Avoid budgetary wrecking ball by making key changes to tax bill

Attention has been so focused on the tax bill that many upcoming deadlines have gone mostly unnoticed. One issue that is being treated pretty much as a fait accompli, is the waiver of the pay-go sequester that would have to be passed shortly after a tax bill passes.

The statutory pay-go sequester (as opposed to the Budget Control Act sequester that enforces the discretionary spending limits) requires across the board cuts in non-exempt mandatory spending programs to offset any deficit-increasing legislation that was passed in a given year. 

{mosads}Cuts apply to Medicare, agriculture subsidies, student loans, the Social Services Block Grant, parts of border security and mandatory spending in the Affordable Care Act other than exchange subsidies and Medicaid expansion. So with this tax cut would come a doozy of a sequester.

The tax cut under consideration will add roughly $1.5 trillion to the debt over 10 years; cuts will equal between a $100-$150 billion a year. Most affected programs other than Medicare, would be wiped out.

It has been assumed that the sequester would not be allowed to hit and Democrats would join Republicans to provide the needed votes to waive it. House Speaker Paul Ryan (R-Wis.) and Senate Majority Leader Mitch McConnell (R-Ky.) went so far as to issue a statement confidently claiming concerns about the large cuts were misplaced because the enforcement mechanism could be waived as it always has been. 

But why should this be taken as a given? There is an opportunity to make the tax bill less costly while keeping the sequester from hitting.

Costing a trillion dollars even after accounting for economic growth, the tax bill will add significantly to the national debt. Even before the tax cut, our fiscal trajectory was on an unsustainable path. The sequester and the other “fiscal speed bumps” should not serve as a free pass to keep on spending, but as an action-forcing moment for Congress to put some desperately needed savings in place.

Fiscal conservatives on the right have lost a massive amount of credibility based on the GOP budget they passed this year. After many years of calling for a budget that cut spending, reformed entitlements, controlled the debt and balanced the budget, they failed to enact even one of those goals when they finally had a chance.

Collins: Republican Leaders Expected to Back ‘Pay-go’ Waiver https://t.co/QXidZwA4La (Roll Call)

— U.S. Senate News (@SenateNews) November 30, 2017

Out of a possible $47 trillion in spending over 10 years, the budget called for cutting an utterly pathetic $1 billion. Their fiscal credibility died with a whimper. I doubt that credibility can be regained, but it seems quite likely that some of the more conservative GOP members will call for letting the sequester hit.

As someone who believes spending cuts are in order and overdue, I would argue that wouldn’t be sensible at all — this would not be trimming the budget with a scalpel, a hammer or even a sledgehammer, but with a wrecking ball.

But there is a sensible alternative. Democrats should not enable this fiscal mess by waiving the sequester without asking anything in return; nor should they ask to tack on a mound of unpaid spending, though the temptation will undoubtedly be strong.

Instead, Democrats should insist on changes to the tax bill to mitigate its costs. 

One option is to include a tax trigger, which would ensure that the tax bill’s revenue targets are met. If revenues fall below what they were estimated to be after growth, part of the tax cuts would be phased out to avoid a massive debt increase.

Critics of the trigger idea argued it could lead to tax increases during an economic downturn, but it’s quite reasonable to craft a trigger that includes an escape valve for recessions. In fact, it’s an idea that should appeal to both those who believe higher revenues will flow in, and those who are concerned they won’t.

Another option would be to prevent the sequester for a year (or longer) by scaling back the tax cut through a number of options. Lawmakers could increase the corporate tax rate by 1 percent or more, reduce the tax breaks for high earners or eliminate some of the proposed tax cuts such as the estate tax reduction.

They could also add in other pay-fors they have wanted, such as the tax break for carried interest.

This tax bill is damaging not just because it is such a lost opportunity for really thoughtful revenue-neutral tax reform that would grow the economy or because it adds to the debt, but because it’s likely to open the floodgates for unpaid policies.

This sequester is not the answer, but it is a leverage point that should not be missed. While it is not Democrats’ responsibility to clean up this fiscal mess, they do have an important opportunity to improve the tax bill. 

Maya MacGuineas is president of the fiscally conservative Committee for a Responsible Federal Budget.