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Are the Super Committee's Hands Really Tied on Taxes?

July 31, 2011

By Josh Barro

Over at Reuters, Jim Pethokoukis says that while the proposed debt ceiling deal would create a “Super Committee” with a mandate to reduce deficits, it would be nearly impossible for that committee to recommend tax increases. He quotes a Republican congressional aide:

It has an undefined mandate of deficit reduction but the way that is constructed would essentially make it impossible to raise taxes. Anything scored by CBO is based on current law. Current law assumes that taxes are going to go up by three-and-a-half trillion dollars next year [over ten years]. So anything you do to the tax code, unless it starts off with a $3.5 trillion tax increase, it’s going to be adding to the deficit... It’s almost impossible for them to touch taxes because if they do, almost anything will be scored as a tax cut, making it that much more difficult to reach the $1.5 trillion that they need to get to.

Can someone who is more familiar with CBO’s processes comment on this? It sounds wrong to me, at least with regard to many of the revenue increases that could be on the table.

It’s definitely true that CBO scores are based on current law. And that would mean that proposals to change marginal tax rates could score as tax cuts, even if they raise taxes compared to current policy. For example, you could propose raising the top tax rate from 33 percent to 36 percent. Since under current law, the top rate is set to revert to 39.6 percent in 2013, this proposal would score as a tax cut.

But let’s say you propose to set a cap on the deduction for home mortgage interest. That proposal would score as a tax increase, because the CBO would assume greater taxable income than under current law and would apply current law tax rates in each year (i.e., higher ones in 2013 and therafter). There’s no reason you would have to write the proposal as “cap the deduction for home mortgage interest and keep current tax rates in perpetuity.”

You could even impose marginal rate increases that score as tax increases by setting them up as separate taxes. PPACA used this approach, applying a payroll tax surcharge on high incomes instead of an income tax surcharge. The existence of pending tax increases in current law did not pose a problem for PPACA’s CBO score, so I don’t know why matters should be any different for the Super Committee.

It’s important to note that the same dynamic also exists in Medicare. Because of the sustainable growth rate mechanism and the “Doc Fix”, Medicare reimbursement rates are set to fall in future years under current law. It is an error to therefore assume that any other proposed changes to Medicare will tend to score as cost increases rather than cuts—indeed, much to the chagrin of some conservatives, the cost of the “Doc Fix” did not have to be included in the CBO score for PPACA.

Maybe I’m wrong about this, and I’d be interested to hear why. Or maybe there are other, yet undisclosed terms in the pending deal that make tax increases a heavy lift for the Super Committee. But I wouldn’t assume that CBO scoring methodology effectively turns this committee’s deficit reduction mandate into a spending reduction mandate.

Edit to add: The Republican staffer quoted above seems to be assuming that, if the Super Committee touches tax policy, it will do so by ripping up the tax code and starting fresh. That would, indeed, set the tax “baseline” at a 10-year revenue level $3.5 trillion above current policy. But I see no institutional reason to assume that they wouldn’t propose tweaks to the existing tax code, especially since the CBO’s methods would be a lot more congenial to that approach.

Original Source: http://www.nationalreview.com/agenda/273248/are-super-committee-s-hands-really-tied-taxes-josh-barro

 

 
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