The $500 Billion Question at the Heart of the Tax Cut Debate

The $500 Billion Question at the Heart of the Tax Cut Debate

REUTERS/Gary Cameron

There’s a wonk fight heating up as President Trump and Republicans push ahead with their effort to pass a package of tax cuts this year. The debate centers on just how to measure the fiscal effects of any tax reform bill, and how it’s resolved will help determine just how big the GOP tax cuts can be and whether they will add another half-trillion dollars to budget deficits.

This gets a bit technical, but stick with us — there’s a lot at stake, after all.

At issue is what assumptions are included in the budget baseline used to score tax changes: current policy or current law. Current policy assumes that Congress will continue doing what it has done in the past, regardless of what various laws actually say. This is important because many “temporary” tax breaks are regularly extended by Congress, often at Christmastime — an annual gift to special interests of all kinds, from rum producers to racehorse owners. Alternatively, using current law to define the budget baseline assumes that laws mean what they say, and that a break will expire when a given piece of legislation says it will.

The choice of a baseline is critical in this case because any tax changes must be “revenue neutral” after 10 years for the Senate to be able to pass them under the so-called reconciliation process that requires a simple majority vote.

Some conservatives are lining up to defend the current policy baseline, in the hopes of passing larger tax cuts. The Heritage Foundation wants Congress to give “tax cuts a fighting chance” by using the current policy baseline. The Wall Street Journal editorial board says Republicans should “press ahead with the baseline that best reflects reality” — and that provides a bigger tax cut, worth another five percentage point reduction in corporate taxes.

Groups opposed to big tax cuts are pushing for the current law baseline. The Center on Budget and Policy Priorities decries the current policy approach as an “arcane maneuver” that “hides $439 billion in tax cuts worth at least $40,000 a year for the top 0.1 percent.” But it’s not just liberal groups that are opposed to the current policy standard. Deficit hawks at the Committee for a Responsible Federal Budget are also speaking out against it, saying it would allow deficits to rise by $462 billion more than a current law baseline: “Using a current policy baseline disguises a half-trillion dollar tax cut as ‘paid for’ even though deficits would increase.”