Senate Republicans Consider a Trillion-Dollar-Plus Tax Cut for Budget

Senate Republicans are considering writing a budget that would allow for up to $1.5 trillion in tax cuts over the next decade, said two people familiar with the discussions.

Budget talks are continuing and no final decision has been reached yet.

A budget that creates fiscal room for a $1.5 trillion tax cut, if adopted, would then be followed by a tax bill that would specify rate cuts and other policy changes that don't exceed that figure. Calling for a tax cut in the budget would let Republicans lower tax rates while making fewer tough decisions on what tax breaks to eliminate to help pay for the cuts.

Such a plan would assume that tax cuts would boost economic growth and generate revenue to help pay for themselves, but it would also likely mean that Republicans would need to make some of the tax cuts expire after 10 years, leaving decisions to a future Congress they may not control.

Republicans had talked earlier this year about tax proposals that would fully pay for themselves but they have been gradually shifting toward a tax plan that doesn't explicitly pay for itself in the first decade. Budget Committee member Mike Crapo (R., Idaho) said on Monday that the tax cut should be "as big as we can get."

The budget is an essential first step to the major tax bill Republicans want to pass this year. If the House and Senate agree on a budget, they can fast-track a tax bill through the Senate on a simple-majority vote through a process known as reconciliation, rather than seek a bigger 60-vote majority that would require support from Democrats.

The budget sets the maximum size of any tax cut over the next 10 years, making it a crucial fiscal marker in this fall's tax debate. A budget with a tax plan that is revenue-neutral would effectively pay for itself, meaning any reduction in tax rates would be offset by reducing breaks or other revenue-raising measures. A budget with $1.5 trillion in tax cuts wouldn't be revenue-neutral.

Republicans face internal tension in trying to bridge the gap between those warning about large federal debt levels and the desire of many to cut taxes. The Senate Budget Committee, led by Mike Enzi (R., Wyo.) hasn't yet scheduled a committee vote or released a draft budget.

Sen. Pat Toomey (R., Pa.), a Budget Committee member, said in an interview Monday that he has been advocating a $2 trillion tax cut. Mr. Toomey's preference is partly based on arguments that the tax bill, which is still being written, would generate significant economic growth that would yield additional tax revenue on its own and make the actual hit to the budget from tax cuts smaller.

The GOP tax-cut target may include more than $400 billion in extensions of expired or expiring tax breaks. Under congressional scorekeeping conventions, retaining those breaks or replacing them would count as tax cuts.

The tax-cut number will dictate how much Republicans can reduce tax rates on individuals and corporations. It will also affect their ability to move forward on desired breaks, such as accelerated depreciation for some business investment.

Mr. Toomey said he hoped Budget Committee members would reach a decision this week. The number, he added, would likely end up below $2 trillion; he said a $1.5 trillion target would be possible.

"It's tough to squeeze in the optimal tax reform into that window, but it would be possible to certainly make a lot of progress relative to where we are now," he said.

The tax-rate cuts Republicans want for corporations, other businesses, estates and individuals would likely increase budget deficits by far more than $2 trillion, so in their tax bill they would still need to find savings elsewhere in the tax code, likely by getting rid of some tax breaks.

"We're going to do as much base-broadening as we possibly can," Mr. Toomey said. "That will allow us to lower marginal rates and move somewhat in the direction of faster capital write-offs."

Faster growth likely couldn't cover all of a $1.5 trillion tax cut, which would reduce projected federal revenue by more than 3%. The high end of the nonpartisan Joint Committee on Taxation's estimate of revenues from economic growth in a 2014 tax plan was $700 billion.

"For every economist, there's an equal and opposite economist, and they're usually wrong," said Budget Committee member John Kennedy (R., La.), who says a middle-class tax cut such as a bigger standard deduction is his top priority.

Under the fast-track budget reconciliation rules, bills can increase deficits for the duration of the budget, typically 10 years. After that, they can't increase deficits, without 60 votes in the Senate.

That could lead to a repeat of the 2001 and 2003 tax cuts under President George W. Bush, which were scheduled to expire in 2010, then were largely extended through 2012. Most survived and had expiration dates removed by a bipartisan majority in 2013.

Republicans such as Mr. Toomey and House Speaker Paul Ryan (R., Wis.) have argued that the tax cuts should be as permanent and long-run as possible to encourage businesses to invest.

"If anything needs to get a sunset, it should be a provision that does not complicate planning and budgeting and investment decisions," said Mr. Toomey, pointing specifically to new tax rules for U.S. companies' foreign profits.

Republicans have a one-vote margin on the Budget Committee, meaning they have to bridge the differences between tax cutters such as Mr. Toomey and lawmakers who talk more about budget deficits, such as Sen. Bob Corker (R., Tenn.). Mr. Corker has met in recent days with Treasury Secretary Steven Mnuchin and President Donald Trump, and it isn't clear yet how big a tax cut he will support.

"I am all for pro-growth tax reform that is done properly, and I had a very productive meeting...with Secretary Mnuchin," Mr. Corker said in a statement last week. "We are doing some additional research and will continue to engage on this topic."

There are more hurdles ahead. On the Senate floor, the budget would need support from at least 50 senators and Republicans have just 52 seats. The House budget came out of committee in July but hasn't gotten a vote in the full chamber. That budget calls for a tax bill that doesn't cut tax revenue, but it also assumes the economic growth in that estimate.

After the House and Senate each pass budgets, the two chambers must agree on the same version to trigger the reconciliation procedures for a subsequent tax bill. Mr. Trump doesn't have to sign the budget.

Write to Richard Rubin at richard.rubin@wsj.com and Siobhan Hughes at siobhan.hughes@wsj.com

(END) Dow Jones Newswires

September 18, 2017 22:35 ET (02:35 GMT)