“Tax cuts pay for themselves” — it’s the refrain that helped push the 2017 Tax Cuts and Jobs Act, which included billions of dollars in rate reductions for both corporations and individuals, over the finish line — even with the most deficit-conscious Republicans.
Now, Republicans are in the early stages of negotiations to extend Donald Trump’s signature tax achievement. But with an estimated price tag of $5 trillion, that argument will be much harder to sell this time around.
The 2017 tax cuts did not actually pay for themselves over the course of the last eight years, with the national debt ballooning to more than $36 trillion from $20 trillion and debt now outpacing economic growth. With inflation still higher than average and government borrowing continuing to grow, there are significantly fewer levers Republicans can pull for growth contributions.
Unlike in 2017, Republicans won’t be able to easily use the math of economic models to hide the fact that creating growth is going to be difficult, tax policy experts told NOTUS.
“For the most part, tax cuts don’t pay for themselves,” said Garrett Watson, the director of policy analysis at the Tax Foundation. And given the nature of what Republicans are proposing this time, the math will be even harder, Watson said.
With several House Republicans saying they will not support anything less than a revenue-neutral tax bill, House Republican leadership is in a bind. Rep. Chip Roy has said he does not want the tax bill to add to the federal debt. Another House Freedom Caucus member said much of the same.
“Well, we need to keep the economy going, so we’ll need to extend those tax cuts, and we’ll have to come up with some ways that our deficit doesn’t go up as a result,” Rep. Andy Harris told NOTUS.
In 2017, many Republicans argued that a “dynamic score” of the tax bill — which incorporates modeling of how the U.S. economy will grow — showed that the tax cuts would stimulate enough growth to pay off their cost. Though the Congressional Budget Office and the Joint Committee on Taxation (the agencies that serve as the official arbiters of what legislation will cost) published a conventional score that showed a $1.5 trillion loss, Republicans argued that dynamic scoring was much fairer.
Now, even a dynamic score will likely not show a positive growth outcome, said Douglas Elmendorf, a professor and former dean at the Harvard Kennedy School and the former director of the CBO.
That’s because the main policy that created growth in the dynamic score was the slashing of the corporate tax rates, and those rates aren’t expiring. “The corporate parts were viewed by analysts as having the biggest positive effect on the economy, so the positive effects that people saw in estimates in 2017 were really geared around the corporate tax provisions,” Elmendorf said.
And extending the individual tax cuts, which are expiring, won’t show growth even with a dynamic score, Kyle Pomerleau, a tax policy expert at the American Enterprise Institute, told NOTUS. (Estimates across the political spectrum expect a full extension of the cuts to cover only between 1% and 14% of revenue loss, assuming no additional offsets.)
“These models are going to show that extending the Tax Cuts and Jobs Act individual provisions are actually going to shrink the economy,” Pomerleau said.
Republicans in Congress are intimately aware of what they’re up against. House Republicans have reportedly asked Trump’s incoming team to avoid any executive orders on policies that Congress could legislate to increase savings. Per Punchbowl News, Republicans have had internal discussions on ways to avoid a “bad” CBO score.
“We’re further in debt. We are $36 trillion in debt. So since 2017, we’ve added a lot to the debt, much of that through COVID. So I think members are acutely focused on debt and deficit. That’s number one,” Rep. Darin LaHood told NOTUS.
And that’s the problem with extending the individual tax provisions, Pomerleau said. “Instead of encouraging additional investment, what happens is that government borrowing is making it more expensive to invest, and therefore private investment goes down.” He expects that dynamic scores will reflect this.
Republicans on the House Ways and Means Committee have expressed two strategies so far to deal with this math issue. Some say they still have faith in the dynamic score and are looking to outside experts for models, as well as new sources of revenue like energy reform. Others are just challenging the integrity of the CBO and JCT.
Rep. Claudia Tenney told NOTUS she sees a world where — after trimming enough spending in other places — an extension of the tax cuts is still able to pay for itself.
“Our problem is a spending problem. I wish we could have dynamic scoring instead of the CBO and committee on tax. They’re very partisan and they’re almost always wrong,” Tenney said. “So, I think growth is really important. If we can do growth, if we can cut expenses and get energy production out, close the border. I think what you’re doing to see is that we can actually narrow the deficit gap and make the tax cuts pay for themselves.” (The CBO will likely produce a dynamic score in addition to the conventional method, though it may take more time.)
Rep. Bruce Westerman, the chair of the House Energy and Commerce Committee, told reporters he’s currently leading a Republican Study Committee effort to get economic models from outside groups for different legislative proposals. He believes that natural resource legislation, like providing support for specific large mining projects, will show increased economic growth through a dynamic score and could thus be included in the reconciliation package.
But including both energy and immigration policy in the dynamic score poses additional problems. Republicans will have to pursue the one-bill budget reconciliation strategy for those proposals to be included in the same score as the tax cuts — and it’s not clear whether that is actually the path they will be able to take. (Assuming any of these legislative ideas make it through the Senate, where non-tax proposals often die under Senate rules.)
And the second is that immigration policy would almost certainly have a negative effect on the score.
“That is going to reduce the potential labor force of the U.S., reduce the total hours worked, and that’s going to reduce total GDP,” Pomerleau said. “And the net effect of that to a dynamic score is going to be negative.”
Without an actual proposal in and and before seeing a score, Ways and Means committee chair Rep. Jason Smith and other Republicans are already waving off the accuracy of the office’s work entirely.
“I’m concerned with CBO and Joint Tax’s past performance. Because they scored it so wrong — prime example. The Trump tax cuts, they were off by — they said it would cost $1.5 trillion in deficits. In fact, if you look at the numbers, it’s created $1.6 trillion in revenues above what they projected. That’s a huge miscalculation,” Smith told NOTUS.
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Violet Jira is a NOTUS reporter and an Allbritton Journalism Institute fellow. Anna Kramer is a reporter at NOTUS.
Emily Kennard, a NOTUS reporter and an Allbritton Journalism Institute fellow, contributed to this report.