Republicans could be teeing up another fiscal cliff as they cut corners and compromise on tax reform.
GOP lawmakers are preparing a slate of new temporary tax provisions, potentially setting up big tax increases for some Americans down the road. The strategy, part of their larger tax-reform effort, threatens a replay of the yearslong battle over tax cuts enacted during the presidency of George W. Bush, which lawmakers only resolved after an exhausting battle culminating in the 2013 fiscal cliff agreement.
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“We’ve been to this movie before,” said Howard Gleckman, a senior fellow at the Washington-based Tax Policy Center.
President Donald Trump’s speech in Springfield, Mo., Wednesday kicks off a “major push” for tax reform, marking the start of efforts to get legislation through Congress and to his desk by the end of the year. And the fight over tax cuts could take center stage in that process.
The idea of making some provisions temporary has divided Republicans for months, with Speaker Paul Ryan, House Ways and Means Committee Chairman Kevin Brady and others arguing vociferously for a more traditional tax reform that would permanently overhaul the code. “We very passionately believe that permanence is very, very important,” Ryan said Thursday in an interview with CNBC.
Others, though, like conservatives in the House, are more interested in tax cuts, mocking the idea of tax reform as doing little more than rearranging the tax burden among different groups and industries.
And some Republicans are emboldened by the outcome of the Bush tax cut fight, noting that, however distasteful, it proved an effective way of mostly getting their way with the tax code because lawmakers ultimately agreed to extend the vast majority of the breaks.
In a statement last month, the “Big Six” lawmakers and administration officials now negotiating a plan behind closed doors indicated it would be a compromise between the competing demands, saying only that they will place a “priority on permanence.” It’s a clear sign their plan won’t quite be a traditional tax reform in the mold of the 1986 overhaul, but it won’t simply be old-fashioned tax cuts either.
Lawmakers haven’t decided how much of it will be permanent and how much will be temporary — that will be a function of their colleagues’ willingness to accept the unpopular pay-fors needed to make permanent changes to the code as well as their tolerance for adding to a budget deficit projected to reach almost $700 billion this year.
Deciding which tax breaks go in which pile will present some dilemmas for Republicans.
If they have to pay for a permanent cut in, for example, the corporate tax rate, it may have to be smaller than if they made it temporary. The question is whether a temporary reduction in the corporate rate to, say, 20 percent, from the current 35 percent — that Republicans hope would eventually be renewed — would be preferable to a 25 percent rate that’s permanent from the outset.
Many insiders suspect business-related provisions, such as plans to switch to a so-called territorial tax system, are more likely to end up being permanent while those benefiting individual Americans — like plans to ditch the alternative minimum tax — will tend to be temporary. That’s because companies usually are more sensitive to changes in the code while, at the same time, it will be politically harder for Congress to actually allow tax breaks for ordinary Americans to lapse.
“If you were to make the doubling of the personal and family exemption lapse in 10 years, do you believe for a moment it would really lapse in ten years?” asked Grover Norquist, the influential anti-tax activist. “I don’t.”
In the CNBC interview, Ryan said: “The big decision-making provisions in the tax code — that stuff’s got to be permanent. There are other things you can do that can time dates on it to make sure that the numbers work. But the big macroeconomic politics that are the — like rates and things like that — that stuff has to be permanent.”
It’s ironic because Republicans have long bemoaned what had been a proliferating number of temporary tax provisions in the code, saying it caused unnecessary uncertainty in the economy. And lawmakers have taken some big steps in recent years to stamp out short-term provisions.
The fiscal cliff agreement made huge sections of the code permanent, while a subsequent $600 billion tax bill approved in 2015 was designed to end the long-running “tax extender” ritual in Congress where lawmakers continually rolled over a big batch of expiring provisions.
There are some clear downsides to making some of the provisions temporary.
Economists generally believe temporary provisions won’t do as much for the economy as permanent ones. The Tax Foundation, a think tank that’s influential among conservatives, warned in a June report that a temporary reduction in the corporate rate would accomplish little. That’s because, while it would provide a short-term boost to growth, the economy would actually shrink in the long run as companies anticipate a rise in the corporate rate.
“You really wouldn’t see much economic growth,” said Kyle Pomerleau, an economist with the group.
Those conclusions will be seconded in a forthcoming article in the tax journal Tax Notes by American Enterprise Institute Economist Alan Viard.
It also threatens to tie up future Congress’s time and energy debating what to do with the temporary provisions, much as lawmakers were forced to continually deal with the extenders.
From the Republican perspective though, the strategy, though not ideal, is a political necessity.
For one thing, they want to use a parliamentary procedure known as reconciliation to push any tax changes through the Senate, over the objections of Democrats.
But there are rules against reconciliation measures adding to the deficit over the long term. It’s fine if they add to the red ink in the short term, but reconciliation bills can’t add to the deficit beyond the so-called budget window, so they either have to be paid for or shut off after the window closes. Republicans used the same maneuver to pass the Bush tax cuts, which is why they were forced to expire in 2010.
Republicans’ appetite for tax cuts, meanwhile, runs in the trillions and their fractious caucus probably can’t agree on enough pay-fors to cover their cost. Their plan to pare a century-old break for corporate interest expenses, for example, is hugely controversial. So to keep the cost down, they intend to make as many of them permanent as they can and allow the rest to be temporary, and hope they will eventually be renewed.
Some say that sort of gamble largely worked out with the Bush tax cuts, which lawmakers extended for everyone but the highest earners.
“Even Obama and a Democratic Senate gave us 85 percent of the Bush tax cut,” said Norquist. “What we learned was that Obama would be terrified they would be blamed for a tax hike” on average Americans.
Of course, no tax provision is really permanent because Congress can always revise the law.
The 1986 tax reform was ostensibly permanent, though by 1990 lawmakers had partially rolled back its cut in the top marginal tax rate amid concerns about the deficit. Likewise, the extenders were renewed so many times — some had been re-upped more than a dozen times — that they were effectively permanent.
But critics say there is a difference between Congress deciding to revisit settled policy and lawmakers creating short-term breaks they hope will be renewed.
“You can plan for the first,” said Gleckman. “You can say, if you’re a CFO of a corporation, ‘Well, I’ve got these depreciation rules and I know they’re not going to last forever, but as far as I know, they are the rules for the foreseeable future.’”
“That’s very different from saying these depreciation rules are only going to be in effect for two years, and then I don’t know what’s going to happen to them, and it’s going to require Congress — which can’t really agree on anything — to agree to extend them,” he said.
“It’s just a terrible idea.”