Scoring shows the Senate’s draft tax package would increase deficits even when assuming tax cuts currently in place extend indefinitely — but one policy expert says that limiting the conversation to deficit impacts is “absurd.”
“I’m worried that we are talking too much about the deficit effect” of the One Bill Beautiful Bill Act (OBBBA), said Brookings Institution’s Wendy Edelberg, speaking on a June 23 Yale Budget Lab webinar. She suggests that with the current Congress and President Trump “looking to reshape fiscal policy broadly over the next decade, reshape the social safety net, reshape revenues, [and] reshape energy policy,” a larger fiscal policy discussion is more appropriate.
Edelberg’s comments came days after the Joint Committee on Taxation released its estimate of the Senate draft’s revenue effects using a current policy baseline. Referred to as a “budget gimmick” by many, the current policy baseline assumes that current laws remain in place indefinitely, despite scheduled sunsets.
But even using a current policy baseline, the JCT found that the Senate Finance Committee’s tax proposals would add $441 billion to the deficit over the 10-year budget window.
The picture is substantially worse when using a more traditional current law baseline, that accounts for the cost of tax cut extensions. The Committee for a Responsible Federal Budget predicted on June 23 that “the Senate-proposed tax cuts would increase deficits by $4.2 trillion — nearly $500 billion above the House’s equivalent proposals.”
The JCT was approaching that same $4.2 trillion figure, based on a “very preliminary” analysis obtained June 23 by Punchbowl News.
“That figure would rise to $4.8 trillion if temporary tax cuts in the bill were ultimately made permanent,” noted CRFB. And it also doesn’t account for changes in the state and local tax (SALT) deduction cap, which may be necessary to move the bill forward.
By contrast, the JCT found the entire House-passed tax and spending package would add $3.8 trillion to the deficit over 10 years using a current law baseline.
Rising borrowing costs. One key consideration, accounted for in some but not all analyses of the OBBBA, is the impact of higher debt on interest rates and borrowing costs.
“This Congress is deluding itself on what the fiscal policy it’s putting in motion will mean for borrowing,” said Edelberg.
Yale Budget Lab’s Martha Gimbel offered a similar assessment. “There is positive growth on average right through the 10 years, but it is still the case that the dynamic score is more expensive because of the interest rate costs,” she noted.
Gimbel said the bill’s costs, which include both “direct costs” and “interest rate costs,” are “really important to keep in mind.” That’s especially true given “the macroeconomic moment that we’re in,” Gimbel added. It’s not 2009, or even 2017 where “there was an argument that there was a need for some additional fiscal activity.”
Given the current fiscal situation, said Gimbel, in bringing forth the OBBBA, “Congress is not responding to the overall macroeconomic context in the way that many economists would like them to.”
An eye toward the future. Beyond the interest costs, the Tax Foundation’s Erica York faulted the OBBBA for “set[ting] up another fiscal cliff in 2028.” While the Senate version would make more permanent changes, York noted that “the President’s tax priorities” total “roughly $60 billion per year.” And many of these — including no tax on tips and overtime — are set to expire.
“Presumably, they won’t be allowed to expire in full,” said York, “so there’s going to be even more revenue loss in the future.”
Penn Wharton Budget Model’s Kent Smetters offered a more pointed critique of the OBBBA’s future impacts. Using a dynamic analysis of the OBBBA, “the real losers,” said Smetters, are “pretty much future generations.”
The individual impact will vary based on household income level, Smetters added, with lower income households losing more because of accompanying spending cuts. But regardless, the bill “tends to decline the economy, you have this crowding out effect, you have lower wages relative to baseline.”
Smetters predicts that future generations are “worse off” under the OBBBA “to the tune of about, maybe $2,000 to $15,000.”
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