Here it is
The Great Budget Baseline ConThe tax cuts don’t add $3.3 trillion to deficits under current tax policy.
The Senate on Monday began its “vote-a-rama” on amendments to the tax bill, and it was scheduled to go deep in the night. But before we see the final product, it’s worth rehearsing one more time one of the greatest distortions of this budget debate—to wit, that the Senate bill is a fiscal blowout because it will increase the federal deficit by $3.3 trillion over 10 years.
That’s the official Congressional Budget Office “score” of the bill, but it’s only true if you assume that Congress was going to tolerate a $4.5 trillion tax increase. That would be the result if the 2017 tax reform expired at the end of this year, as most of the individual tax provisions are scheduled to do.
Congress was never going to allow that. Even Democrats support extending most of the 2017 individual cuts except the lower 37% top marginal rate. Senate Republicans correctly argue that the bill’s cost should be measured against a more realistic baseline, which assumes that existing tax rates and policy continue.
In any rational world, changes in the law would be scored against current policy. But in Washington they are scored against CBO’s current-law “baseline,” which assumes that the 2017 tax cuts will expire. Voila, $3.3 trillion in new deficits over 10 years.
Based on current policy, however, CBO estimates that the Senate bill would save $500 billion over 10 years. Spending reductions would offset increased costs from President Trump’s new tax carve-outs for overtime, tips, and auto-loan interest, as well as the increase in the state-and-local tax deduction to $40,000. The higher SALT cap reduces revenue by $140 billion over 10 years. All of those changes are bad tax policy, but they don’t add up to $3.3 trillion.
But get this. Under CBO’s current-law baseline, the SALT deduction cap disappears at the end of this year, so the new $40,000 cap has the effect of reducing the deficit by $944 billion over 10 years. Only under Beltway accounting can a bigger tax subsidy reduce the deficit.
By the way, even Barack Obama’s advisers argued that Congress in 2012 should use a current policy baseline to extend most of the George W. Bush tax rates that were set to expire at the end of that year. “The relevant point of comparison isn’t current law, it is ‘current policy,’” wrote Jeff Zients, the Obama Office of Management and Budget director.
The larger SALT cap and tax breaks for special interests create distortions in the code and will do nothing for economic growth. Republicans also made them temporary to reduce their cost on paper, knowing that they will invariably be extended. Democrats have played similar budget tricks with “temporary” spending increases.
CBO’s baseline forecast is also misleading because it builds in annual spending increases. This lets Democrats claim that reforms that slow spending growth such as Medicaid work requirements are a spending “cut.” CBO projects that Medicaid spending will increase by about 4.5% annually over the next decade. The Senate bill slows the growth to about 2% a year. This isn’t a real cut.
The Senate bill, for all its faults, is the first serious attempt at entitlement reform in nearly two decades. The Senate bill will slow spending growth in Medicaid, food stamps and student loans. It will also roll back subsidies that have become entitlements for the renewable-energy industries. Yet Democrats oppose all of these changes that really would reduce the deficit in future years.
There is much in the GOP bill that deserves criticism, but the $3.3 trillion deficit critique is phony—like Beltway accounting.
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