Capitol Hill Recap: Wonk Out!

Certain lawmakers could use a budget rule to extend tax cuts from the 2017 tax reform bill that won’t cost a dime. 

What Went Down:

• Budget rule could make extending tax cuts priceless by making them costless.
• Tax bill fate still unclear.

Let’s Get To It:

Wonk Stuff

For those who don’t know, “wonk” is backwards of “know” and is a term used on Capitol Hill to describe someone who delves into the weeds of legislation.

You’re about to become a wonk. 

One of the biggest issues that will guide the debate for extending the expiring tax cuts in the Tax Cuts and Jobs Act (TCJA) will be what those extensions will cost.

But what if the extensions don’t cost anything?

Believe or not, there is a thought-process (called a “budget rule,” which is really more of a theory) on Capitol Hill that would allow lawmakers to extend all expiring tax cuts in the Tax Cuts and Jobs Act (TCJA) without costing a dime – even though some budget projections show extending these tax cuts would cost between $3.5 trillion and $6 trillion over ten years. 

This theory takes some explanation:

• There is a phrase on Capitol Hill called “current law.”
  • It refers to how bills are expected to change the revenue flow of the U.S. government if they become law.
  • For example, under current law, certain TCJA tax cuts will expire at the end 2025. This means that under current law a tax increase is scheduled to occur in 2026. However, if the TCJA tax cuts are extended into 2026 then there would be no tax increase and the Federal government would lose the revenue it would have gained if the tax cuts expired in 2025. As stated above, budget experts say that – under current law – extending the TCJA tax cuts would cost between $3.5 trillion and $6 trillion over ten years.
  • Current law is used to determine the “cost” for enacting legislation. In other words, if the legislation comes with a price tag that number is based on current law.

• There is another phrase on Capitol Hill called “current policy.”
  • It refers to basing the cost to enact legislation on current policy.
  • Here is a very simplified argument for using current policy: If Congress extends a tax cut, then why compare its revenue generating ability to what the tax law was years ago? The top individual tax rate in 2017 was 39.6 percent. But now it is 37 percent. Under this argument, the prospective tax cut extension should be compared to what the law is now and not compared to way back when in 2017.

Comparing and contrasting the two theories:

Fact: The current top income tax rate is 37 percent and is scheduled to increase to 39.6 percent in 2026.

Using current policy, the 37 percent rate would be extended, and therefore no revenue change because the tax law would be the same. In short, extending all TCJA tax cuts in 2025 would not cost the federal government a dime.

Under current law, extending the 37 percent rate would be compared to 39.6 percent and the U.S. government would receive less revenue. In short, extending all TCJA tax cuts in 2025 would cost the federal government many “dimes”.

However, there is a shelf life for using current policy to avoid costs to the Federal government.

If Congress waits until 2026 to extend the TCJA tax cuts, then current policy will have changed (i.e., tax rates increase) and the argument for using current policy is sunk. It will cost the Federal government revenue to extend TCJA tax cuts in 2026 using current policy. This is because the lower tax rates that expired in 2025 will be compared to higher tax rates in 2026.

Another caveat with current policy: If TCJA tax increases are not extended in 2025, that would be considered a revenue drain to the Federal government.

For example, if R&D amortization reverts to expensing after 2025 then the Federal government would take-in less revenue. Current policy (amortization) would be compared to new policy (expensing) and the Federal government would lose revenue.

If R&D expensing becomes law in 2024, then extending the measure beyond 2025 would not lose revenue for the U.S. government. Current policy would be expensing and extending that policy would not lower revenue for the Federal government.

Confused? Who isn’t?

If lawmakers choose to use “current policy” and not “current law” when debating the extension of TCJA tax breaks in 2025, then a big hurdle (i.e., cost) will be removed from the discussion. 

However, costs will re-enter the debate if lawmakers try to rescind some of the TCJA tax increases – unless they make those changes prior to the 2025 tax debate.

Legislative outlook: The outcome of the 2024 elections will have a tremendous impact on the 2025 tax debate and whether “current policy” will be used to determine the “cost” of extending the TCJA tax breaks. 

Tax Bill Update

Bottom line: The fate of the tax bill will be decided when Senators return next week from their two-week recess.

Last week’s Recap sums it up and is here.

Pardon if this recap missed a monumental moment, but we can recap it next time!

Adios amigos!