When Congress passed the $622 billion year-end tax deal, House Speaker Paul Ryan quietly scored a budgetary victory that could set the stage for his long-sought goal of overhauling and simplifying the tax code.
The permanent tax breaks secured in the legislation will make a tax reform proposal that cuts tax rates without increasing revenue through other policies look cheaper to accomplish in the future. That in turn will make the political fights over the potential deficit impact of tax reform much easier for Ryan and his allies to navigate.
“This is a huge move forward,” said House Ways and Means Tax Policy Subcommittee Chairman Rep. Charles Boustany (R-La.). “Frankly I’m very pleased that we got as much as we did in this tax package. I didn’t think we would get this far.”
House Democratic leaders voted against the tax package, in part, because of their concern that the permanent tax breaks included in the deal would grease the skids for the type of conservative overhaul of the tax code that Ryan (R-Wis.) envisions. Ryan has also said he hopes that tax reform could be a part of a bigger push for spending cuts and reducing the rate of spending on Medicare and Social Security.
House Minority Leader Nancy Pelosi (D-Calif.) urged her colleagues to oppose the measure calling it a “Trojan Horse” – a pile of attractive near-term tax changes serving as the vessel for more contentious proposals Republicans can push in the future.
At issue is how Congress assesses, or scores, how much its policies will add to the annual deficit and the overall national debt. Too big a number and critics of the policy can charge the legislation is a budget buster, while a low deficit tally allows its advocates to tout the proposal as a responsible piece of policy.
Congressional scorekeepers measure the cost of legislation against a baseline that is based on current law. This means that if a tax cut is set to expire, extending it will be scored as adding to the deficit because the government will be losing revenue it otherwise would have collected. By permanently extending several large tax breaks for businesses and individuals in the year-end bill, the baseline will now assume that the government will collect less revenue in the future. This in turn will make it easier for Republicans to put forward a reform plan because it can cut taxes while appearing to add less to the nation’s debt than if these popular tax breaks had been extended only temporarily as they often were in the past.
The year-end bill ensures that if tax reform does happen the official starting point for how much revenue would be needed to keep spending at the same levels will be about $560 billion less over 10-years.
“It lowers the bar that tax reform has to clear in terms of how much revenue it needs to raise,” said Ed Lorenzen, a senior adviser at the Committee for a Responsible Federal Budget and former aide to House Minority Whip Steny Hoyer (D-Md.) who is critical of the tax bill. “Now [Ryan] does not have to get rid of tax breaks in order to pay for extending these temporary provisions. He’s also able to claim savings from repealing some of the breaks they just made permanent.”
The issue split Pelosi and Hoyer from Senate Democrats and the White House, both of which supported the tax deal.
Senate Minority Leader Harry Reid (D-Nev.) said tax reform still needs to happen and the tax code is broken, but he wasn’t going to wait around to beg for priorities to be included in tax reform that could be made permanent now.
“We don’t have to wait for tax reform to get permanent tax breaks for the working poor, that’s done, we’ve done that,” Reid said in an interview.
But Hoyer and Pelosi repeatedly warned their members in the days before the bill came to the floor that voting to make beloved tax breaks permanent now means dealing with lower revenue forever. They were worried about the baseline.
“It will give [Republicans] a lower base of revenues which will make it easier for them to cut rates, all of that will result in very substantially increasing pressure to make cuts,” “Hoyer said in an interview after the deal was released. “I don’t think there’s any doubt that Social Security, Medicare and other entitlements are put at risk by this tax bill.”
Ryan and most Republicans argue that making the tax breaks permanent is a more honest way of accounting for how much money the government can expect to raise in taxes. Congress has routinely renewed the breaks year after year and the tax bill that passed is just embracing that reality, they argue.
“That isn’t raising the deficit because, guess what, they were going to be continued anyway and the deficit was going to be the same” Ryan told reporters on Friday. “We think this is honest budgeting, honest baselines, reality.”
It is a difficult and wonky argument for even most lawmakers to understand, particularly when most members don’t believe tax reform will happen any time soon and certainly not until there is a new president.
Conservative activists have heralded the tax bill and how it sets that table in the future.
“The biggest win of this bill is that it will make conservative tax reform easier by permanently lowering the current-law revenue baseline,” the conservative Americans for Tax Reform said in a statement. “This means that conservative reformers can design a pro-growth tax system less destructive of liberty and which steals less money from the American people.”
Not all House Democrats saw the vote as a blow. House Ways and Means Committee member Rep. Richard Neal (D-Mass.) voted for the tax package and said the deal was a chance to get some tax certainty now rather than waiting for a tax reform that might never come.
“We’ve been talking about tax reform since 1986,” Neal said. “You couldn’t plan around what we were doing year in and year out.”
Hoyer said he expected the tax bill would pass, arguing members see tax breaks they like now and don’t expect there will be consequences in the future.
“They don’t see the immediate cost of it and as a result they think it’s a good political vote,” Hoyer said. “It takes zero courage to vote for a tax cut, it takes a lot of courage to say if we can’t pay for something we ought not to buy it.”