Tax Package Sausage

Weekly WastebasketTax Package Sausage

Budget & Tax  | Quick Takes
Nov 9, 2017  | 8 min read

It has been said that sausage and legislation are two things you don’t want to see made.

But at Taxpayers for Common Sense, we’re not looking away while lawmakers are elbow deep in tax legislation sausage. House leadership released the Tax Cuts and Jobs Act last week and the Ways and Means Committee is marking up the bill this week. The Senate Finance Committee is poised to brief the Republican conference today and release their tax legislation soon thereafter.

We will learn exactly what will be in the Senate bill just about the time this lands in your inbox, but we do know it will be different from the House bill. And the details of the Senate bill will be important – the chief political advantage of using Budget Reconciliation to move the legislation is that it limits debate and only requires a simple majority to pass the Senate.

But that advantage comes at a price: the legislation cannot create deficits after the ten-year budget window. If it does, the Senate goes back to requiring a 60-vote threshold for passage.

The latest Joint Committee on Taxation (nonpartisan congressional revenue scorekeeper) evaluation of the House package found the bill adds less to the deficit each successive year between 2019 and 2023, from $219 billion in 2019 to $50 billion in 2023. But after that loom bigger deficits ending at $156 billion in 2027. That would seem to indicate deficits in 2028 and beyond, which is a no-no for the Senate.

But what do we know so far? Let’s take a look at the good, the bad, and the ugly of this House bill so we have a baseline against which to compare it to the Senate proposal.

First the good. The House bill does look at tackling huge swaths of the tax code rather than simply picking out a dozen favors to particularly effective lobbyists.

But it isn’t comprehensive reform – the changes the House package envisions would have to phase out over the course of ten years to not increase the deficit outside of the ten-year budget window as required by the Senate.

Nor does it eliminate many more loopholes and sacred cows. Nor is it revenue neutral (as we were initially promised). That said, it does propose the most dramatic and sweeping change to the tax code in a generation.

The House bill also includes some important policy changes. Scaling back the mortgage interest tax deduction scares a lot of people and riles up homebuilders and realtors, but it is good policy. The current law encourages debt, not homeownership. (Countries that do not have a mortgage interest deduction like Canada and the United Kingdom have similar rates of homeownership.) And the existing law is regressive – the vast majority of the benefits go to upper income households.

The proposal to limit the deduction to the first $500,000 in mortgage debt is a step in the right direction.

Similarly, eliminating the Alternative Minimum Tax is overdue. There is nothing inherently wrong with the structure of the Alternative Minimum Tax, which was intended to limit deductions and ensure everyone is paying some amount of tax, but having a back-up system to make sure people don’t get away with gamesmanship is the wrong approach. The right approach is to create a system that doesn’t encourage gamesmanship.

Now to the bad. Trying to push through a huge, more-than-400 page tax bill without meaningful engagement of both parties is just wrong – and it ignores the fact that for durable change like the 1986 reforms there has to be buy-in from both sides.

This is a task that should be done using regular order, with Executive Branch proposals, hearings on actual legislation and then mark-ups – as in 1986 by a Republican President, a Democratic House, and a Republican Senate.

This is a case where watching the legislative sausage get made, however unappetizing it might be, is critical to public confidence in the process and the result.

But there is an even more obvious problem: at last count the bill adds more than $1.5 trillion to the deficit over the next ten years. The most recent Congressional Budget Office estimate is nearly $1.7 trillion including the cost of servicing the additional debt.

That doesn’t take into account dynamic economic effects, but no amount of “dynamism” is going to come close to eliminating that debt.

To make matters worse, some of the provisions that add to the deficit would seemingly have no serious ability to stimulate the growth that will allegedly close this huge revenue gap. An additional child tax credit that expires in five years. Doubling the estate tax exemption on the way to phase it out altogether. Under current law, estates worth less than $5.45 million (twice that for married couples) are exempt, leaving about 5,000 estates. Under the House bill, there would be 2,000 estates subject to the tax and then none. Allowing 2,000 wealthy families to pass on a higher percentage of their wealth will not stimulate enough economic growth to offset the $172 billion in lost taxpayer revenue. The bill also includes a couple of tax extensions (small bore provisions that are only extended for a few years) that will likely become the nucleus of new tax extenders package that will grow and come up every few years.

The ugly isn’t inherently bad in the context of tax reform, which should involve trade-offs and difficult choices.

But what is problematic about the Tax Cuts and Jobs Act is that the proposal seems to have skirted some of the more difficult choices.

For example, the treatment of “pass through” income provides significant release to business owners with a certain level of revenue, but offers no real offset for the $500 billion that shift in law would cost. In another case, the shift to a territorial tax system included an excise tax targeting companies that shift profits overseas to avoid taxes. Just yesterday, the House defanged the proposal so that it now is expected to raise $7 billion in revenue versus an originally estimated $155 billion.

In reality, the most problematic aspect of the bill is that it ignores the ugly fiscal situation facing our nation.

The U.S. has a $20 trillion debt – greater than the annual Gross Domestic Product – that is expected to grow sharply over the next decade. The country cannot afford to push a tax bill that absent unrealistic growth estimates will increase that debt substantially.

The country needs comprehensive tax reform. But it has to be truly comprehensive, and it has to be done right.