Senate Likely To Consider Budget Resolution Next Week: Last Thursday, Oct. 5, the Senate Budget Committee voted to report an FY 2018 Budget Resolution on a party-line 12-11 vote. The Senate plan would launch a filibuster-proof tax cut bill that would add $1.5 trillion to the public debt to pay for corporate and pass-through tax cuts, lowering the top individual tax rate, eliminating the estate tax, and other tax cuts (see below).
The Reconciliation instructions would also enable the Energy Committee to include in the Reconciliation Bill provisions to open the Arctic National Wildlife Refuge to oil and gas drilling.
In order to claim a path to a “balanced budget,” the Senate plan calls for more than $5 trillion in non-defense spending cuts over 10 years including cuts of $473 billion in Medicare and more than $1 trillion in Medicaid cuts – although these cuts are purely aspirational and would not be enforced through Budget Reconciliation.
House Passes Budget Resolution: Last Thursday, the House of Representatives passed an FY 2018 Budget Resolution 219-206. Like the Senate Committee plan, the House-passed resolution would launch filibuster-proof tax cuts, but claims no addition to the public debt based on assertions that “tax cuts will pay for themselves.” The House plan would also include $203 billion in entitlement cuts in the filibuster-proof tax bill.
Outlook: Before a tax bill can advance, the House and Senate must adopt a common budget plan – which is more likely to resemble the Senate plan due to resistance among Senate GOP moderates to the House entitlement cuts. Speaker Ryan recently commented on CBS that trying to combine entitlement cuts with tax legislation “would kill tax reform.”
Neither budget plan resolves defense and non-defense discretionary spending levels for the current fiscal year. See article below on spending caps and a possible December shutdown.
For further details on the Senate and House budget plans, see the FedWeb Budget Resolution page.
Tax Cut Framework
September 27, 2017: Trump Administration, House and Senate GOP released a “Unified Framework for Fixing our Broken Tax Code.”
Procedural Requirement: The tax bill cannot proceed as a GOP-only filibuster-proof “Reconciliation” bill unless Congress first adopts an FY 2018 Congressional Budget Resolution.
Cuts Taxes for Upper Income Americans by reducing the top individual rate from 39.6% to 35%, eliminating the Estate Tax, reducing the corporate and pass-through rates, and eliminating the Alternative Minimum Tax.
- The estate tax currently impacts very few Americans and is paid only on estates worth more than $5.5 million.
Doubles the Standard Deduction (to $24k for joint filers and $12k for single filers) and merges the personal exemption into the larger standard deduction. Consolidates the current seven brackets into three (12%, 25%, and 35%). Increases the Child Tax Credit (no details). Tax “committees will work on additional measures to meaningfully reduce the tax burden on the middle-class.” (No details.)
Calls for eliminating “most itemized deductions.” No details, but claims to protect mortgage interest and charitable contributions. Previous statements have proposed eliminating the state and local tax deduction. (Under current law, taxpayers who itemize deductions on their federal income tax returns can deduct state and local real estate and personal property taxes as well as either income taxes or general sales taxes. The deduction costs the federal Treasury about $1.3 trillion over 10 years, according to the nonpartisan Tax Policy Center.)
Distribution of the Tax Cuts: In their preliminary analysis, the nonpartisan Tax Policy Center estimates that under the new tax structure, in 2018, 50% of the total tax benefit would go to the top 1 percent, increasing to 80% of the total benefit by 2027; and after tax income in 2027 would increase between 0.2% and 0.4% for the bottom 80% of taxpayers, while the top 1 percent would see their income increase 8.7%.
Cuts Corporate Income Tax Statutory Rate from 35% to 20% and eliminates Corporate AMT. (Note: the statutory rate is irrelevant for many corporations; the GAO reported that profitable corporations paid an effective rate of only 12.6% in 2010 due to credits, exemptions, and offshore tax havens.)
25% for Pass-Through Businesses: Proposes a 25% rate for pass-through businesses (sole proprietorships, partnerships, and S-corporations). Critics are concerned that wealthy Americans would restructure income to take advantage of pass-through rates.
Full Expensing: The framework allows businesses to immediately write off (or “expense”) the cost of new investments. (Full expensing is the treatment of a capital expenditures as an operating cost so that deductions can be taken immediately.)
Business Deductions and Credits Reduced: Proposes to partially limit the deduction for net interest expense incurred by C corporations. (No details provided.) Numerous special exclusions and deductions would be repealed or restricted, but no details provided. The current-law domestic production (“section 199”) deduction would “no longer be necessary.” R&D and Low-Income Housing Credits would be preserved.
Changes to International Taxation are Ambiguous: The frameworkcalls for transitioning to a “territorial” tax system under which U.S.-based multinationals would not pay tax on foreign profits. The rationale is that U.S. multinationals are currently at a competitive disadvantage under the current “worldwide” system, although the current system allows American corporations with foreign subsidiaries to defer paying taxes on income earned abroad until that income is repatriated. The tax framework would effectively repatriate foreign earnings held offshore and impose a one-time tax. Critics of moving to a purely territorial approach argue it will encourage further off-shoring of U.S. operations and jobs, although the framework says this would be avoided by taxing foreign profits of U.S. corporations “at a reduced rate and on a global basis”–creating ambiguity about what the framework is actually proposing for international taxation.
Cost of the Tax Cuts, the Byrd Rule, and 10-year Expiration of Tax Cuts: A preliminary analysis by the nonpartisan Tax Policy Center puts the cost of the tax cuts at $2.4 trillion over the first 10 years, and $3.2 trillion over the second decade. Note that the Senate Budget Resolution allows only a $1.5 trillion cost in the first decade; and the Senate’s Byrd Rule does not permit any deficit increase in the second decade. The Byrd Rule restriction will effectively require that any tax cuts not fully paid for, will have to expire at the end of 10 years.
Increasing the Debt: The Committee for a Responsible Federal Budget estimates the tax plan would increase Debt Held by the Public to more than 100% of GDP by 2027. As for arguments that tax cuts will pay for themselves, CRFB points out that “past tax cuts in 1981 and the early 2000s have led to widening budget deficits and lower revenue.”
- However, the Administration is split on deficit impact: Treasury Secretary Mnuchin continues to claim the tax cuts will pay for themselves, while OMB Director Mulvaney — a self-described fiscal hawk — acknowledges the debt will increase but asserts it is justified to secure the tax cuts.
FY 2018 Appropriations Remain Stalled; Fight Looms Over Disaster Aid
State of play: Avoiding a December federal shutdown requires bipartisan action to raise defense and domestic spending caps.
FY 2017 appropriations expired on September 30, 2017, the last day of the fiscal year. The September 8, 2017 emergency bill continues federal funding at current levels through December 8, 2017 — at which time federal agencies will have to shut-down unless FY 2018 appropriations bills or another continuing resolution “CR” are enacted.
On September 14, 2017, the House passed an omnibus appropriations measure, but it is only a placeholder. The House bill combined the 12 regular appropriations bills passed by the House Appropriations Committee. However, these “placeholder bills” will not become law – because Republicans and Democrats have yet to negotiate overall spending levels for the (1) Defense and (2) Non-Defense Discretionary (NDD) spending categories. FedWeb Appropriations Portal
The Budget Control Act of 2011 set statutory caps on Defense and Non-Defense Discretionary spending for each year through 2021. However, the Bipartisan Budget Act of 2013 increased the defense and non-defense caps for FY 2014 and 2015; and the Bipartisan Budget Act of 2015 increased the caps for FY 2016 and 2017. Many anticipate a similar bill to increase the caps for ’18 and ’19, although 60 votes (bipartisan agreement) are required in the Senate.
Disaster Aid: In the meantime, Congress will have to consider additional emergency appropriations for disaster aid, flood insurance, and wildfires — which could trigger a fight over whether the aid should be enacted as “off-budget” emergency legislation or tied to cuts in other domestic programs. The Administration formally submitted a $29.3 billion aid request on October 4.
Debt Ceiling Stand-Off in December
The bipartisan Sept. 8 emergency bill suspended the debt ceiling through December 8, 2017, temporarily avoiding a Treasury default on U.S. obligations.
A major debt ceiling fight in December remains a possibility, given increasing partisan discord over ACA repeal, tax cuts, and immigration — and the fact that the debt ceiling bill is “must-pass” legislation.
The statutory limit on the public debt, often called the “debt ceiling,” is a legal limit on the Treasury’s ability to borrow funds necessary to finance already incurred obligations of the United States. If Congress passes spending measures that exceed incoming revenues, but prevents the Treasury from borrowing funds to cover the deficit, the nation would default on its legal obligations to lenders, Social Security beneficiaries, veterans, Medicare providers and all others to whom payments are legally owed. Default has never occurred and would have catastrophic effects on the ability of the U.S. Treasury to issue bonds in the future, as well as destabilizing global financial markets.