As we fast approach the new year, the looming expiration of the Tax Cuts and Jobs Act (TCJA) provisions threatens to raise taxes for millions of Americans. Among the issues being debated by lawmakers, one seemingly minor matter could have significant implications for the tax debate, and that is how the budgetary impact of extending tax cuts is measured.
Let’s delve into the intricacies of this issue and break it down into key points:
- Baseline Measurements: When Congress passes tax or spending legislation, it is measured against a baseline projection by entities like the Congressional Budget Office (CBO) and the Joint Committee on Tax (JCT). While spending is usually gauged against current policy baselines, tax legislation is measured based on current law.
- Budgetary Impact: Permanently extending the TCJA beyond 2025 is estimated to reduce revenue by $4.2 trillion over 10 years. Allowing the TCJA to expire would result in a significant, immediate tax increase for a majority of taxpayers.
- Underlying Assumptions: While most taxpayers may not be aware of the impending tax changes in 2026, their current policy baselines could be significantly impacted if lawmakers extend the TCJA provisions as is.
- Deficits and Debt: Evaluating tax legislation based on current policy baselines could inflate deficits without effectively addressing fiscal discipline. The trajectory of revenues, deficits, and debt would remain unchanged under such an extension.
- Growth Impacts: Extending the TCJA under a current policy baseline may not provide the growth benefits that lawmakers hope for, as it merely avoids tax increases rather than promoting economic growth.
In conclusion, using the current policy baseline to extend the TCJA provisions may have unintended consequences for future deficits, growth projections, and procedural hurdles. Lawmakers must carefully consider the implications of their decisions and focus on policies that truly reduce deficits and promote sustainable economic growth. Merely adjusting baselines will not suffice; substantial reforms are needed to achieve deficit reduction and ensure fiscal responsibility in the years to come.
