Is Trump’s Tax-Cut Tactic Based on an Error?

A lot of people, not just the president, seem to have misunderstood the budget rules.
Olivier Douliery/Pool via Bloomberg

Undeterred by his last failure, President Donald Trump is pressing again to repeal and replace the Affordable Care Act. One big reason is that he believes getting rid of Obamacare would make it easier to finance the big tax cuts he's promised.  “We will save perhaps $900 billion," Trump told Fox Business in an interview that aired Wednesday. "That's all going back into the taxes."

But the nonpartisan Committee for a Responsible Budget, which opposes big budget deficits, believes Trump's legislative strategy is based on a misconception. The last version of the American Health Care Act created only about $150 billion in real savings over 10 years, not $900 billion, according to the group. What's more, the law requires that any savings must go toward deficit reduction, not tax cuts.

Trump is far from the only person who has said that repealing Obamacare would make it easier to pass bigger tax cuts. It's a common theme in congressional circles as well as in news stories and commentary. But that doesn't mean it's correct.

"This is something that got said, and then it was just repeated," says Marc Goldwein, senior policy director and senior vice president at the Committee for a Responsible Federal Budget (CRFB). The confusion is over budgetary baselines—the starting points for considering changes in taxes and spending. "Baselines are legitimately one of the most confusing things we do in budgeting, and most people don’t understand them," Goldwein says.

The $900 billion in savings that Trump asserted in the Fox Business interview is way off. It appears to count spending cuts without considering that repeal of Obamacare would also reduce revenue by eliminating various taxes and fees. If the Affordable Care Act were replaced with the American Health Care Act, spending would fall by $1.15 trillion over a decade while cutting revenue by $1 trillion—a net first-decade savings of $150 billion, according to the last official score by the arbiter of such matters, the Congressional Budget Office.

Even that $150 billion cannot be applied toward tax cuts. Under the "pay-go" rules that Congress has imposed on itself, Goldwein says savings from this piece of legislation can't be banked to pay for another piece of legislation. 

Commentators and politicians have said that replacing Obamacare would have lowered the revenue baseline in the budget, but that's irrelevant. "The cost of a tax plan is the change in revenue from the baseline—no matter what that baseline is," the CRFB said in late March in a blog post that laid out the budget math. In other words, any tax cut that Trump seeks will be evaluated on its own, based on how much it reduces revenue, without regard to whatever other changes have already been made in the budget.

The political reality is that Congress can break its own rules. So if Trump does manage to get through a  health-care law that cuts the deficit, Congress could decide to cut taxes by an equal (or greater) amount. But that would be outside the formal procedures, says Goldwein, and in any case would have nothing to do with the much-discussed reduction in the revenue baseline.

If the Republican-controlled Congress wants to pass big tax cuts in the coming fiscal year, the easiest way to do it while complying with most of its own rules is to set a very low target for how much revenue it expects to receive. Lower targets are, of course, easier to hit. The revenue target is set in the annual budget resolution. Obamacare, which is still on the books, includes several taxes that haven't gone into effect yet. Congress could declare that those taxes are on "permanent hiatus," says the CRFB, and that would allow Congress to cut taxes by $260 billion over the next decade while still claiming to be revenue-neutral. The declared savings are fungible: Congress could either really kill the Obamacare taxes, or let them take effect and cut some other taxes.

The CRFB is not in favor of such a move. "Full disclosure," the group wrote last month. "We hate even writing this because we think the use of the gimmick would be terrible fiscal and economic policy."

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