House Republicans Rethink Tax Increases, At Least For A Minute
House Republicans have, at least temporarily, redefined what they mean by a tax increase. By doing so, they have turned their backs on their decades-old pledge to never, ever, not under any circumstances, raise taxes. And they have opened the door, if only a crack, to a possible way to use revenues to reduce budget deficits, or at least to offset new spending or tax cuts.
The crack in the GOP’s implacable opposition to tax hikes came in the Limit, Save, and Grow (LSG) deficit reduction and debt limit bill the House passed on April 26. Nearly all of the bill’s $4.8 trillion in deficit reduction would come from spending cuts. But, according to the congressional Joint Committee on Taxation, the bill also would reduce the deficit by about $515 billion over the next decade by repealing the green energy tax credits that were included in last year’s Inflation Reduction Act, a centerpiece of President Biden’s policy agenda.
The Pledge
For the House GOP this is…awkward. For decades, opposition to tax hikes was key to the GOP brand. More than 1,400 politicians, including the vast majority of current House Republicans, have signed the no new tax pledge created by lobbyist Grover Norquist in 1986.
It is a short and explicit commitment to oppose any increases in “marginal income tax rates” and “any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”
The new GOP bill eliminates credits with no offsetting rate cuts.
House Ways and Means Committee Chair Jason Smith (R-MO) tries to explain this inconsistency by describing the IRA’s green energy provisions as corporate welfare [designed] “to function like direct government spending.” He hangs his hat on provisions that allow firms to transfer credits. A second letter from Speaker Kevin McCarthy (R-CA) confirms this interpretation.
“Corporate welfare” is not a phrase one expects to hear from a Republican chair of the Ways and Means Committee. But Smith’s politically convenient invention of transferability as a necessary characteristic of tax expenditures ignores the nature of many special-interest subsidies that litter the tax code.
Hundreds of Tax Expenditures
Smith is absolutely right that many of the IRA’s green energy credits are do indeed “function like direct spending.” But not because they can be transferred. By the standard definition, scores of tax expenditures function like spending subsidies, even though they are not transferable.
The US Treasury helpfully lists the hundreds of tax expenditures now on the books. Many easily could have been structured as government spending. But they weren’t, either for administrative convenience or because in recent decades Congress has been happier appearing to cut taxes rather than boost spending.
This has been true for refundable tax credits such as the earned income tax credit (EITC) and the child tax credit (CTC). Indeed, the federal budget already counts the refundable portion of these tax credits as spending.
It also is true for a long list of other individual income tax deductions and credits. What is the mortgage interest deduction, if not a direct government subsidy to a select group of home buyers? Or the exclusion for employer-sponsored health insurance, which by itself will reduce federal revenue by nearly $3.4 trillion over the next decade.
And businesses are on the gravy train too. Tax breaks that offset corporate research costs, widely popular among 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 spending-like and those that are truly tax-related policy choices, though often poor ones.
Rethinking Tax Subsidies
A dozen years ago, when we were in the midst of another of the nation’s periodic deficit reduction frenzies, my TPC colleague Donald Marron wrote an essay called “Spending in Disguise.” He not only described how tax expenditures function as hidden spending but explained how treating them that way could make it possible for Republicans to accept new revenues as part of a deficit-reduction package.
So here we are again. There is a Democrat in the White House so Republicans demand deficit reduction. And they insist it can be achieved only through spending cuts. For now, most Democrats won’t engage at all in this debate but once they do they’ll favor some 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. Their brief conversion feels more like a one-off aimed at canceling a Biden legislative success. But cutting tax expenditures in a thoughtful and systematic way could both clean up the revenue code and help reduce federal deficits.
