The voices of Tax Policy Center's researchers and staff
Late last night, Senate Finance Committee Chair Orrin Hatch (R-UT) revealed his revised version of the Tax Cuts and Jobs Act, which the panel will consider today. In effect, he would create two vastly different tax laws: First, a generous tax cut for businesses and many high-income households combined with more modest tax cuts for most low- and moderate-income households. Then, after eight years, nearly all the individual income tax changes would disappear.
The result: The law would morph into a tax increase for those who pay the individual income tax plus a permanent tax cut for corporations.
The individual tax flip
Oh, and it would also fracture one of the foundations of the Affordable Care Act’s individual marketplace by ending the tax penalty for individuals without health insurance, potentially leaving up to 13 million more Americans uninsured while increasing federal revenue by $318 billion over 10 years.
The flip in individual taxes would be striking. In 2019, the bill would cut individual income taxes (including tax reductions for pass-through businesses) and estate taxes by $157 billion. By 2027, it would raise those taxes by $75 billion, according to the congressional Joint Committee on Taxation.
Hatch’s latest version of the TCJA would attempt to soften the blow of those medium-term individual tax hikes by providing even more generous tax cuts for the first few years. He’d reduce individual income taxes even more than his original plan by tinkering with some middle-income tax rates and through an even more generous child tax credit—raising the credit from $1,000 to $2,000. His initial bill would have increased it to $1,600.
The Byrd rule problem
Hatch did all this because his version of the TCJA faced a Senate rules problem. Because Republicans wanted to pass a bill without seeking substantial support from Democrats, they needed to pass the bill under special budget rules that would allow Senate approval with only 51 votes instead of the usual 60.
But that choice triggered what’s called the Byrd Rule that bars a bill passed under budget procedures to add to the deficit after 10 years. And Hatch’s initial draft looked like it was going to violate that rule—big time. According to JCT, it would have reduced federal revenue by nearly $217 billion in its 10th year, and there was little in the bill to lower that cost in future years.
Turning off the tax cuts
So Hatch would effectively turn off all of the TCJA’s individual income tax cuts after 2025. He’d also repeal most, but not all, of the measure’s individual income tax increases. Importantly, he would retain the bill’s shift to a less generous method for indexing the tax code for inflation, called chained CPI.
He’d leave the corporate tax changes in place, effectively funded by the change in individual income tax indexing and the repeal of the ACA’s insurance mandate.
The revised plan would also reprise the yo-yo pattern of estate taxes many remember unfondly from 2010. It would roughly double the exemption amount through 2025, then return it to current levels. This is certain to generate a new round of bad jokes about knocking off Uncle Harry just before New Year’s Day, 2026.
The 2025 sunset of most individual income tax changes is not the only disappearing act in this version. More generous tax depreciation of business capital investment and special rules to allow first-year write-offs for investments by film and TV producers would expire after 2022. Another provision allowing citrus growers to take a deduction for casualty losses would expire after 2027. To further complicate matters, the bill would trigger several business tax changes contingent on total federal revenue collections through 2026.
Indefensible tax policy
This is indefensible tax policy. It would become the apotheosis of tax extenders, effectively turning the entire individual income tax code into the one giant temporary tax cut. Such a short-term tax reduction might make sense if the nation were mired in recession. But it is impossible to defend at a time of near full-employment, with the Federal Reserve already raising interest rates as the economy strengthens.
The politics of Hatch’s Byrd gambit is premised on two big ideas: First, voters will be so enthralled by their initial tax cuts that they’ll ignore the bill’s future tax increases. Second, nobody—not even Democrats--would be willing to allow the bill’s tax cuts to expire. Democrats, of course, believed no-one would kill the Affordable Care Act.
And budget scoring aside, if the bill is extended after 2025 it would add hundreds of billions of dollars a year to the deficit.
Once touted by its sponsors as the greatest tax reform in a generation, the Tax Cuts and Jobs Act is rapidly descending into the mire of political expediency.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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