T he individual tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA) expire at the end of next year. Some lawmakers are already raising one concern that should be focal in the fast-approaching TCJA debate: how to contend with these expiring tax cuts in an era of multi-trillion-dollar deficits.
As the debate on TCJA’s future begins, policy-makers should determine two things. One, what “box” do we want to build for this debate? And two, should true, permanent, fundamental tax reform be on the table?
Every legislative package fits into some framework (or “box”) within which lawmakers must operate. When deciding the parameters of this box, there are considerations for politics and procedures, underlying economics, and timelines for action.
Let’s briefly discuss the box tax writers built in 2017. Working with a single-party trifecta, Republicans decided to operate within the constraints of the strict rules of budget reconciliation. It was a choice to do tax reform on a partisan basis, and it was a choice to write the reconciliation rules to circumvent revenue neutrality and fit $1.5 trillion in net tax cuts within the ten-year budget window.
To make the budgeting work, lawmakers chose to make the corporate side of the reforms permanent while sunsetting the individual provisions The individual provisions drove the bulk of the projected revenue loss, and the corporate reforms were the engine for the economic growth lawmakers were aiming to achieve. Some decried this at the time as a handout to the well-off, but America’s businesses would have had a hard time recovering post-Covid if the corporate provisions stayed at their highly uncompetitive 2016 levels.
But we cannot erase the pandemic. Though the law was enacted before the world knew what was coming, all policy choices from here on out must deal with how Washington spent from 2017 to 2023. The fiscal combination of Trump’s tax cuts and Biden’s stimulus packages came with an up-front price tag that would shock even Keynes.
All these monumental laws fell into legislative boxes with few fiscal constraints — there is no way to sell a trillion-dollar budget as a minor thing. Step one in designing the next box for tax reform should be to acknowledge the threat of our debt. Revenue neutrality does not need to be the final design, but a policy framework with tighter restrictions, requiring — at a minimum — offsets for any new spending, should be seriously considered.
Which brings us to point two. Temporary tax policy, no matter its rate, no matter its intention, is flawed. Lawmakers must use this chance to make permanent, pro-growth changes to our tax code.
Biden has said he’ll let the tax cuts expire (in contrast to vague commitments in his own budget), which would result in a tax hike on 62 percent of American tax filers. Trump has endorsed extending the entire law, but, on the Tax Foundation’s estimates, would add upwards of $4 trillion to the debt (or $3.5 trillion if scored dynamically) over a decade and put at jeopardy the very entitlements both leaders have sworn to never touch.
No matter who ends up occupying the Oval Office, policy-makers will fall somewhere in the middle. Congress needs to take a step back and, provision by provision, build on what the TCJA did well and reassess where it fell short.
To do this, Congress should prioritize policies that come with the lowest cost for the highest amount of economic growth. Immediate cost recovery for investments, a tool utilized by businesses of all sizes and forms, should be expanded and made permanent. Tax Foundation research has found that full expensing has such a positive economic impact that it can actually decrease the long-run debt-to-GDP ratio. If growth and debt control are the priorities, this is the place to start.
Other provisions in the TCJA, such as the expanded standard deduction, went a long way in making our tax code simpler, but the lower rates and brackets for individuals are extremely expensive and produce little growth. If lawmakers want to permanently lock in those lower rates, they need to broaden the base. A straightforward solution could be to fully repeal the SALT deduction, which would raise $2 trillion over ten years.
Tax policy is about trade-offs, and in a hyper-political environment, compromise scares Congress. But if lawmakers start the debate now, they just may be able to chart this ship toward a lasting, growing economy for all taxpayers.