In Tax Fight, Deficit Hawks Go Down

By Nick Timiraos and Kate Davidson Features Dow Jones Newswires

Deficit hawks emerged Friday among the losers in the GOP effort to pass a tax overhaul.

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The Senate prepared Friday to pass a tax bill that would reduce the government's revenue by about $1.4 trillion over a decade. The House version of the bill would also reduce revenue by $1.4 trillion.

President Donald Trump's administration and GOP lawmakers have argued the revenue loss would be much less than that hefty price tag because cuts will spur economic growth and boost federal revenue even as tax rates drop.

But a growing number of estimates shows higher growth won't fully offset lost revenue from lower tax rates. That means that budget deficits -- already projected to increase in the years ahead as baby boomers retire and take on benefits like Medicare and Social Security -- could end up even larger than already projected.

The nonpartisan Joint Committee on Taxation, Congress's official scorekeeper on tax projections, said Thursday the Senate bill would generate $458 billion in revenue from stronger economic growth while adding $51 billion in higher interest costs, leaving the net cost of the bill at $1 trillion over a decade.

That estimate was one reason why Sen. Bob Corker of Tennessee, a self-described deficit hawk, appeared prepared to defect on the vote Friday, making him potentially the lone Republican dissenter.

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The Tax Foundation, a right-leaning think tank, found a version of the bill that cleared the Senate Finance Committee would decrease government revenue by $1.78 trillion without accounting for the benefits of economic growth and about $516 billion after accounting for stronger economic growth.

Republicans fought for years to include scoring estimates that account for economic growth in evaluating tax legislation. After the JCT estimate was released, some doubted the conclusions.

"Our bill will end up reducing the deficit," Sen. Rob Portman (R., Ohio) said. Mr. Portman, another self-described deficit hawk, served as budget director in the GOP administration of former President George W. Bush before winning his Senate seat as part of the tea-party wave in 2010.

After Mr. Trump, a Republican, won the White House last year, top GOP lawmakers said any tax proposal needed to be revenue neutral -- bringing in as much revenue by eliminating deductions and other tax breaks, for example, as it lost from lower rates.

But the revenue-neutral commitment proved daunting to keep as resistance built against revenue-raising measures meant to offset the cost of reduced tax rates. House Republican leaders abandoned a controversial bid earlier this year to impose a tax on imports while exempting exports, which would have raised around $1.5 trillion over a decade and helped finance other tax cuts.

A key breakthrough came in September, when Sens. Pat Toomey (R., Pa.) and Mr. Corker agreed to a budget blueprint that allowed for a $1.5 trillion reduction in revenue over a decade. Some argued the actual cost would be much smaller than that when accounting for the benefits of growth. Still, it marked an important step away from adherence to controlling deficits.

"At that moment, you heard the last squawks from the deficit hawks," said Steven Bell, a former Senate Republican budget aide who is now a senior analyst at the Bipartisan Policy Center.

The economy has expanded solidly over the past year. The budget deficit has widened, too, to about 3.5% of gross domestic product in October from 2.6% one year earlier. According to projections by the Congressional Budget Office that don't account for any tax cuts, the U.S. budget deficit will hit $1 trillion in 2022. Mr. Bell projects the tax bill will pull forward that milestone by three years, to 2019.

Conservative lawmakers and economists said the need to boost the economy's growth rate, at about 2% over the last decade, for now overwhelms any concerns about adding to the federal government's $20 trillion in debt.

"I dislike budget deficits and I have long warned about their dangerous effects," wrote Martin Feldstein, a Harvard economist, in an opinion column in Project Syndicate this week. "Nonetheless, I believe that the economic benefits resulting from the corporate tax changes will outweigh the adverse effects of the increased debt."

The GOP's about-face on deficits has been a bitter pill for groups emboldened by numerous bipartisan blue-ribbon commissions earlier this decade that championed fiscal overhauls. These critics worry Republicans will now have little political leeway to push for spending curbs on programs such as Social Security, Medicare or Medicaid.

"Anybody who is going to make the argument that our entitlement programs are a fiscal threat -- which is true -- will have lost credibility if they said deficits don't matter when it comes to tax reform," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, which supports debt reduction.

Write to Nick Timiraos at nick.timiraos@wsj.com and Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

December 01, 2017 17:57 ET (22:57 GMT)