The latest development in the unfolding saga of the Senate tax bill is the possible inclusion of a so-called trigger.
Although the details are still pretty hazy, the basic idea is that some of the new tax cuts would be rolled back if they do not produce the hoped for economic growth. This would (hopefully) guard against loss of revenue exploding the federal budget deficits and national debt.
While we appreciate this (faint) nod toward fiscal responsibility, there are a variety of reasons why this idea is unworkable and wrongheaded.
(For a quick reminder of the dangers of unrestrained growth of the federal debt, see the Congressional Budget Office’s grim budget outlook here.)
Let’s start with the all-important Senate rules.
Because the Republican leadership has chosen to pass a sweeping tax overhaul through the budget reconciliation process, rather than through regular order, it has to abide by the complicated rules that allow it to avoid a Democratic filibuster.
The Byrd Rule, named after the late Sen. Robert Byrd (D-WV), prohibits non-budgetary items from being included in a budget reconciliation bill. The trigger Senators are now considering is contingent on some future growth target not materializing, so it is practically impossible to calculate what its budgetary effect would be. Without a “score” of its budgetary effect, it cannot be included in a budget bill.
But let’s say the Senate finds a clever way around its own rules, and it manages to pass a tax cut bill with the possibility of some future trigger.
The problem with this idea is the Catch-22 of increasing taxes during a time of slow economic growth.
Taxes would be going up to shore up the federal budget at a time of less-than-hoped-for tax revenues, but increasing taxes could further slow economic growth at exactly the wrong moment, possibly shifting slow growth into recession. Leading to even lower tax revenues.
In general, most economists whether they are Keynesian demand-siders or supply-siders, would not recommend raising taxes when the economy is flagging.
Then there is the problem of uncertainty. Groups like the U.S. Chamber of Commerce have come out strongly against the idea of a trigger because it represents the opposite of what most businesses are looking for – certainty.
Lower taxes is great, but predictability is paramount.
Creating variables or thresholds based on broadly defined economic growth that might trigger higher taxes – things individual businesses certainly cannot control or predict – would introduce more uncertainty into the tax code.
One thing is certain. After this Congress votes for a tax package that includes a trigger to hedge against future deficits, a future Congress can decide to dismantle or even ignore that trigger. We’ve gone through this bait-and-switch of promised future fiscal responsibility away.
Post Script: There have also been some rumblings about creating the oddly named “spending” rather than tax trigger. So, instead of rolling back tax cuts that don’t generate economic growth, this trigger would impose spending cuts to offset the lost revenue.
This is even more unformed than the tax trigger.
The Congressional Budget Office estimates that in 2020, the Senate bill would add $250 billion to the annual deficit. That would reduce discretionary spending by twenty-five percent. For several years the deficits would equal a third of the Pentagon’s budget. Considering the howls that came from lawmakers when the first Trump Administration budget tried to cut a small fraction of that you know it isn’t happening. Besides you can look at the failures of the last time Congress tried to do this with Budget Control Act of 2011 and spending caps to realize this option has got its own set of problems.