious House Republicans wary of approving the amendment.

Notably, the Senate version appears to use a “current policy baseline” to extend the expiring provisions of the 2017 Tax Cuts and Jobs Act. By doing so, it assumes provisions currently in effect extend indefinitely, regardless of sunset dates — therefore extending them would add no new costs.

Relying on a current policy baseline to cover extension costs, the Senate calls for just $4 billion in deficit reductions. That’s nowhere near the $2 trillion in reductions the House would require for its taxwriting committee, Ways and Means, to unlock its maximum tax cutting authority.

It’s not just the most extreme House deficit hawks who are alarmed by the Senate amendment. House Budget Committee Chair Jodey Arrington (R-TX) called the Senate approach “unserious and disappointing.” To him, it “sets a dangerous precedent by direct scoring tax policy without including enforceable offsets.”

And Representative Lloyd Smucker (R-PA), who sits on Ways and Means and is vice chair of the House Budget Committee, said he could not vote for the Senate-amended resolution. “We can and must do better,” he said, calling on Republicans to “come together … to craft a fiscally responsible solution.”

A procedural concern.

Fiscal impacts aside, Marc Gerson, tax policy co-lead at Miller & Chevalier, sees another issue with using a current policy baseline. The approach means the extensions will score as having no revenue impact — but that “interacts with the reconciliation rules, where every provision has to have a non-incidental effect on the budget,” Gerson explained.

To pass a reconciliation bill, the Senate is bound by the Byrd rule, which “prohibits inclusion in reconciliation of matter unrelated to the deficit reduction goals of the reconciliation process” — so-called “extraneous matter.” Among the reasons a provision may be deemed extraneous is if it does not produce a change in outlays or revenues.

Because of the Byrd rule, what would otherwise be “straight extensions,” Gerson explained, “would have to be tweaked somehow to get that budget effect.”

He gave the example of maintaining the TCJA’s 37% top individual rate, which under a current policy baseline “doesn’t cost any money.” Lawmakers would need to “go in and tweak that provision enough so that the Senate parliamentarian would say it does have a budget effect.”

A minor change, like adjusting the threshold where a tax rate applies, could be sufficient, said Gerson. “But they’d have to do that to every provision of the bill,” he added.

Arnold Ventures’ George Callas agreed with Gerson’s assessment. Because “straight extensions would violate the Byrd rule,” lawmakers “would need to make minor tweaks so that each provision scores,” said Callas.

Brookings Institution’s Molly Reynolds, likewise, feels that the Byrd rule “could create challenges for a straight extension of the TCJA inside the budget window.” She explained that “if you are assuming that the tax cuts continue under a current policy baseline, then retaining the various provisions with no changes could be scored as not producing a change in revenue.”

Risks and opportunities.

To Gerson, opening up each provision for minor tweaks “creates risks and opportunities for taxpayers” and adds complexity to tax reform efforts.

He expects that to avoid a Byrd rule violation, lawmakers would have to “go through all the provisions and try to generate these up-or-down revenue effects that probably zero out in the end.” Overall fiscal impacts for the U.S. would likely be neutral, but that might not be the case for individual taxpayers.

“We’ll have all these incremental changes on the margins,” Gerson explained. Those changes could have an impact on individual taxpayers where, for example, a tax-rate dollar threshold is changed, and now “one person is above it and subject to a 37% rate, but another person is below.”

And Gerson posits that every provision would have to go before the Senate parliamentarian to determine whether it has “enough of a budget effect” to avoid a Byrd rule violation.

Doing so “will take time, and it could get complicated,” said Gerson.

“On the scale of the challenges the GOP faces,” said Reynolds, “I think this is probably a problem that can be solved by making some relatively minor changes.”

But she agreed that “it could take some attention to detail — which, at the very least, could add more time to the process.”