As Republicans work to pass the largest overhaul of the U.S. tax code since 1986 by the end of this calendar year, they're not banking on any support from Senate Democrats. Instead, they're using a process known as budget reconciliation, which only requires a simple majority to pass.
But there's a catch: Republicans would need at least a few Democratic votes to avoid the tax bill triggering automatic spending cuts to Medicare, student loans and other programs because of the “Pay As You Go” (paygo) rule.
Paygo requires immediate, across-the-board spending reductions to many mandatory programs for any bill that reduces taxes and doesn't fully offset them with revenue increases elsewhere. The GOP tax cut plan would add $1.5 trillion to the debt over the next decade. Under paygo rules, the government would have to make $150 billion in mandatory spending cuts every year for the next 10 years.
Medicare alone could lose $25 billion in funding next year if paygo were to go into effect, according to a new Congressional Budget Office report. Customs and Border Patrol, the Student Loan Administration and the Military Retirement Fund would also face the scalpel, according to an analysis from the nonpartisan Committee for a Responsible Federal Budget. (Unlike Medicare, Social Security and most other safety net programs like food stamps are exempt from paygo cuts.)
"The paygo law limits reductions to Medicare to four percentage points (or roughly $25 billion for that year), leaving about $111 billion to be sequestered from the remaining mandatory accounts," the CBO concluded.
Congressional staff on both sides of the aisle admit that it's unlikely Democrats would stand by and allow those painful cuts to popular programs to happen. But Democratic leaders, including Sen. Minority Leader Charles E. Schumer (D-N.Y.), are well aware they could have leverage in this situation if they can convince the public that it would be Republicans, not them, who would be to blame if paygo were to go into effect.
They say they'd likely use it: A senior Democratic aide, who spoke on the condition of anonymity since the tax bill deliberations are ongoing, predicted a “rocky scenario” for Republicans.
House Democratic Whip Steny H. Hoyer (D-Md.) wouldn't get into specifics on what Democrats might ask for in return for waiving paygo, but he said his party would remind Republicans — and the American public — how “hypocritical” it is for the GOP to complain about the growing debt for years and then pass major legislation to add to it.
“Here's a perfect example where [Republicans] want all ice cream and no spinach,” Hoyer said.
Aides for House Speaker Paul D. Ryan (R-Wis.) and Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) say Republican leaders are thinking through how to handle paygo. They expect it to be waived, as it has many times in the past. After the tax cuts under President George W. Bush, Republicans attached the paygo waiver to a must-pass military spending bill to smooth the process.
Paygo was first enacted in 1990 under President H.W. Bush as part of the Budget Enforcement Act, but since 2000, lawmakers have found ways to bypass paygo and add to the debt. Normally, senators and representatives simply add a line to a bill that says paygo doesn't apply.
But Republicans can't do that under reconciliation. Instead, to get around statutory paygo, Congress would have to pass a separate bill from the tax legislation. The extra bill would require 60 votes, meaning at least eight Democrats would have to give their blessing to ignore paygo, since Republicans currently control 52 seats — a margin that could get even smaller depending upon what happens with the special election for the Alabama Senate seat in December.
Despite Republican assurances paygo cuts won't happen, AARP is still concerned about cost-cutting. The organization, which has 38 million members age 50 and over, sent a letter to Congress in February warning “the tax system should produce sufficient revenue to pay for important national, state and local priorities.”
“We think having a simpler tax code is a great idea, but we also need a tax code that produces enough revenue to pay for programs, including Medicare and Medicaid,” said Cristina Martin Firvida, AARP's director of financial security. She says many of AARP's members have been calling and writing AARP asking about what will happen to Medicare and Medicaid if the tax bill passes.
Even if paygo gets waived, there could still be a push to trim federal government spending in the coming years. America's debt already tops $20 trillion and is on track to grow quickly.
“If you’re not bringing in enough money, there's going to be a day of reckoning,” Martin Firvida said.
The federal government deficit was $666 billion in 2017 and is projected to top $1 trillion by 2022, according to the Congressional Budget Office. If the tax bill is enacted, the federal government could hit $1 trillion deficits as early as 2020.
“It is downright delusional to believe tax cuts will be sustained,” says Brian Riedl, senior fellow at the right-leaning Manhattan Institute for Policy Research and former chief economist to Sen. Rob Portman (R-Ohio).
Riedl predicts the American pubic won't stand for deficits as high as $1 trillion. Some Republican lawmakers, including Sen. Bob Corker (R-Tenn.) and members of the House Freedom Caucus, have already voiced strong concerns about the $1.5 trillion cost of the tax bill.
The White House and congressional Republican leaders have argued that tax cuts will cause so much economic growth that they will pay for themselves, but that has not happened in the past and no mainstream economic analysis predicts that would happen this time around.
In the past, Republicans have favored sharp reductions to safety net programs like welfare, food stamps and Medicaid. President Trump promised not to touch Social Security or Medicare on the campaign trail, but those are among the main drivers of the spending growth, making them hard to ignore as part of any cost-cutting agenda.
For now, Republicans are focused on passing the tax bill, and Democrats are trying to thwart it. But the paygo battle would come swiftly if tax cuts are enacted by the end of the year. Statutory paygo goes into effect 15 days after Congress adjourns. If Congress did that right before Christmas, paygo cuts could start as early as the third week in January.
Both sides waived paygo after the tax cuts under George W. Bush, but this time around the debt is already much higher than it was in the early 2000s. The country's debt is now 77 percent of gross domestic product, the total economic output of the country. In the early 2000s, it was only about 30 percent of GDP.
“Tax cuts will need to be financed sooner or later,” said Ed Lorenzen, a senior adviser at the Committee for a Responsible Federal Budget, who uses the Twitter handle @CaptainPAYGO. “If Congress blocks a paygo sequester, it will still need to enact cuts at some point in the future.”