The Tricks That Will Deliver Tax Reform

The GOP has an arsenal of budget gimmicks to achieve massive, permanent tax cuts. Using them could be very dangerous.

Photo illustration by Slate. Photos by Alex Wong/Getty Images and Saul Loeb/AFP/Getty Images.
There are rules meant to limit budgetary insanity on Capitol Hill. Republicans could easily break them.

Photo illustration by Slate. Photos by Alex Wong/Getty Images and Saul Loeb/AFP/Getty Images.

There are many rightful concerns about the budget proposal that the White House unveiled last week, but chief among them must be its faulty accounting. So acute are the pressures to cover for its costly policies that the administration seems to have employed impossibly rosy growth projections and to have double-counted $2 trillion of economic growth from tax cuts. When Congress attempts to pass a tax reform bill, perhaps later this year, institutional norms will prevent legislators and the Joint Committee on Taxation—Congress’ official scorekeeper for tax bills—from using tricks as egregious as these to keep the costs of a tax plan down. Congress, however, will likely employ other budget gimmicks along the long path to tax reform, which would pave the way for radical policy with enormous costs.

Right now under the Senate’s Byrd Rule, reconciliation bills, which are filibuster-proof, cannot decrease revenues beyond the budget window period; a tax cut lasting beyond 10 years would have to be paid for either by cuts to government spending or by an increase in government revenue. But Republicans can find ways to pass a massive tax cut that isn’t confined by that window. As is readily apparent from the invocation of the nuclear option in the confirmation of Justice Neil Gorsuch, which killed the filibuster for Supreme Court nominations, congressional rules are designed to bend under pressure, and so it is no surprise that senators are starting to think creatively around them with regard to tax reform. Procedural tactics circumventing the Byrd Rule would signal the enactment of immoderate legislation—legislation that could unleash severe harm on the economy.

Waivers of the Byrd Rule require a supermajority of senators. Without that voting threshold, the primary method of getting around the rule would be to include expiration dates so that the law would sunset prior to the end the budget window. Republicans came up with this controversial tactic, which violated the spirit of the reconciliation process as a deficit-reduction vehicle if not its letter, to pass the Bush tax cuts in 2001 and 2003—two of the largest tax cuts in the nation’s history—with only a simple majority.

Unlike with simple rate cuts, however, temporary lawmaking does not mesh well with fundamental tax reform, likely muting the pro-growth effects of tax changes by causing immense planning uncertainty, especially in the business tax reform area. Recently, there have been calls from the White House and certain senators to simply lengthen the budget window, allowing for a temporary tax cut with a long enough fuse to accommodate business investment. If nonpermanent tax cuts last 20 or 30 years, the argument goes, companies may make bigger investments based on their understanding of what taxes they’ll owe as if the legislative changes were permanent. The sunset is simply too far off in the future to be taken seriously, according to these advocates.

But a longer window could unleash all manner of problems. Tax reform that is so extreme that budget rules need to be warped to accommodate it is also likely to be repealed once Democrats regain power. And a sunset provision, even one that does not require expiration for two or three decades, will allow Democrats to more easily change the law by framing the tax plan as temporary from the get-go. Such policy uncertainty will prevent investors from making the investments necessary to jumpstart the economy.

On the international business side, where reform is needed most, an unstable tax fix would likely not provide the incentives necessary to rationalize the inefficient and unwieldy structures that multinationals have developed to shift their operations and income offshore. Without the moderating influence of the Byrd Rule, Trump’s plan would also add trillions to the country’s debt, putting the country on an unsustainable fiscal course. These consequences would drastically limit the macroeconomic growth that Republicans hope to achieve through the tax overhaul.

An extended budget window would also negatively impact the budget process itself. By measuring the costs of legislation across a lengthy horizon, Republicans could pretend to pay for costly tax cuts by specifying tax increases or spending cuts that would not go into effect until many years from now—an event that would be unlikely to actually occur. In this manner, lengthy budget windows render revenue estimates essentially meaningless in out-years and accommodate gimmicks that push costs onto future generations—the precise constituency budget rules are designed to protect.

With any luck, lengthening the budget window may prove too unworkable and controversial to constitute a live threat to the Byrd Rule. It would, after all, heavily test the processing power of the Joint Committee on Taxation, which would have to forecast variables such as interest rates across a much longer horizon than it is accustomed.

The budget window idea, however, is likely just the beginning of a process in which Republicans test the boundaries of reconciliation, which are fluid because of their legal status as congressional rules. A simple majority of senators could, for instance, legally repeal or suspend the Byrd Rule in the next budget resolution, which cannot be filibustered under Senate rules.

This tactic flies under the radar because the Byrd Rule has been codified in statutory form. Superficially, then, it might seem that any changes to it would have to be made by both houses of Congress, including a supermajority in the Senate, as well as the president. Because the rules of reconciliation are procedural rules that govern the internal lawmaking structures of Congress, however, each house has purview over them under the Rulemaking Clause of the Constitution and general separation of powers concerns. That means that each house can unilaterally change its procedural rules, even when they are in statutory form. Indeed, the Budget Act—the source of the Byrd Rule—itself preserves the right of each house to do so. This same route could also be used to modify statutory PAYGO rules, which require that tax cuts be paid for through spending decreases or revenue increases, so that those rules do not apply to tax reform.

This may all seem far-fetched, but the abandonment of the 60-vote threshold in confirming Gorsuch along with mounting revenue concerns might, in fact, embolden Republicans to also go “nuclear” on tax reform by eradicating the pesky Byrd Rule. Indeed, in this post-Gorsuch environment, President Trump recently issued a call on Twitter for the Senate “to switch to 51 votes” in order to enact health care repeal and tax legislation. Unlike abolishing the general legislative filibuster, which would impact all legislation, changing the Byrd Rule would have a precedential effect limited to reconciliation bills, which must be budget-related. This makes it a much less risky strategy than abandoning the legislative filibuster outright, which the GOP has shelved out of fear of its backfiring once Democrats regain control of the Senate.

Circumventing the Byrd Rule, or even getting rid of it entirely, would also be in keeping with a pattern of expansion of the reconciliation process. Prior to 2001, for example, it would have been unfathomable that Republicans could enact the Bush tax cuts through reconciliation, escaping the Byrd Rule by ingeniously sunsetting the cuts.

The Bush tax cuts now have a legacy of having exacerbated ballooning deficits and a rise in inequality. We can expect the same saga to unfold here if Republicans choose once again to flout procedural constraints that are meant to save lawmakers from themselves, who otherwise are incentivized to deliver more than they can pay for.

Even if the weak boundaries of reconciliation hold this time around, Congress will undoubtedly deploy other budget devices to dampen the costs of any tax reform bill. In recent years, Republicans have set the stage to compel the Joint Committee of Taxation to use the “dynamic” score of tax bills as the official score. By estimating a tax policy change’s effect on the overall economy, dynamic scoring typically reduces the costs of tax cuts. Dynamic scoring is not unobjectionable in and of itself, but it is also not the panacea some Republicans believe it to be. The growth rates employed by the Joint Committee on Taxation will be more realistic than those assumed in the president’s budget. Under dynamic scoring, higher deficits may also somewhat offset the investment incentives provided by the tax cuts. To pay for rate cuts of the magnitude found in current GOP tax reform plans, Republicans will have to dig deeper than dynamic scoring.

Changing the budgetary baseline is another unprecedented trick Republicans will likely use in enacting tax reform. The official cost of legislation is the difference between the baseline and the amount of government revenues that are generated or spent subsequent to the enactment of the legislation. Under budget rules, the baseline is supposed to follow “current law.” The House GOP tax reform blueprint, however, contemplates manipulation of the baseline into one of current policy rather than current law. This budgetary sleight-of-hand measures the costs of policy changes not against the baseline of the law as written but against how the party wishes it to be. Using a Wonderland-like alternative reality, this maneuver essentially renders policy objectives costless. Under the normal current law baseline, for instance, temporary legislation is assumed to expire as scheduled and thus any extensions of temporary tax cuts would score as losing revenue. Using the distorted current policy baseline, however, expiring laws are presumed to be permanent, thereby making their extension costless. In the House plan, this wizardry would erase $400 billion of costs in making temporary tax provisions permanent.

In short, nothing can stop Republicans from employing budget gimmicks in enacting tax reform. Under constitutional doctrine, budget rules are wholly within the province of Congress. As a result, the rules cannot truly do what they are designed to do: tie lawmakers to the mast. Most likely, the temptation to deliver costly tax cuts by shifting costs unto future generations will prove too great for the Republicans, who will game the rules to carry this out.

There is an option beyond budgetary sophistry, however. Republicans and Democrats could work together to develop tax reform that is permanent, fair, and revenue-neutral. Three decades ago, in 1986, the parties chose to do exactly that when they last reformed the tax code. If Republicans use budget gimmicks in order to pass radical partisan tax reform that costs trillions, they should be held accountable for not taking the high road of bipartisanship. Republicans may win on procedure, but they will ultimately be judged on policy.