Good morning. Today you'll hear from our tax policy reporter, Andrew Duehren, about the tricky math of Republican tax cuts. We're also covering a war briefing, Heathrow Airport and the Houston Rodeo.
Picking tax cuts
Republicans have a math problem. There's a long list of taxes they want to cut. But they can't cut them all, because House Republicans have set a $4.5 trillion limit on the amount of money the federal budget can lose over the next 10 years to tax cuts. Even such a huge figure is not enough to encompass all of Republicans' ambitions, which include ending taxes on tips, trimming corporate payments and extending other treasured tax breaks. So members of Congress are negotiating over what they can actually squeeze into their bill — and what they'll have to leave out. In today's newsletter, I'll walk through the Republican wish list. I'll also explain how Senate Republicans want to use what is essentially a budgetary cheat code to make the math problem much easier. The old tax cutsMuch of the $4.5 trillion plan will be eaten up just by keeping the last round of tax cuts in place. In 2017, during President Trump's first term, Republicans passed a bill that lowered taxes for individuals and corporations. Then, too, they were trying to cram their ambitions below a ceiling. So they scheduled many of the cuts, including a larger standard deduction and an expanded child tax credit, to expire at the end of 2025. They were betting that Congress would not let taxes go up on many Americans. They were right. But keeping taxes where they are now will cost roughly $4 trillion over 10 years. And a few business tax breaks are already phasing out. Restoring those would cost an additional $200 billion. That would leave just $300 billion for other ideas. There's another problem: Republicans said their target was contingent on $2 trillion in spending cuts. If they slash less than that, the tax cut will have to shrink, too. Suddenly, the House plan does not seem so sweeping. The new tax cuts
But Trump wants to do more than just extend the tax cuts from his first term. During the presidential campaign, he outlined several new ideas, many of which call for exempting different types of income from taxation. These will be expensive. The Committee for a Responsible Federal Budget, a nonpartisan group, has estimated their costs over 10 years:
Including all of these ideas in the bill would exceed the G.O.P. limit by hundreds of billions of dollars. So House Republicans are looking to raise other taxes — by ending subsidies for electric vehicles, for example — to compensate. They almost certainly can't balance the scales, but they have a few options. They could abandon some of Trump's pledges, continue the 2017 tax cuts for less than 10 years or do some combination of the two. Lawmakers are crunching the numbers to figure out what they can stomach. The Senate solutionRepublicans in the Senate believe they have an easy answer to this conundrum. They want to change the way tax cuts are counted. According to their proposal, keeping the old Trump tax cuts in place would cost nothing. How is that possible? Right now, scorekeepers in Washington evaluate future costs based on what the law says. Because much of the 2017 tax law ends this year, extending it would count as a new tax cut — and tax cuts cost money. Republicans in the Senate see it differently. They argue that the cost of legislation should be compared to the price of policies that are in place right now. The old Trump tax cuts are currently in effect, they say, so maintaining the status quo should appear to cost $0, not $4 trillion. (My colleagues collected some of the most colorful comparisons for this maneuver. One budget expert said, "It's like taking an expensive weeklong vacation and then assuming you can spend an extra $1,000 per day forever since you are no longer staying at the Plaza.") Adopting this standard would make it a lot easier to craft a tax bill that, on paper, costs less than $4.5 trillion. Then only new measures, like not taxing tips, would add to the cost. But some Republicans in Congress warn that changing the score-keeping rules could destroy the last shreds of fiscal discipline in Washington, potentially expanding a deficit that most economists already believe is too large. The bottom lineIt's unclear if Republicans will solve their arithmetic problem. Reaching a consensus could take months. With the tax cuts expiring at the end of the year, they face an unforgiving deadline. Failure would mean that Republicans would either oversee a tax increase on many Americans or turn to Democrats for a bipartisan fix. Republicans are hoping to avoid both of those outcomes. For more: Read how the tax cuts could affect your finances.
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