Tax deal likely much more expensive than official estimate, experts warn

The tax deal, which includes expanded business deductions and child tax credits, could be voted on by the House of Representatives as early as this week.

But the deal’s $78 billion figure is covered by the cancellation of another business tax credit, making it difficult to see the bill’s true cost amounting to hundreds of billions of dollars.

The break with the deal, which allows companies to reduce taxes now and increase them in the future, is likely to be extended before the tax code is reset at the end of 2025. This means that future revenues owed to the government and currently priced in revenues will be reduced. Estimates may never be available, and the long-term deficit could increase as a result of the deal.

If just two of the deal’s key business loans, which allow for early amortization of capital investments and research and development costs, are extended, the deficit could rise by more than $400 billion, or more than five times the top line. be. Invoice costs.

“Extending the bonus depreciation expansion and retroactively allowing the continuation of immediate deductions for research and development expenses would increase the deficit by $404 billion (excluding debt service costs) from 2023 to 2032.” Congressional Budget Office (CBO) cited the Joint Committee on Taxation (JCT) in its 2022 analysis of these credits.

These estimates do not include the long-term costs of other major business interruptions, which would qualify for enhanced interest payment deductions, or the cost of paying additional debt with interest accruing over time.

CBO noted that the cost of servicing the debt would exceed $70 billion for the first two credits alone, about the same amount as the top-line credit itself.

Republicans want to extend corporate lending beyond 2025, when many of the huge tax breaks passed as part of the 2017 Tax Cuts and Jobs Act (TCJA) expire.

House Ways and Means Committee Chairman Jason Smith (R-Missouri) has already touted a tax plan with these extensions in mind, a key priority for many lawmakers, especially Republicans who favor the TCJA. It is.

“This bill locks in more than $600 billion in proven, pro-growth, pro-American tax policies with important provisions that will support more than 21 million jobs,” Smith said this month. This is stated using long-term calculations.

Budget experts say this number is consistent with the estimated tax cut extension.

“The $600 billion figure…is consistent with previous estimates of the 10-year cost if these provisions were made permanent,” Joe Hughes, a policy analyst at the Institute on Taxation and Economic Policy, told The told Hill.

“Two of the business provisions relate to the timing of tax payments, so if the extension is only temporary, the revenue score will be lower by assuming that the government will cover some of the next year’s revenue loss. would underestimate the actual costs. Of course, the proponents of these provisions never intended for these provisions to truly lapse,” he said.

Adam Michel, director of tax research at the libertarian-leaning Cato Institute, described the JCT’s official revenue scoring of the bill as “a little choose-your-own-adventure.”

“Most of the bill’s changes expire in 2025, so Junction’s estimates make it highly unlikely that Congress will make these provisions permanent within a year or two or temporarily extend them again,” he said. “It doesn’t take into account likely scenarios.”

Considering the package as a whole, business deductions and CTCs would cost $1.4 trillion over 10 years, with $600 billion in business interruption and $800 billion in CTC expansion, Michel said. said. The bill’s revenue booster, the $77 billion repeal of the Employee Retention Tax Credit (ERC), is a one-time savings that far outweighs the credit extension.

Other think tanks and budget advocacy groups have also commented on how much higher the real cost of the tax plan proposed by Smith and Senate Finance Chairman Ron Wyden (R-Ore.) is than the list price.

The Committee for a Responsible Federal Budget estimates that the Wyden-Smith plan would cost $650 billion over the next 10 years “if arbitrary sunsetting is abandoned and the policy is made permanent without further offsets.” .

Cato’s Michel warned that the static revenue losses caused by the plan’s business tax cuts would decline once companies started paying taxes on profits made from incentivized investments, adding that losses would be “50% He argued that there is a possibility that it may be overestimated.

But even at a 50% estimate, the roughly $300 billion in business interruptions over the next 10 years is nearly four times the $77 billion raised by this bill.

The prospect of a significant increase in the budget deficit under the bipartisan bill comes after several government shutdowns and fears of default amid debt disputes.

Republicans decried deficit spending, while Democrats approved caps on spending in the name of deficit reduction.

“In fiscal year 2023, the federal government ran a $1.7 trillion deficit, an increase of $320 billion from the previous fiscal year, the largest deficit ever recorded outside of the years of the COVID-19 pandemic. “We have an annual budget shortfall that is essentially double last year’s budget deficit,” said Republican Sens. Daines (Montana), Mike Crapo (Idaho), and James Lankford (Oklahoma). ) contributed. A December letter to CBO Director Philip Swagel warned about incurring interest costs while interest rates remain above 5%.

Recent polls show that ordinary Americans are increasingly concerned about the level of the deficit.

According to the survey, the percentage of people who say that reducing the budget deficit in 2023 “should be a top priority for the president and Congress” has increased by 12 points from 2022. Pew Research Center It was published in May last year.

Both Republicans and Democrats were more likely to say it should be a top priority last May than in 2022. But “Republicans are still much more likely than Democrats to make this a priority (71 percent vs. 44 percent),” Pew reported.