Senate Republicans are pushing an aggressive timeline to vote on a major overhaul of the U.S. tax code by Friday, but Congress’ official tax scorekeeper is racing too, and that could pose a problem for the GOP.
The nonpartisan Joint Committee on Taxation plans to release a final estimate of the Senate bill’s impact on the debt as early as Wednesday night. And when they do, the deficit hawks who hold the bill’s fate in their hands will be watching closely.
“To me the big issue is how are we dealing with debt and deficit? Do we have realistic numbers?” said Sen. James Lankford, R-Okla., on Monday. Lankford is one of at least four senators who have expressed major unease with how much the tax cut bill will add to the nation’s $20 trillion debt.
If the report shows a hefty addition to the debt, a few Republican senators might abandon the bill or demand large changes. Republicans can’t afford to lose more than two GOP senators, an extremely thin margin.
Even without the tax bill, America’s debt is expected to balloon to $31 trillion by 2027 as baby boomers age and the government pays out more for Social Security and Medicare.
The Joint Committee on Taxation, the nonpartisan analysts charged with estimating the costs of any tax bill, have already put out an initial report saying that the Senate GOP plan would add just over $1.4 trillion to America’s debt by 2027, bringing the total debt to $32.4 trillion. But President Donald Trump and many Republican leaders say that forecast is too high because it does not account for any growth from the tax bill. The analysis JCT plans to release as early as Wednesday would be a “dynamic score” that factors in all the growth that’s expected to come from businesses and families taking their tax savings and spending, saving or reinvesting the money.
The Trump administration contends there will be so much growth that the tax bill will pay for itself entirely, but hardly anyone else is willing to go that far. Nonpartisan economic groups say the tax bill is likely to generate modest economic growth that would pay for a third of the bill’s total price tag, if that. The right-leaning Tax Foundation estimated the bill would end up adding about $1 trillion to the debt after accounting for growth. The Committee for a Responsible Federal Budget says the “true cost” is likely to be over $2 trillion because the country is probably going to have to pay a lot higher interest in the coming years (basically China and Japan won’t lend the United States money at such cheap rates anymore).
Republican leaders planned to vote without waiting for JCT’s dynamic score. That’s what happened in the House when JCT said it didn’t have enough time to prepare a final estimate. But JCT is rushing to get one done before the Senate vote.
“Our optimistic estimate for completion of this [dynamic] analysis is late Wednesday,” wrote Thomas Barthold, JCT director, in a letter to Democratic Senator Ron Wyden (Oregon).
Almost everyone agrees JCT won’t show that the bill generates enough growth to fully pay for itself. The question is what the final price tag will be from JCT – will it be closer to $1 trillion or $2 trillion?
JCT gave a hint in its letter to Wyden and it doesn’t sound good for Republicans trying to brush off debt concerns. The JCT director said the growth estimate will “assume an aggressive Federal Reserve response,” meaning JCT thinks interest rates are likely to be a lot higher if the tax bill passes. That increases the costs of re-paying the debt, sending the total price tag even higher.
Senator Bob Corker, R-Tenn., another vocal critic of the debt, voted Tuesday to advance the tax bill out of the Budget Committee and onto the Senate floor. But he told reporters he’d reached a deal with the White House and Senate leaders that addresses some of his concerns.
Corker has been pushing a plan where, if revenues come in lower than anticipated in the coming years, higher tax rates would be triggered automatically. It’s unclear if Corker wants higher rates on companies or individuals. At the moment, the Senate bill makes tax cuts for corporate permanent, while the cuts for families expire after 2025.
Budget hawks like the Committee for a Responsible Federal Budget say the best plan would be to go back to the drawing board and come up with a tax policy that doesn’t add a penny to the debt, but a trigger is a good “plan B.”
“The best thing would be to put together a bill that is fully paid for, but if that’s not going to happen, I would definitely take plan B,” said Maya MacGuineas, president of the nonpartisan CRFB.
While a trigger sounds good in concept, it is very tricky to implement. Tax revenues could come in lower than expected for a wide variety of reasons, including another major recession. If the trigger caused taxes to rise during an economic downturn, it would make a bad situation even worse. MacGuineas says there are ways to structure the trigger to avoid that painful situation, but it would take time to think through.
The other concern is a trigger like this brings a lot of uncertainty to businesses and families. Are they getting a tax cut or not? It wouldn’t be as clear with a trigger. The driving force of the Trump tax plan is to reduce corporate taxes in the hope that businesses will take their tax savings and invest more in U.S. factories, research and jobs. But companies are likely to be a lot more hesitant to open the purse strings if they aren’t sure how long the low tax rates will last.
“This [trigger] idea has caught on, and could greatly complicate the bill’s path – and it surely would complicate long-term tax planning if a future tax hike suddenly becomes a possibility,” warned Greg Valliere, chief global strategist at Horizon Investments, in a note to clients.
But the concerns for business have to be weighed against the bigger woes for the U.S. economy if the debt hits an alarming level. Investment bank JP Morgan warned this week that federal deficits are likely to hit $900 billion – or 4.4 percent of GDP – by 2019 if the GOP tax plan becomes law. That would be the largest deficit in the postwar era that wasn’t from a recession.
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