What counts as a tax cut?
That is the question on the minds of many Republicans on Capitol Hill these days as they consider how far — and how fast — they can cut taxes again. The wonky ways of measuring the federal budget are shaping up to be central to the debate.
Forcing the issue is the end of many of the tax cuts Republicans passed in 2017. Without any action by Congress next year, taxes would go up for most Americans, as provisions like lower marginal income rates and a larger standard deduction expired. Republicans want to protect their handiwork and extend the tax cuts before they lapse.
By conventional budget rules in Washington, doing so would amount to a tax cut — and an expensive one at that. Compared with a scenario where all of the 2017 tax cuts end as scheduled, extending them for 10 years would reduce the revenue the government collected by roughly $4 trillion, according to the Congressional Budget Office.
Republicans are struggling to come up with other tax increases or spending cuts to cover that cost. So maybe it is not a surprise that some of them are starting to advance an alternative theory of the case: that continuing existing tax cuts actually costs nothing.
Senator Michael D. Crapo, an Idaho Republican who is expected to lead the Senate Finance Committee next year, took to Fox Business this week to make that argument.
“If you’re just extending current law, we’re not raising taxes or lowering taxes, that is a $4 trillion deficit. That’s ridiculous,” he said in an interview with Larry Kudlow, who helps advise President-elect Donald J. Trump. Mr. Crapo said later, “We’re going to have to take the bold steps of saying to the American people that we are not going to let $4 trillion of tax hikes happen and that it’s not going to increase the deficit.”
Mr. Crapo, who said he had discussed the idea with Mr. Trump, added that Republicans could try to officially change budget rules so that extending the tax cuts is not shown to cost anything. Other Republicans may be wary of going that far, and some budget experts are raising alarms about the possibility.
“It’s clearly a budget gimmick and an end run around the needed efforts to make sure that, given our terrible fiscal situation, new policies don’t make it worse,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a nonpartisan group that seeks smaller deficits.
It is a bipartisan tradition in Washington to work around (or just ignore) the findings of the nonpartisan Congressional Budget Office and the Joint Committee on Taxation, the two bodies responsible for evaluating the cost of legislation.
After all, the 2017 tax cuts are expiring next year because Republicans wanted to pass legislation with a more modest contribution to the deficit. They procrastinated figuring out the fiscal math, hoping that a future Congress would keep the tax cuts going.
And they had reason to think their strategy would work. Lawmakers are generally hesitant to let tax cuts expire — and in essence raise taxes on their voters.
In 2012, Congress and President Barack Obama faced a situation very similar to what lawmakers are dealing with now. Sweeping tax cuts signed into law by President George W. Bush were set to expire at the end of 2012, creating an expensive fiscal cliff. The Obama White House made the same argument as Mr. Crapo: The cost of legislation should be measured against “current policy,” which assumed that the Bush tax cuts would continue, not “current law,” under which the cuts would expire.
The thinking allowed the Obama White House to claim that the deal it made to extend many of the Bush tax cuts reduced the deficit by more than $700 billion over 10 years. The budget office, using the current law base line, said it actually increased deficits by roughly $4 trillion over that time frame.
Adopting a “current policy” mind-set again could help Republicans out of the fiscal hole they dug in 2017. Members of the party are exploring cuts to clean energy and social welfare programs next year, but unifying enough of those cuts may ultimately prove difficult. And then there are other, potentially expensive policies they may also want to pass, including the list of additional tax cuts Mr. Trump proposed during the campaign.
Making the math work will be easier if the party can look past roughly $4 trillion in expected deficits from extending the 2017 cuts. Republicans could simply argue that the estimated cost of the tax cuts is overblown or, as Mr. Crapo suggested, go beyond the rhetoric the Obama White House used and actually change the way budgets are measured.
But deficit hawks in the party may be unsatisfied with just waving away such a huge cost. The debt is already expected to grow to levels economists find alarming, even assuming taxes go up because the 2017 cuts expire.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office and an economic adviser to Senator John McCain, is no fan of how the budget office scores tax cuts. Changing budget rules to assume that continuing tax cuts has no cost may help win Republican votes in the short term, he said, but it would expose the party to steep criticism.
“Maybe this helps them get to 218 and 50,” he said. “On the other hand, there will be people who accuse them of changing them now because it’s convenient for them,” he said. “They will suffer the slings and arrows of attack if they go this route, there’s no question about it.”
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