As House GOP leaders worked to build support for the debt ceiling increase measure they ultimately passed by a razor-thin margin last week, speculation grew that it might violate a long-standing pledge not to raise taxes.
Grover Norquist is president and founder of Americans for Tax Reform and author of the “Taxpayer Protection Pledge” that has been a fixture of GOP tax policymaking for decades.
In an interview, Norquist explained why his group determined the debt limit legislation would not raise taxes — even though official scorekeepers said it would — which helped Speaker Kevin McCarthy salvage the narrowest of victories.
By signing the pledge, which ATR first introduced in 1986, lawmakers promise they will oppose efforts to raise marginal tax rates for individuals or businesses and oppose any “net” reduction of deductions and credits unless matched dollar for dollar by reducing tax rates.
Members of the House Freedom Caucus successfully pushed for the debt limit bill to repeal more than a half-trillion dollars in “green” energy tax credits that Democrats included in their budget reconciliation law last year.
In analyzing the resulting legislation, the Joint Committee on Taxation estimated that repealing the credits would, even after factoring in other provisions that would reduce revenue, still cause the overall bill to increase revenue by $317 billion over 11 years.
The official score imperiled Republican support for the bill since so many GOP lawmakers have signed the pledge — 189 in the House and 42 in the Senate in the current Congress, according to ATR.
But Norquist relied largely on an informal analysis of the bill by GOP leaders who said they believed it would reduce taxes. He said the tax impact of the debt limit bill is murkier than is usually the case because the estimated cost of the energy tax credits has been rising, and some of the credits are refundable or transferable.
The government pays out refundable tax credits even when a taxpayer does not have tax liability, and these are scored as spending outlays rather than a decrease in revenue. Likewise, Norquist said he does not consider a transferable tax credit, where the recipient who may not be able to use it can sell it to others who can, to be a tax reduction.
Democrats designed several clean energy tax credits in the 2022 law, including expensive incentives for production of wind-powered electricity, investment in solar panels and facilities that manufacture parts and equipment, with two key departures from policies in place at the time.
The first is that certain beneficiaries — including tax-exempt organizations, states and localities, Native American tribes and electric cooperatives — could claim the credits as direct payments from the Treasury. The second is that taxpayers who are eligible for the credits but can’t or don’t want to use them can instead sell all or a portion of their credits to others.
“That part of the tax credit that you can buy and sell is just cash,” Norquist said, arguing the transferable credits should be treated like spending by government scorekeepers.
House Republican tax writers agreed. Nonetheless, the JCT deemed the outlay portion of the GOP debt limit bill’s tax credit repeals to total less than $17 billion, or about 3 percent of the total savings from canceling the energy tax credits.
As the vote approached, Norquist said ATR “suggested that it would be very helpful to have a commitment in writing” in which GOP leaders would promise not to allow any final debt limit bill to include a tax increase. GOP leaders provided this in the form of an exchange of letters between Ways and Means Chairman Jason Smith, R-Mo., and McCarthy on April 26, the day the bill came to the floor and passed.
Smith wrote to McCarthy that the bill “will yield a reduction in taxes for the actual American taxpayers” even though JCT said it would increase revenue.
“With ‘direct pay’ and ‘transferability’ features, Democrats designed this ‘green’ corporate welfare to function like direct government spending, rather than traditional tax credits that reduce taxes owed,” Smith wrote. He added that “much of this can and should be treated as direct outlays to the federal government.”
Smith didn’t say how much of the “score” should be reclassified as outlays. But he added the bill’s cost estimate may also undershoot actual real revenue reduction from other provisions in the bill, namely the $191 billion projected loss from repealing new mandatory IRS tax collection funds.
Smith pointed to prior White House budget office and Treasury estimates that the IRS funding could yield $296 billion in direct revenue collections, rising to as much as $440 billion when accounting for indirect effects like the deterrent effect on tax avoidance.
Taking the high end of the administration estimates would negate much of the revenue gain from the energy tax credit repeals, even before any reclassification as outlays, Norquist and top Republicans argue.
McCarthy wrote back to Smith saying he agreed that “when appropriately accounting for the spending-like nature of the transferability of credits created by the [2022 law] and for true cost to taxpayers resulting from the administration’s planned harassment agenda, the net impact … will be an overall tax reduction for the American people.”
McCarthy pledged in the letter that “House Republicans will not support a tax increase as part of any bill presented to the President” dealing with the debt limit and fiscal issues.
Norquist said that was the ammunition he needed.
“So we had Ways and Means going, ‘We say it’s not a tax increase, that’s our best estimate of what it is.’ And the speaker going, ‘Even if that was off by an inch, I guarantee it will never morph into a tax increase,’” Norquist said.
“And with that,” he said, “we were comfortable in saying, OK, then it is not a violation of the pledge, and it is fair for you or anybody to tell somebody that ATR’s sense of this is it is not a net tax increase.”
‘The strongest veto’
President Joe Biden has invited congressional leaders to the White House for a May 9 meeting as they try to reach a debt limit deal by early June.
Norquist, a veteran of numerous fiscal policy battles, offered his take on what a deal could look like.
Biden “will never give us back those tax credits because that is his legacy: ‘I’m going to turn everybody green,’” he said. “And the parts of the modern Democratic coalition who have the strongest veto are the guys who are driving that issue.”
Norquist said if there’s a negotiation, Democrats are most likely to agree to rescinding some of the unspent pandemic aid. Some minor loosening of permitting regulations for energy infrastructure regulations is also possible, he said.
He also believes there could be an agreement to allow higher current spending than Republicans want in exchange for some kind of structural change in Medicare, Medicaid, housing aid or other programs that could achieve greater long-term savings.
As an example, he pointed to the 2015 law that overhauled the way the government reimburses health care providers under Medicare.
In an analysis of the legislation at the time, the Centers for Medicare and Medicaid Services said it would increase spending by more than $100 billion over the first decade. But over a 75-year period, the agency projected, the bill would reduce the actuarial deficit in the program, lowering the present value of future Medicare hospital payments by $387 billion and doctor payments by $2.5 trillion.
“With a certain amount of that, you can give Democrat interests cash now for reduced spending later and everybody’s happy. But it requires Republicans who can say, ‘I’m looking at the future,’” Norquist said.
“What do you do with those Republicans who like to go on Fox TV and scream” about immediate spending cuts? he asked. “Can you explain to them that this is a good deal?”