GOP Fiscal Future out of Focus (Oct. 23)

When the Senate passed an FY 18 Budget Resolution, 51-49, it cleared the way for $1.5 trillion in deficit-financed tax cuts. Attention now turns back to the House, which will consider the Senate Resolution on Thursday. President Trump urged House Republicans to support the Senate framework on a passionate conference call this weekend.

Will the House pass the Senate Budget Resolution as is? What lies ahead in the GOP tax campaign? With such a significant debt increase proposed and few viable revenue raising proposals to pay for it under discussion, the question arises — what is the fiscal future the GOP has in mind for the nation?

Best,

Dana

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It is harder than usual to evaluate the relative viability of proposed provisions without a fiscal framework in place to provide context, but let’s take a look.

Senate Budget Resolution

Last week, the Senate concluded a grueling vote-a-rama by narrowly passing an FY 18 Resolution on top line spending with reconciliation instructions. GOP lawmakers are using the budget Resolution process send reconciliation instructions on tax immune from filibuster.  So all legislation pursuant to the instructions need only 50 GOP votes if they don’t cost more than:

•  a $1.5 trillion over the next decade, and
•  $8 trillion in spending cuts over that same period ($4.1 trillion of which may come from mandatory spending programs).

Differences with the House

The Senate Resolution differs markedly from the Resolution the House passed in early October, calling for $5.8 trillion in aggregate spending cuts, $4.4 trillion in mandatory spending, mostly from welfare, anti-poverty, and agriculture programs that are considered non-starters for Senate Republicans. The Senate Resolution also keeps defense spending at current levels, whereas both the House and the Administration proposals call for increasing military expenditure.

House Republicans agreed last night to forgo a conference committee and take the Senate budget to the floor. Floor debate could begin as early as Wednesday with a final vote coming on Thursday. Early indications are favorable.

Not Your Father’s Penny-Pinching GOP

The Senate Resolution’s instructions apparently fly in the GOP’s traditional fiscal face. The GOP’s feckless effort over the last nine months to find revenue sources that can pass Congressional muster has collapsed in the rush to provide tax rebates, essentially. Do Republicans actually care about deficits anymore?  Example of revenue proposals floated this year that have gone or will go nowhere:

•  Border Adjustment Tax (BAT) —  The first eight months of the year, House Ways and Means Chair Kevin Brady promoted the border adjustment tax, claiming it would raise about $1.2 trillion in revenue over a decade. The BAT has similarities to a “value-added tax” that many other nations with comparable corporate income tax rates use in order to raise revenue. At the end of the summer, the White House and Senate Republican leaders rejected and threw out the BAT.

•  State and Local Tax (SALT) Deduction —  Since the spring, the White House pushed for repealing the SALT deduction, which would raise over $1.3 trillion in revenue over a ten year period. This would unfairly hurt taxpayers who live in higher-tax states like New York, New Jersey, and California. After six Republicans from blue states signed on to a letter urging the preservation of the SALT deduction, discussions now shift toward applying the elimination to taxpayers with incomes above $200,000. A cap on this and many dozens of other deductions — corporate deductions are plentiful and not headed for the political graveyard like SALT and BAT.

•  Rothification — The latest idea to raise revenue would tax 401(k) savings more. The policy would reduce the maximum pre-tax contribution to a 401(k) savings account from a standard amount of $18,000 for the average person and $24,000 for those over 50 years old, to $2,400 across the board. The policy would incentivize a large-scale shift to Roth accounts, which are taxed up front. The Joint Committee on Taxation estimates that the USG would generate $115 billion in additional revenue, less than one-tenth of the $1.5 trillion deficit the Senate Resolution calls for.

President Trump confused the Rothification debate this morning by announcing that there will be no changes to 401(k)s. The idea was likely doomed from the start. Money managers wasted little time lining up to lobby in opposition to a policy that punishes savings.

A Surplus… Seriously?

Without a consistent approach to making up for losses revenue, Republicans have to rest on a lie: that tax cuts pay for themselves. They pay lip service to revenue raisers, first with Ryan’s BAT and today suggestion of a $1+ million fourth income bracket, but their proposals have been nothing more than trial balloons full of holes and hot air.  But the absurdly inflated claims made repeatedly by Secretary Mnuchin and others that the planned tax cuts will produce a surplus. Yes, a surplus. That nonsense is now being repeated on the Senate floor (Sen. Graham used the “S” word there last week in approving the plan).

The reason Republicans are so willing to explode the deficit lies in their guiding purpose for being in politics: tax cuts. The critical Freedom Caucus votes to pass the budget resolution will come at a cost. Mark Meadows has demanded that the House vote on a final tax bill in the second week of November. This deadline is ambitious but impossible in reality, especially given the opacity of deficit and revenue-raising priorities.

This Week

Paul Ryan is signaling that the House will take up and pass the Senate budget proposal this Thursday. The question is now whether the GOP budget and tax plans can come together. Thursday night, following the Senate passing its Budget Resolution, the market saw steep sell-offs of Treasury bonds.