Are There Any Deficit Hawks?
Our national debt has increased exponentially over the past quartercentury. Many in Congress, particularly Republicans, claim to be deficit hawks who stress the importance of controlling the budget and reducing our national debt.
In 1990, Congress implemented the pay-as-you-go rule (PAYGO), which generally requires Congress to offset legislative spending increases or revenue reductions (AKA tax cuts) by reducing other spending or otherwise increasing revenue. The idea is to prevent deficit spending and national debt increases.
In the near future, Congress will have to extend the debt limit and the Republicans say they will refuse to do so unless there are accompanying spending cuts. While this is terrific political rhetoric, it is inconsistent with the House Republicans’ actions since they took control of the House.
Since then, the House has implemented a cut-as-you-go rule (CUTGO) to replace PAYGO. CUTGO differs from PAYGO in two ways. First, it does not allow tax increases to fund additional spending. Second, tax reductions generally do not need to be paid for by spending cuts. While CUTGO is a wonderful soundbite, in reality, it makes it easier for Congress to increase the deficit, resulting in additional national debt because the incremental deficits are funded by borrowing.
Under PAYGO, tax reductions must be funded unless the tax cut was implemented using the reconciliation process. Under the reconciliation process, tax cuts cannot increase the deficit by more than $1.5 trillion over the ensuing 10 years. That is why many of the tax reductions implemented in the 2017 Tax Cuts & Jobs Act expire at the end of 2025.
CUTGO does an end run around these constraints, setting the ground for unfunded tax cutting that increases both the deficit and national debt. It also provides a mechanism for extending the tax cuts that expire in 2025.
Indeed, one of the first bills passed by the Republicans would rescind the recently enacted IRS funding increases. Republicans claim this reduces expenditures by $72 billion. However, according to the Congressional Budget Office, this bill costs the government $186 billion in lost revenue over the next decade because the IRS will fail to collect additional taxes. The CBO estimates that the excess of revenue loss over cost savings will be $114 billion.
The $186 billion amount is likely grossly understated. In 2021, a firm called Calcbench analyzed the financial statements of 467 of the S&P 500 companies. Those 467 corporations reported additional profits of approximately $235 billion in 2020 because the IRS lacked the capacity to properly audit aggressive prior year tax return positions before the statute of limitations expired.
This study examined only 467 corporations for a single year. If you extrapolate these results to corporate America over the next decade, the resulting amount undoubtedly dwarfs the CBO’S $186 billion estimate. Those incremental tax collections would not only reduce the deficit, but also might actually pay down our national debt.
Locally, Rep. Mike Garcia sent an email to his constituents bragging about three bills he introduced. Two of them are budget busters.
The first would redirect IRS funding to veterans. Because spending is redirected, rather than eliminated, a conservative estimate of the cost is the CBO $186 billion estimate of lost tax revenue.
The second is the “SALT Fairness Act” repealing the State and Local Tax (SALT) deduction cap created by his fellow Republicans in the Tax Cuts and Jobs Act of 2017. While this bill has not been scored, the repeal of the SALT deductions over eight years raised $693 billion of tax revenue. That is about $86 billion annually. If Garcia’s bill was enacted, over the remaining three years of the SALT deduction cap the bill would presumably cost $260 billion.
What Garcia is not telling you is that his legislative proposals would increase the deficit and thereby increase our national debt by at least $446 billion — perhaps considerably more depending upon on the amount of forgone additional tax revenue the IRS would have collected from increased funding. Garcia certainly is not a deficit hawk.
CUTGO was first implemented in 2011, but was not truly effective until 2017 when the Republicans controlled both houses of Congress and the presidency. During 2017 and 2018, when CUTGO was in full force, deficits ballooned from $671 billion (the last Barack Obama budget) to $1.2 trillion in 2018 and 2019 (the last two years of CUTGO).
The fact that CUTGO did not do much to achieve its intended objectives is not surprising. Throughout my career, I have seen many clients who had troubled debt situations. None of them ever improved their financial position by reducing their revenue. In that context, the recent Republican proposals are not likely to implement budget controls or reduce our national debt.