Notice & Comment

Why the End of This Year Is the Worst Possible Time to Pass Tax Reform

Republicans hope to pass tax reform before Christmas so that they can go back to their constituents over the Winter Holidays and talk about their accomplishments.  However, because of the Pay-As-You-Go Act (PAYGO), passing tax reform at the end of the year would be the worst possible time to pass tax reform as it would lead to an immediate sequestration.

PAYGO generally requires that legislation cannot increase the deficit within a five-year or ten-year window.  About three weeks after Congress ends its 2017 session, the Office of Management and Budget (OMB) has to create a 2017 PAYGO scorecard that aggregates the total budgetary impact of all legislation enacted during the 2017 session of Congress.  If the aggregate cost of non-emergency legislation would increase the deficit in either window, an offsetting automatic sequestration would kick in, requiring up to a $103 billion sequestration per year. Specifically, Medicare could be cut by up to $26 billion and $77 billion in other programs could be eliminated.  For more details, see Alan Cohen’s excellent table detailing the potential cuts and for a complete list of the cuts, see here.

To determine if legislation would increase the deficit, OMB must first identify if the Senate or House Budget Committee included a cost estimate for the legislation.  By convention, the Budget Committees adopt the Congressional Budget Office (CBO) and/or Joint Committee on Taxation (JCT) estimate.  If Congress does not publish an estimate, OMB must estimate the cost of the legislation.  OMB then averages any costs over the five-year and ten-year window.  Further, OMB must carry over any savings or costs from previous years to determine whether sequestration is required.

For 2018, the current five-year window has a $3.3 billion dollar reduction in the deficit and the current ten-year window has a $14.1 billion reduction in the deficit.  Assuming Congress passed the most recent Senate proposal that CBO/JCT estimated, there would be a $691 billion increase in the deficit over the five-year window and $1 trillion increase in the deficit over the ten-year window.  Averaging out those numbers would lead to a $135 billion increase in the 2018 deficit for the five-year window and an $89 billion increase in the deficit for the ten-year window.  Thus, if Republicans passed tax reform, they would likely cause the maximum mandatory sequestration under PAYGO.

However, PAYGO’s requirements are not set in stone.  Because PAYGO is a law, Congress could always avoid a mandatory sequestration by changing PAYGO.  To change PAYGO, Republicans would need Democratic support because the change cannot be included in sequestration legislation (for which the Senate does not need a filibuster-proof majority).  The Byrd Rule prevents Congress from including in reconciliation legislation provisions that do not impact revenue or outlays.  Under budgetary rules, PAYGO does not change revenue or outlays.  Therefore, Congress cannot use the reconciliation process to change PAYGO and would need Democratic support to avoid a mandatory sequestration.

Even assuming Democrats would be willing to compromise to pass a law that eliminated the mandatory sequestration, the Christmas timeline for passing tax reform would limit negotiation.  Congress would need to negotiate a compromise within three weeks of the 2017 session of Congress ending. Congress already has a busy December and by the time it gets around to passing tax reform, the 2017 session might be over.  Congress would then have to negotiate during the Winter Holidays (when it would be on recess) and the first week(s) of January.  That is likely too short time a time period to negotiate a compromise, especially with the vote on tax reform fresh in Democrats’ memory.  Additionally, with the 2017 session of Congress immediately ending, Democrats might be tempted to let the sequestration take place and blame the spending cuts on tax reform.  Tax reform would be much more unpopular if the immediate impact of tax reform is sequestration.

As a result, there is little reason for Congress to not wait a few weeks to pass tax reform.  By waiting until the beginning of 2018 to pass tax reform, Republicans could buy much more time to negotiate.  The PAYGO scorecard including tax reform would then not take place until the end of the 2018 session of Congress (likely December 2018).  Republicans could use the extended time between passing tax reform and the sequestration to (1) negotiate with Democrats on eliminating the sequestration or (2) pass offsetting deficit reductions such as repealing the Affordable Care Act.  Additionally, waiting for the 2018 PAYGO scorecard would push any sequestration past the 2018 election, limiting the political impact of the sequestration and making it harder for Democrats to explain to the public the link between tax reform and sequestration.

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