Capitol Hill Recap: The Tax Time Warp

The House Ways and Means Committee plans to begin to publicly debate and amend tax legislation on May 13–a big step in the reconciliation process, with the ultimate goal of producing “one big, beautiful” bill to extend the 2017 Tax Cuts and Jobs Act. Assuming the markup isn’t delayed again, it will be the first time we see detailed language of these proposals.

This is the stage where seemingly dead and buried ideas mysteriously come back to life to haunt the proceedings. After dropping a proposed top bracket income tax hike last month, President Donald Trump brought it back into the mix this week—only to throw cold water on it again in a social media post earlier today. And after Republicans committed themselves to making long-lasting changes to the tax code, temporary boosts are apparently under consideration again as well.

Rep. Ron Estes, R-Kan., a member of Ways and Means, said he expected a “bunch” of the reconciliation items to be time-limited by anywhere between four to eight years. And many of the items that President Donald Trump has requested, including further tax breaks for domestic manufacturers, would expire in 2029.

There are a few reasons this might be an attractive option for Republicans. For starters, an expiration may help win over skeptics who’d prefer not to add new permanent exemptions to the code, increasing its complexity. (Though it’s likely there’d be strong pressure to keep extending them anyways.) But the main reason is the cost—because reconciliation bills are estimated over a 10-year timeframe, a four-or-five year change costs less than one that would last for the full decade, or permanently.

The overall picture seems to suggest a new emphasis on stacking more tax changes into the first few years. That could be driven by hopes that the tax bill could give the economy a boost, and ward off a potential downturn during Trump’s second term. But it’s in direct opposition to Congressional Republicans’ desire to add stability and permanency into the tax code.

It also faces a tough audience among the deficit hawks who already fear that the reconciliation bill will drastically add to the national debt. Shortening a provision’s lifespan to a few years may decrease its cost on paper, but that savings is negated if Congress decides to extend the policy indefinitely. And surely, a new president in 2029 won’t want to see a large tax hike take effect in their first year in office.

This could emphasize that among Republicans, there aren’t just different policy priorities—there are different ideas about what the goal of the tax bill should be.

Tax Pieces From the Past Week:

Capitol agenda: The shrinking Trump tax cuts – Ben Leonard and Lisa Kashinsky, Politico:

It’s setting up a tough day for House Ways and Means Chair Jason Smith. The Missouri Republican is set to meet with Trump on Friday, as GOP leaders scramble to keep the tax package from unraveling. Republican lawmakers and aides have been signaling this week that some of Trump’s pledges will have to be temporary to make the budget math work. Johnson also plans to talk with Trump by phone later Friday about the megabill, including the tax piece.

Favorable Tax Cut Baseline Won't Fool Lenders, House Told – Asha Glover, Law360 Tax Authority ($):

"Adjusting baselines to achieve a different score will not change investor perceptions about whatever the policy change may be," said Schneider, who formerly served as an economist to the House Ways and Means Committee. "In this fiscal context, when it comes to the TCJA, investors would be concerned if a current policy baseline is used to argue a policy change has no cost and therefore, no fiscal restraint whatsoever is needed. In other words, it cannot be an excuse to not cut spending or not seek other deficit reduction."

Republicans Flesh Out Trump’s ‘No Tax on Overtime’ Idea—With Limits – Richard Rubin, The Wall Street Journal:

Marshall doesn’t have an official revenue estimate yet for his proposal. His limits on the no-tax-on-overtime concept would exclude some workers or cap their tax breaks. That would keep the fiscal effect far below think-tank estimates of a broader break, which ran from $680 billion to $1.3 trillion over a decade. Marshall’s limits—particularly the income thresholds that exclude top earners—reduce the potential cost by about 75%, according to the Yale Budget Lab. Lawmakers could also set the break to expire to reduce the headline cost.

Tax writers seek spending cuts to finance budget bill – Zach Cohen, Bloomberg Tax ($):

Rep. Lloyd Smucker (R-Pa.), a senior member of the Ways and Means Committee and of the Budget Committee, on Wednesday led more than 30 House Republicans urging leadership to abide by deficit reduction targets necessary by non-tax panels before allowing for the full $4.5 trillion in tax cuts included in the budget reconciliation instructions for the House.

The Future of IRA Credit Transfers: Predictions From the First Year – Marie Sapirie, Tax Notes ($)

But buyers have shown reluctance to commit to long-term purchases, which affects sellers developing projects that are not expected to be completed until 2026 or 2027 for whom an advance commitment would be helpful for financing. Moon said that some purchasers are willing to commit to production tax credits for five or 10 years, but that most are unwilling to commit today to ITCs that are expected to be generated in 2026 and beyond. “Some very large buyers are contracting for 2026, but they are few and far between,” he said, adding that these negotiations are extensive and include considerations regarding changes in law, insurance, indemnification, and potential construction delays.

Capitol Hill Recap: Tax Time Warp

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