As Republicans advance tax bill, economists say deficit concerns remain
President Donald Trump and congressional Republicans moved one step closer to meeting their self-imposed Christmas deadline to pass a massive tax reform plan Tuesday as the Senate Budget Committee advanced the bill to the floor in a 12-11 party-line vote.
Trump met with Republican senators on Capitol Hill prior to the vote, cajoling them to set aside their complaints about the legislation and resolve their differences later. The White House applauded the vote, and Trump said later that he is optimistic the bill will pass on the Senate floor.
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“The momentum driving our shared priorities of job growth, economic competiveness, and fiscal responsibility through tax reform is undeniable, and this Administration is encouraged by the progress the Senate has made toward achieving these priorities,” Press Secretary Sarah Sanders said in a statement. “The President looks forward to providing tax cuts for hardworking Americans by the end of the year.”
The House passed its version of tax reform legislation weeks ago, and the president has urged lawmakers to get a final bill on his desk by December 25. While the House and Senate bills are similar in many respects, there are substantial differences that would need to be reconciled and approved by Republicans in both chambers.
The bill passed by the Senate Budget Committee Tuesday includes a permanent corporate tax rate cut, sunsets individual rate cuts after 2025, repeals the Affordable Care Act’s individual mandate, and fully eliminates the personal deduction for state and local taxes.
Although Republicans maintain a future Congress would likely preserve the personal rate cuts, the Congressional Budget Office concluded the current version of the bill would leave Americans earning $75,000 a year or less paying higher taxes by 2027. In the short term, the average taxpayer in all brackets would see a tax cut, but some families would still face tax increases and the majority of the benefits would flow to higher earners.
Despite the high priority placed on the legislation by the White House and GOP leadership, several Republican senators have been hesitant to fully embrace it for a number of reasons.
Sens. Ron Johnson (R-Wis.) and Steve Daines (R-Mont.) had complained that corporations benefit more from the plan than small businesses, and they want to see more generous provisions for so-called pass-through businesses.
Sen. Susan Collins (R-Maine) has balked at the inclusion of the repeal of the Affordable Care Act’s individual mandate in the legislation. The CBO has estimated such a move would save taxpayers money but would leave millions more uninsured and lead to higher premiums.
After meeting with Trump Tuesday, Collins told reporters, “A lot of my concerns are being addressed.”
Sens. Bob Corker (R-Tenn.), Jeff Flake (R-Ariz.), and James Lankford (R-Okla.) have sought assurances that the bill will not add significantly to the federal debt. Sen. John McCain, R-Ariz., said Monday that “a lot of things” about the bill still concern him.
Any three of these lawmakers could kill the bill, and some of their demands are contradictory. Cutting taxes further for pass-through businesses would decrease federal revenues and increase deficits unless other offsets are found.
Corker told CNBC on Tuesday morning that Republicans had been working “feverishly” to address the impact of the tax cuts on the federal debt. He said later that he received a verbal commitment that the bill will include a trigger mechanism to increase rates if tax revenues fall short of rosy GOP projections.
Critics say Republicans are racing to pass their bill before the full impact is known. The nonpartisan Joint Committee on Taxation and the Congressional Budget Office have produced preliminary estimates of the effects of the proposed changes to the tax code, but those figures do not take into account possible economic growth created by the cuts.
The JCT informed Sen. Ron Wyden Tuesday that it aims to have a dynamic score of the Senate bill as reported to the Finance Committee completed by Wednesday night. Any subsequent changes to the legislation would not be accounted for.
Lankford told Sinclair Monday that he wants to support tax cuts if they are crafted in a fiscally responsible way.
“I’m in favor of a tax cut, I’m in favor of a major tax reform, which we haven’t had in 30 years,” he said. “Let’s fix the broken system but let’s do it in a way that doesn’t cause us to have more deficits at the same time.”
Whether the bill is fiscally responsible is largely in the eye of the beholder, though, and lawmakers can easily cherrypick data that supports their positions.
“The estimate being floated right now is that the economy would grow by .4 percent [per year],” Lankford said. “That’s a reasonable estimate.”
Many economists disagree. The Committee for a Responsible Federal Budget found that no non-partisan assessment of the House or Senate tax plans predicts that much growth.
“We haven’t seen a single analysis that says this tax plan will get to .4 percent,” said Marc Goldwein, CRFB senior vice president and policy director. No official government estimate of any past tax reform proposal has predicted growth that large either.
According to the CRFB, such growth would only be possible if tax reforms were combined with policy changes that address entitlement programs, immigration policy, regulations, and the national debt.
“Debt-financed tax cuts are actually much less pro-growth than fiscally responsible tax cuts,” Goldwein said.
He sees many options to make the cuts more responsible, but none that Republicans appear to be considering. For example, they could eliminate more targeted tax breaks like the employer-sponsored health insurance exclusion, get rid of the state and local tax deduction for businesses, or set the corporate tax rate at a still-competitive 25 percent.
A backstop provision to prevent severe deficits like Corker is seeking could work, but Goldwein recommended a structure that delays some of the cuts until the effects on the economy are clear, rather than cutting everything at once and later walking rates back.
“I think a trigger that starts with rates at a higher level is better than a trigger that works in reverse,” he said, though he added, “Any trigger is better than no trigger.”
Even the most optimistic non-partisan assessment of the GOP plans from the Tax Foundation predicts growth that falls short of .4 percent per year. Goldwein noted that their analysis has not yet been updated to include the expiration of the individual tax cuts, which could reduce the projected growth.
Scott Greenberg, a senior analyst at the Tax Foundation, defended the group’s analysis, but he observed that their calculations still show the Senate bill is far from deficit-neutral. Assuming aggressive growth that would produce $1.26 trillion in additional tax revenue, their model estimated the plan would still cost $516 billion over ten years.
Another independent estimate using the Penn Wharton Budget Model to incorporate more modest economic growth found that the Senate bill would increase the federal debt by $1.4 to $1.6 trillion over ten years.
“The Senate bill would grow the economy…but those economic effects would not be enough to erase the loss in revenue in the first ten years,” Greenberg said.
Greenberg acknowledged that the Tax Foundation’s growth models do not factor in any negative impact on the economy from increased federal debt. While other economists believe increased federal borrowing to service the debt will reduce productive private investment, the Tax Foundation assumes that effect would be negated by the supply of foreign capital.
“The additional federal borrowing that would be required would pale in comparison to the stock of available global saving that is able to fund that federal borrowing,” Greenberg explained.
Other economists do expect increased deficits to be a drag on economic growth.
“The GOP proposed tax cuts are unlikely to pay for themselves, and the economic growth that is anticipated to occur is likely to be much lower because of the deficits that are projected to arise as a result of the tax cuts,” said Aparna Mathur, a resident scholar at the American Enterprise Institute.
“I think we need to be more ambitious about broadening the base or less ambitious about cutting the rate because of the likely adverse impact on growth,” she said. “It is likely that if this does not happen, then tax cuts today will be followed by tax hikes a few years down the road.”
The controversial and currently unpopular tax reform plan poses a political challenge for Republicans, who must choose between voting for a bill that Democrats can accurately say increases taxes on many middle-class families or ending 2017 without any significant legislative accomplishments.
“I would say that, at least as things currently stand, this piece of legislation is quite surprisingly a lose-lose for the Republicans,” said Glenn Altschuler, Litwin Professor of American Studies at Cornell University. “If they don’t pass any legislation, they will be viewed as hopelessly incompetent by most voters and they will pay a price with very large donors who have made this the sine qua non of their demands of the party. So not passing it is definitely problematic for the Republicans. That said, this is a bill that almost twice as many Americans oppose as support, which is stunning for a bill to reduce taxes.”
Many of the remaining GOP holdouts are not facing reelection, are in safe seats, have an established history as deficit hawks, and/or have been personally insulted by President Trump.
“You would think passing tax-cutting legislation by a Congress controlled by Republicans would be a piece of cake,” Altschuler said. “That it isn’t tells us something about the flaws in the bill, the flaws in selling the bill, and the divisions in the Republican Party that in this case manifest themselves in senators who are not particularly concerned about bucking their president.”
Neither version of the bill has received any Democratic support in the House or the Senate so far, and Altschuler said they have little incentive to get on board now.
“What this suggests is that no Democrat is afraid of being tarred as someone who voted against this legislation,” he said.
In the past, Republicans have been able to finagle a few votes for tax cuts from conservative Democrats in red states. None have backed this bill yet, and Senate Democrats who have tried to work with Republicans said Tuesday their concerns have been ignored.
“What we're saying is, we can do this,” Sen. Joe Donnelly, D-Ind., said at a news conference accompanied by more than a dozen other Democrats. “This country's so much better off with a tax bill that passes with 60 or 70 votes than one that ends up at 50 with the vice president breaking the tie. Why don't we all do this together, stand up for the middle class, keep jobs here?”
Ultimately, Altschuler predicted Republicans’ apparent haste and desperation to show voters some achievements ahead of the 2018 midterms could backfire, and GOP lawmakers who brush off warnings about the deficit in the name of political expediency may regret it.
“If it’s generally recognized that what you’re trying to do is pass anything just so you can say you passed it, that’s not conducive to convincing voters that you’re acting in the public interest,” he said.