Republicans have a “math problem,” a KPMG policy expert concluded, because extending tax cuts, the potential revenue raisers, and the acceptable deficit impacts “just don’t all quite balance.” Meanwhile, the top Republican on the Senate Finance Committee has called into question legislative scoring rules, saying there should be a distinction between extending tax cuts and “spending.”
KPMG’s Daniel Winnick, who previously served as tax counsel to the House Ways and Means Committee, shared his predictions about when Congress will take action on tax legislation, as well as likely priorities during the Pennsylvania Institute of CPA’s Philadelphia Tax Summit earlier this month.
But incoming Senate Finance Chair Mike Crapo (R-ID) is questioning why legislative scoring rules treat “the failure to stop tax increases” as a deficit. Crapo has suggested trying to “change to baseline” to force tax extenders to be scored differently.
Reconciliation
It’s widely expected that at least a portion of 2025 tax reform and extension of Tax Cuts and Jobs Act (TCJA, P.L. 115-97) expiring provisions will take place via reconciliation. That would bypass the need to get at least some Democrat lawmakers on board. But there are some constraints — reconciliation legislation cannot increase deficits beyond a 10-year budget window, and it can only accommodate budget-related provisions.
Timeline
Winnick predicts that things will likely move fast, as the first reconciliation measure would need to pass out of Congress by September 30, 2025. He expects the incoming administration to “use its coattails to have their first reconciliation bill pretty quickly.”
House Speaker Mike Johnson (R-LA) confirmed those suspicions days later, saying that extending the TCJA’s tax cuts will be at the “top of the agenda” for the incoming administration.
Any provisions that don’t make it into that first bill could be included in a second reconciliation bill after September 30, Winnick explained. So as that first bill moves ahead, “we have to have in the back of our mind, what the second bill is going to look like … and what promises are being made to get people on board with the first bill.”
A Balancing Act
“There’s going to be broad consensus across the conference that they do need to have legislation,” Winnick said. The real question is, “What’s in that legislation?” A major guardrail will be the bill’s top-line number — and how any extensions impact the deficit, Winnick added.
Representative Lloyd Smucker (R-PA) said at a November 19 Joint Economic Committee hearing that he feels “we can’t add to the debt with what we’re doing at this particular time,” adding “I think it’s very, very important.” He called for “go[ing] to the spending side” to pay for TCJA extensions.
At the same hearing, Representative Jodey Arrington (R-TX) said “there’s a myth by some of my Republican colleagues that we can just grow out of the $36 trillion, 125% debt-to-GDP hole we’re in.” Arrington also called for reducing spending along with measures to increase growth. But he’s “not convinced that all tax cuts pay for themselves” — adding that he’s “never heard any thoughtful person that’s been an expert in this area say that it is the case.”
Despite these comments, Winnick predicts there will be “an aggregate appetite for an increase in the deficit” and that the top-line number will very much be the subject of political negotiation.
Scoring
Winnick explained that “one of the games… is to get your spending in the earlier years and your revenue in the out years the later years in the budget window,” he explained.
Crapo, however, has called into question current scoring rules used by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) that treat tax cut extensions as a deficit. “Extending current spending does not score as a deficit,” explained Crapo, calling the discrepancy “ridiculous.”
Crapo also asserted that former President Barack Obama “when President Bush’s tax cuts were expiring — did the same thing.”
This is not the first time Crapo has indicated a different approach to evaluating tax proposals’ potential deficit impacts. Senate Finance Committee Minority Counsel Michael Gould commented back in September that Crapo feels a tax reform proposal “does not necessarily have to have an offset if it’s a very pro-growth idea.”
Crapo said he was making the argument for alternate scoring “very aggressively,” adding that “there is quite a bit of receptivity to this argument among Republicans because they don’t want to raise taxes.”
To that, Winnick told Checkpoint that “in the past, CBO and JCT have used a budgetary baseline based on current law, not current policy, even when current policy is the starting point for political negotiations.” He added that “congressional leadership could try to change the scoring rules to adopt a current policy baseline, but new rules would have to be applied to expiration dates consistently and could show a larger long-term budget deficit.”
But “even if Congress can’t agree to a new set of budget rules, they can still pass a deficit instruction for reconciliation while making the political argument that current policy is the right starting point for thinking about the effects of the bill,” explained Winnick.
Revenue Raisers
Beyond Republican lawmakers’ calls for spending cuts and a different scoring methodology, Winnick said that extending the TCJA’s tax cuts without revenue raisers won’t be feasible given the budget window constraints.
In the 2017 law, those raisers included the individual state and local tax deduction (SALT) cap and “suspension of individual itemized deductions.” But with narrower margins for Republicans in the House than when the TCJA passed, Winnick cautioned that the SALT cap might not be a viable revenue raiser this time around. “Majority-making members from New York, New Jersey, California — the high tax states — are going to have trouble voting” for a SALT cap, he explained.
Another possible revenue raiser, said Winnick, is imposing a greater tax against businesses from countries that discriminate against U.S. companies. He sees this option being implemented through the undertaxed profits rule, through a digital services tax, or — more likely — through an expansion of the base erosion and anti-abuse tax (BEAT) for companies headquartered in countries with discriminatory tax measures.
Winnick also saw as potential revenue raisers cutting back Inflation Reduction Act energy credits, particularly for electric vehicles, and increasing the stock buyback excise tax.
As far as spending cuts, Winnick said to keep an eye on the forthcoming appropriations bill to fund the government beyond December 20. If that bill doesn’t touch IRS funding, that’s a clear hint that Republicans are saving the money for later — as an offset in a reconciliation tax bill.
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