The House of
Representatives yesterday approved
the Senate-passed Concurrent Budget Resolution for Fiscal Year 2018. The narrow margin – 216-212 – reflected Republican
anxieties both about the impending tax legislation’s consequences for the
deficit and about some of the upper-middle-class tax preferences that
Republican leaders have discussed trimming to reduce the net cost of the
measure. These include the deduction for
state and local taxes (SALT)
and the exclusion for contributions to 401(k) and similar retirement
plans. Because much of the popular media
coverage has been rather muddled, this seems a good time to set out where this
process stands.
Budget resolutions
are not law – they are concurrent resolutions not submitted to the President
for signature – but rather allocate important procedural advantages within
Congress, chiefly in the Senate.
Growing partisanship, fractures within each of the parties,
and the rise of multi-year budget deals have robbed annual budget resolutions
of much of the importance they once had in setting the nation’s fiscal
priorities. At present, its main
function is to authorize
“reconciliation” legislation, which are bills that can move through the
Senate immune from filibusters and pass with a bare majority. Budget resolutions contain a great deal of
additional material, but most of it is not binding. Thus, for example, the language in this
budget resolution assuming reductions in the SALT deduction does not commit
Congress to enact that into law.
Last winter,
Republicans passed a budget resolution for Fiscal Year 2017 that authorized
repeal of the Affordable Care Act through reconciliation but ultimately were
unable to secure the 50th vote needed for passage. That resolution expired with the end of
Fiscal Year 2017 at the end of last month.
This new budget
resolution authorizes reconciliation legislation to cut taxes any time between
now and September 30. This budget
resolution also allows this reconciliation legislation to authorize leasing of
the environmentally delicate coastal plain of the Arctic
National Wildlife Refuge for oil and gas drilling.
The House and
Senate versions of the Fiscal Year 2018 budget resolution differed in several
important respects. In particular, the
House version also would have given several committees with jurisdiction over
important anti-poverty programs reconciliation instructions to propose deep
cuts in those programs to pay for part of the cost of the tax legislation. Theoretically, if these committees failed to
report out such legislation, the budget committees could have written it for
them and sent it directly to the floor, where only a bare majority would be
required to pass in the Senate.
The Senate
leadership concluded that mandating deep spending cuts at the same time would
needlessly complicate passing upper-income
tax cuts: even the draconian cuts
the House envisioned would only offset a small part of the cost of the
envisioned tax legislation, leaving congressional Republicans still subject to
attack for fiscal
irresponsibility while adding vulnerability for playing “reverse Robin Hood”. Believing that senators were set on this
position, the House leadership opted simply to bring the Senate version up for
a vote in the House rather than attempting to call a House-Senate conference
committee.
The final budget
resolution therefore does not mandate immediate budget cuts. This may seem like good news, but it only
postpones the inevitable: tax cuts of anything
like the magnitude congressional Republicans are proposing are fiscally
unsustainable and will inevitably
lead to even deeper cuts to social programs than those that occurred under
bipartisan deals during the Obama years.
As soon as the tax cuts are enacted, the flock of deficit hawks
currently suffering an epidemic of laryngitis will recover and demand “shared
sacrifice” to close the resulting hole.
Republicans have consistently opposed any net tax increases to reduce
deficits, and the most that most Democrats have advocated has been an even
split between spending cuts and revenue increases. Even if the Democrats have miraculous success
in the next two elections, this still spells deep cuts in vital domestic programs. (Anecdotes of dubious spending of course can
still be found, but any substantial, politically feasible excesses in domestic
spending were eliminated years ago to pay for earlier tax cuts or in response
to sequestration.) The Center on Budget
and Policy Priorities has written an
informative
set
of
papers
illustrating
the kinds of spending cuts
this tax legislation is likely to yield.
Although having a budget
resolution containing “reconciliation instructions” protects Republicans from
filibusters and from points of order for adding to the budget deficit during
the ten years it covers, it does not eliminate all significant procedural
problems with tax cuts. In particular, 2
U.S.C. § 644(b)(1)(E)
creates a point of order against any legislation that would increase the
deficit during the decade following the period covered by a budget resolution. Because the Act assumes that many rules
affecting taxes and direct spending programs that exist in the final year of a
budget resolution will continue, the only way to avoid a deficit increase in
the second ten years is to sunset the tax cuts before the end of the first ten
years. Congressional Republicans did
this in
2001 and 2003 with major tax cut legislation and largely won the resulting
game of chicken with the Obama Administration when those cuts were due to
expire.
Although some
interest groups and Republican Members continue to denounce expiring tax cuts –
claiming that expiration dates will deny business the certainty to make investments
– it appears Republicans will have little choice. At most, they may be able to make permanent a
set of tax cuts that lose the same amount of revenue that their tax increases
would supply. Thus, interest groups
lobbying for making their favoring tax cut permanent are pushing back hard against
those trying to eliminate the SALT or 401(k) revenue-raising provisions of the
legislation.
Another problem
Republicans face is that the ideas they have released would lose far more than
the $1.5 trillion over ten years that the budget resolution allows. They likely will close part of this gap by phasing
in some of their cuts to conceal the cost during the ten years covered by the
budget resolution.
Thus, we could have provisions that slowly phase in, jump up
to full force in the ninth year, and then are repealed completely in the
tenth. How this is supposed to stimulate
business activity is far from clear.
Part of the
solution we are likely to see involves various forms of “creative accounting.” They may include provisions allowing the affluent
to pre-pay, at a steep discount, taxes that would otherwise become due outside
of the ten-year budget window, moving revenues into the accounting period while
actually increasing the fiscal irresponsibility of the legislation. In addition, congressional Republicans have directed
the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT)
to estimate tax legislation with “dynamic scoring”: the unproven, indeed largely
discredited,
supply-side theory that lower tax rates spur increases in economic activity and
largely pay for themselves with increased revenues from taxing that
activity. They also have installed
leadership at both organizations that is receptive to their agenda.
Yet Republicans
seem to be trying to have it both ways on dynamic scoring. On the one hand, they are claiming that they
actually will not be increasing the deficit by $1.5 trillion because dynamic
effects will eliminate most or all of the deficit increase. Yet they also seem to be contemplating
various schemes to reach the $1.5 trillion figure only by dynamically scoring a
much larger revenue loss. One
possibility is to sideline CBO and JCT completely and have the Treasury
Department estimate the effects of this legislation using the kinds of
outlandish economic assumptions previously seen only from the Heritage
Foundation. Getting the Senate
parliamentarian to accept this unprecedented contortion would be challenging,
but she does serve at their pleasure.
One side note illustrates
the cynicism of claims that this legislation will stimulate the economy. Roughly three-quarters of all non-military
infrastructure spending in this country is financed by state and local
governments. Reducing or eliminating the
deduction for state and local taxes will make raising revenues to pay for those
activities considerably harder politically.
Bond
ratings agencies have made clear that they regard any impediments to state
and local taxation as substantially increasing the risk of bonds and will
downgrade future issues accordingly.
Thus, this legislation seems on-track to significantly depressing
needed, economically desirable, and job-creating domestic infrastructure
spending.
The tax legislation’s
prospects are unclear. This legislation is
a Republican priority, not by any means just a Trump priority, so even Members
that are becoming skeptical of the President are likely to support it. By including drilling in the Arctic Refuge in
the plan for the bill, the leadership all but guaranteed the support of Sen.
Lisa Murkowski (R-AK). Although some
Members feared that repealing the Affordable Care Act could provoke a voter
backlash, virtually all Republicans expect that the failure of this tax
legislation would cause important donors to sit out the coming election campaign
and likely support challenges to the party leadership in both chambers. The budget resolution passed narrowly in the
House, but the leadership reportedly gave several Members permission to vote
against it to assuage constituents after amassing sufficient votes for
passage. And Republicans have made clear
that they intend to move this legislation very, very fast, before opposition
has time to organize. Finally, the deadline
for raising the debt limit, which Democrats had hoped might give them leverage
against tax cuts that would swell the National Debt, is now not expected to
occur until the Spring.