Senate Makes a Move Toward Tax Reform

Senate Republicans unveiled their version of a budget resolution to set up tax reform Wednesday afternoon, with significantly different deficit instructions than the House. While the discrepancy is “very unusual,” what stands out to one practitioner is the seeming consensus among Republicans in both chambers over what the tax provisions “should look like.”

“If you look at the tax provisions in a vacuum,” said Lisa Wolski of Washington Council Ernst & Young, “it doesn’t seem like there’s a lot of disagreement.” They want to extend most Tax Cuts and Jobs Act expiring and expired provisions and put into place “some or all of President Trump’s campaign promises,” Wolski told Checkpoint.

While Republicans will have to make “some compromises” over provisions like the Child Tax Credit and the state and local tax (SALT) deduction cap, “it doesn’t seem to me that that it should be all that difficult to reach agreement just on the tax stuff,” said Wolski.

Once both chambers approve a budget resolution containing deficit increasing and reducing instructions for various congressional committees, Congress can move to nailing down actual tax reform provisions via a reconciliation bill.

As the Senate was gearing up to vote on its latest budget resolution, Wolski said she was optimistic about a tax reform bill by August recess. However, she thinks the Memorial Day deadline proposed by some Republicans is just “aspirational.”

The cost of tax reform.

Extending the TCJA would reduce federal tax revenue by $4.5 trillion over 10 years, according to the Tax Foundation. The group predicts that economic growth would offset about $710 billion, for a net cost of nearly $3.8 trillion.

However, that number does not include the cost of other Trump Administration tax proposals — namely cutting taxes on tips, overtime, and Social Security benefits; adjusting the SALT cap; and reducing taxes for domestic producers.

Even with a few revenue-raising proposals baked in, the Committee for a Responsible Federal Budget says putting those additional tax promises into place along with a TCJA extension could cost between $5 trillion and $11.2 trillion over 10 years. (The group estimates the additional tax cut promises could cost between $1.2 trillion to $6.45 trillion over 10 years.)

House versus Senate numbers.

The House budget resolution provides the Ways & Means Committee with $4.5 trillion for tax cuts (enough for a $3.8 trillion TCJA extension and $7 billion more in tax cuts.) But it also mandates a total of at least $1.5 trillion in spending cuts by certain committees — and makes the full $4.5 trillion in tax cuts contingent on $2 trillion total spending cuts.

In contrast, the Senate’s amendment provides just $1.5 trillion to the chamber’s taxwriting committee — but it is actually more generous. “The Senate appears to use a current policy baseline,” explained CRFB’s Marc Goldwein, “which basically means they are assuming … all of the existing tax cuts are already extended.” Under a current policy baseline, provisions currently in place are assumed to extend indefinitely regardless of sunset dates, adding no “new” costs.

In sum, the Senate’s amendment “includes reconciliation instructions that would likely allow up to $5.8 trillion in additional primary deficits through 2034,” according to CRFB. That includes “up to $2,021 billion of deficit-increasing instructions, at least $4 billion of deficit reduction instructions, and the implicit inclusion of $3.8 trillion of tax cut extensions by adopting a ‘current policy’ baseline.”

“What the Senate has put forward is one set of instructions for the House and a completely different set of instructions for the Senate,” Goldwein explained during an April 2 webinar. “That’s not to say there isn’t legislation that could, in theory, meet both sets of instructions,” he said. “But it’s unusual in how different they are from each other.”

Baseline.

And there’s been much debate over whether it is even appropriate to use a current policy baseline to price out the cost of a TCJA extension.

Earlier this week, it seemed Senate Republicans were set to take the question to the Senate parliamentarian. But then on Wednesday, Senate Budget Committee Chair Lindsey Graham (R-SC) announced that he has “the authority to determine baseline numbers for spending and revenue under section 312 of the Congressional Budget Act” — and that he had “determined that current policy will be the budget baseline regarding taxation.”

According to Wolski, “the law is clear that the Senate Budget Committee is the decider of the baseline.” Nevertheless, the Senate parliamentarian “does have a responsibility to enforce the Byrd rule questions and violations,” she explained.

Under the Byrd rule, there are certain limits on what can be achieved via budget reconciliation. Notably, provisions that do not produce a change in outlays or revenues, provisions where such a change is “merely incidental,” and provisions that increase the deficit outside of the budget window are barred under the Byrd rule.

So even with Senate Republicans bypassing the parliamentarian on the current policy baseline question, “there are rules and decisions that she will make, even if you just accept the idea that it’s clear that the Senate Budget Committee can say what the baseline is,” Wolski explained.

And “the big question everybody has,” said Wolski, “is what about the out years? Do they do the current policy baseline forever?” And is the parliamentarian “measuring those out-year revenue impacts, that are Byrd rule questions, against that?”

Pay-fors.

A current policy baseline can’t be used to extend the already-expired TCJA provisions, said Wolski, so lawmakers “will have to raise taxes someplace else to pay for those.” Among those expired provisions are bonus depreciation, the limitation on deduction of business interest under Code Sec. 163(j), and research and development expensing under Code Sec. 174.

“What a lot of the business community is looking at,” said Wolski, is how the tax reform bill deals with “those provisions that they have to offset because they’ve either expired” or where “the 2017 law didn’t work out the way people wanted it to.”

“It’s unlikely they’re going to raise taxes on individuals to give it to businesses,” said Wolski, “so it’s going to come from businesses in some way.” That leaves the question of whether any proposed tax trade-offs are something “the business community is happy about making.”

But CRFB, the Tax Foundation, Arnold Ventures, and others have pointed out the vast number of possible offsets for tax cuts.

Given all those options, Goldwein takes issue with the Senate budget resolution’s instructions providing the Finance Committee with $1.5 trillion to spend. “The Finance Committee has the authority over the vast majority of money in all of government,” he explained. “They have Medicare, they have Medicaid, they have a lot of welfare programs.” But they also have the Affordable Care Act, the Inflation Reduction Act, and “all the tax breaks in the Tax Code.” In Goldwein’s view, the Finance Committee “should be saving money.”

The cuts mandated in the House budget resolution provide “a good opportunity to take a serious look at all the gimmicks in Medicaid and to make big reforms to the student loan program,” said Goldwein. Regardless, even in the House version, the $2 trillion in cuts does not cover the $4.8 trillion in authorized spending, he added. “That’s just basic math.”