House Republicans have redefined, at least temporarily, what they mean by a tax increase. In doing so, they have turned their back on their decades-long commitment to never, ever, under any circumstances, raise taxes. And they have opened the door, if only a crack, to a possible way to use the revenue to reduce budget deficits, or at least to offset new spending or tax cuts.
The crack in the Republican Party’s relentless opposition to tax increases came in the Limit, Save, and Grow (LSG) Deficit Reduction and Debt Limit Bill the House approved on April 26. Nearly all of the bill’s $4.8 trillion deficit reduction would come from spending cuts. But, according to the Congressional Joint Committee on Taxation, the bill would also reduce the deficit by about $515 billion over the next decade by repealing green energy tax credits that were included in last year’s Cut Inflation Act, a centerpiece of the president’s political agenda Biden.
For the House GOP this is… uncomfortable. For decades, opposition to tax increases was key to the Republican brand. More than 1,400 politicians, including the vast majority of current House Republicans, have signed the no new tax promise created by lobbyist Grover Norquist in 1986.
It’s a short, explicit commitment to oppose any increase in “marginal income tax rates” and “any net reduction or elimination of deductions and credits, unless matched dollar-for-dollar by further lowering tax rates.”
The new GOP bill eliminates the credits without compensation rate cuts.
House Ways and Means Committee Chairman Jason Smith (R-MO) tries to explain this inconsistency describing the IRA’s green energy provisions as corporate welfare [designed] “to function as direct public expenditure”. Hats are hung on provisions that allow companies to transfer credits. A second letter from President Kevin McCarthy (R-CA) confirm this interpretation.
“Corporate welfare” is not a phrase one expects to hear from a Republican chairman of the Ways and Means Committee. But Smith’s politically convenient invention of portability as a necessary feature of tax spending ignores the nature of many special interest subsidies that litter the tax code.
Hundreds of Tax Expenses
Smith is absolutely correct that many of the IRA’s green energy credits “work as out-of-pocket expenses.” But not because they can be transferred. By the standard definition, tax expenditure scores function as spending subsidies, even though they are not transferable.
The US Treasury helpfully lists the hundreds of tax expenditures now in the books. Many could easily have been structured as public spending. But they weren’t, either for administrative convenience or because in recent decades Congress has apparently been happier cutting taxes rather than increasing spending.
This has been true for refundable tax credits, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). In fact, the federal budget already counts as an expense the refundable part of these tax credits.
It is also true for a long list of other individual income tax deductions and credits. What is the mortgage interest deduction, but a direct subsidy from the government to a select group of homebuyers? Or the exclusion of employer-sponsored health insurance, which alone will reduce federal revenue by nearly $3.4 trillion over the next decade.
And companies are also on the gravy train. The tax breaks that offset corporate research costs, wildly popular with Democrats and Republicans, look suspiciously like government spending. So does the low-income housing tax credit. My TPC colleague Eric Toder and former colleague Frank Sammartino explained here the difference between tax breaks that are similar to spending and those that are actually tax-related, albeit often bad, policy choices.
Rethink tax subsidies
A dozen years ago, when we were in the midst of another of the nation’s periodic deficit-cutting frenzies, my TPC colleague Donald Marron wrote an essay called “Disguised Expenses.” Not only did he describe how tax spending works like hidden spending, but he explained how treating it that way could make it possible for Republicans to accept new revenue as part of a deficit-reduction package.
So here we are again. There is a Democrat in the White House, so the Republicans are demanding a deficit reduction. And they insist that it can only be achieved through spending cuts. For now, most Democrats will sit out of this debate at all, but once they do, they will favor a mix of spending cuts and tax increases.
Republicans could help break this logjam by adopting a more than fleeting redefinition of tax increases. They almost certainly won’t, of course. His brief conversion feels more like a one-off aimed at canceling a Biden legislative success. But thoughtful and systematic tax spending cuts could clean up the revenue code and help reduce federal deficits.