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Biden budget’s omission of tax cut renewals leaves deficit hole

The administration’s budget math rests on a key assumption: that Republicans’ 2017 tax cuts will be allowed to expire on schedule after 2025

President Joe Biden notes that this year’s deficit is on track to be $1.3 trillion lower than last year’s, but Republicans dismiss that boast.
President Joe Biden notes that this year’s deficit is on track to be $1.3 trillion lower than last year’s, but Republicans dismiss that boast. (Tom Williams/CQ Roll Call)

President Joe Biden made deficit reduction a top priority in his election year budget request, promising $1 trillion in savings over the next decade.

That pivot comes after Biden’s first year in office saw a pricey pandemic relief package shower U.S. households with cash, stimulating consumer demand and ultimately helping to stoke the inflation Democrats are now trying to tamp down ahead of the midterms.

“The deficit went up every year under my predecessor,” Biden said upon introducing his budget on March 28. “My administration is turning that around.”

But the administration’s budget math rests on a key assumption: that Republicans’ 2017 tax cuts will be allowed to expire on schedule after 2025. The problem for Democrats is that most of those tax cuts would have to be extended to honor Biden’s pledge not to raise taxes on anyone making less than $400,000 a year.

Estimates vary, and they will depend on potential offsets and how the various provisions affect each other’s cost if extended together. But it would likely take somewhere between $1 trillion and $2 trillion to ensure a basic extension of the GOP tax cuts shielding middle- and lower-income households from higher taxes, based on a CQ Roll Call analysis of Congressional Budget Office and Joint Committee on Taxation data.

That’s in line with estimates from groups like the Committee for a Responsible Federal Budget, which found that filling a similar hole in last year’s Biden budget could cost around $1.4 trillion, including added interest payments on the debt. With the addition of another year in the budget window beyond the tax provisions’ 2025 expiration, CRFB analysts say that figure could grow to $1.7 trillion.

Child tax credit, ‘SALT’

That figure would come down somewhat if more generous estate tax parameters aren’t extended and deductions for owners of “pass-through” businesses like partnerships and S corporations are limited for those making above $400,000. But it doesn’t factor in renewing the expanded child tax credit that was a signature policy in last year’s COVID-19 aid package; extending that permanently would cost another $1 trillion over a decade, although scaled-back versions have been discussed.

Meanwhile, permanently extending a big cost-saver in the 2017 law — a $10,000 cap on state and local tax, or “SALT,” deductions — seems unlikely given that most Democrats oppose it. Lifting that cap to $80,000 as in the House-passed “Build Back Better” budget reconciliation bill, for instance, would cost more than $50 billion a year, the JCT estimated. 

Extending other popular provisions, like full and immediate expensing of business equipment purchases and research and development costs — the latter has already lapsed — would add to the price tag. All together, it’s easy to see how a plausible package to extend the bulk of the expiring 2017 tax cuts could push north of $2 trillion, including debt service.

The administration’s budget baseline assumes most Build Back Better policies would be enacted. But that bill would extend the larger child credit only through 2022 while keeping in place full R&D expensing through 2025. And it would make permanent the 2017 law’s limits on pass-through business loss deductions, using up a roughly $200 billion offset if enacted this year, without touching the other major tax cuts coming up for renewal in a few years.

Republicans already have begun accusing Biden of violating his pledge not to raise taxes for most Americans by proposing a budget that would let the GOP tax cuts expire.

“That is going to raise taxes on every average … American by $2,000 a year, and those are people making less than $100,000 a year,” Missouri Rep. Jason Smith, the top Republican on the House Budget Committee, said at a Tuesday hearing on Biden’s request.

White House budget director Shalanda D. Young, who testified at the hearing, acknowledged the budget assumes the 2017 tax cuts would expire but offered no comment on that assumption.

An administration official, speaking on condition of anonymity, said in an email that Biden “has committed and continues to commit that individuals making under $400,000 a year will not have to pay a single dollar more in taxes — and that remains true under the President’s Budget.”

The official pointed out the tax cuts don’t expire until 2025 and said Biden “looks forward to using that time to work with Congress to continue reforming our tax code so that it asks the wealthy to pay their fair share, raises the right amount of revenue, and protects low and middle-income families.”

Broad-based benefits

The sweeping 2017 tax law cut taxes on average for all U.S. households, not just those at the top. 

The law lowered most individual income tax rates and roughly doubled the standard deduction. It increased the child tax credit from $1,000 to $2,000 per child and increased the income thresholds to widen eligibility.

It also removed millions of middle-class households from the reach of the alternative minimum tax, which was enacted in 1969 to keep the wealthy from avoiding tax but not indexed for inflation. It created a 20 percent deduction for business owners who file their tax returns as individuals, which has proved popular despite its complexity.

At the time the law passed, the JCT found that during the years most of its provisions were in effect, around half of the total benefits would flow to households earning less than $200,000.

But to fit the provisions into the fiscal box created by budget reconciliation rules, Republicans had to ensure the total package didn’t cost more than $1.5 trillion over a decade. So they set many of the priciest provisions to expire after 2025 to save money.

The expiration of the tax cuts in less than four years sets up a potential clash within Congress that some are likening to the “fiscal cliff” at the end of 2012, when then-President Barack Obama, a Democratic-controlled Senate and GOP-controlled House faced off against each other over a series of expiring tax cuts enacted when George W. Bush was president.

“Politically, I think it’s going to be similar where lawmakers are going to want to try to negotiate some sort of deal that prevents some sort of cliff that is going to have political ramifications for them,” said Kyle Pomerleau, a senior fellow at the right-leaning American Enterprise Institute. “Now what that negotiation looks like will depend on who’s the president, who’s in Congress.”

The Biden budget’s $1 trillion deficit reduction figure is likely to grow to some degree once an updated baseline that incorporates higher spending in the fiscal 2022 omnibus appropriations law is factored in. But whatever the final number ends up being, it would likely be erased, and then some, if the Biden budget accounted for extending the 2017 tax cuts.

Pomerleau said he doesn’t fault the Biden budget for assuming the tax cuts expire, since that’s what will happen under current law unless Congress makes a change. But he agrees that if the tax cuts were extended, “it would wipe out the deficit savings that [Biden] is projecting.”

Even if his budget projections prove faulty, Biden claimed he has already proven himself a deficit hawk. This year’s deficit, he noted, is on track to be $1.3 trillion lower than last year’s. “That would be the largest one-year reduction in the deficit in U.S. history,” he said.

Republicans dismissed that boast, noting that the reduction is largely the result of emergency pandemic spending coming to an end. Democrats approved $1.9 trillion in pandemic aid last year without a single Republican vote.

As a consequence, Sen. Charles E. Grassley, R-Iowa, said at a Budget Committee hearing last week that the claimed deficit reduction “is comparable to an arsonist taking credit for containing a fire by refraining from dousing it with more gasoline.”  

Peter Cohn contributed to this report.

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