You don’t hear much about the deficit anymore.
It was only a few years ago that trillion-dollar budget gaps and the ever-rising national debt were the singular preoccupation of lawmakers in Washington—particularly Republicans. The federal fiscal imbalance, Senator Mitch McConnell said in 2012, was “the nation’s largest long-term problem.” Former Speaker John Boehner warned the following January that deficits and the debt were “killing the economy.”
Buoyed by increasing revenue from an improving economy and tax increases in 2013, along with spending caps enacted in 2011, the deficit has shrunk by more than half since the early Obama years, to $439 billion in fiscal 2015. And as the gap has declined, so has the urgency on Capitol Hill. The new House speaker, Paul Ryan, made his name proposing budget plans aimed at tackling the nation’s long-term debt. But when he laid out his policy vision for the party during a major address last week, he never mentioned either the budget gap or the $18 trillion national debt.
And by the end of this week, bipartisan majorities in Congress could pass a sweeping tax package that adds as much as $700 billion or $800 billion to the deficit over the next decade. The legislation, which is still being negotiated along with a $1.1 trillion year-end spending bill, would make permanent and in some cases expand tax credits and deductions that lawmakers usually revisit on an annual or biannual basis. And it could delay the collection of taxes enacted as part of the Affordable Care Act in 2010, including the politically contentious “Cadillac tax” levied on high-end health insurance plans.
“It’s certainly a pretty stark reversal” from the recent era of fiscal restraint, said Loren Adler, research director of the Committee for a Responsible Federal Budget. The centrist think tank projects that the long-term cost of the package under consideration could be far higher, adding $4.1 trillion to the debt over 20 years.
Whether the legislation that Congress ultimately passes is that large remains unclear. While Republicans want to make popular tax breaks permanent, Democrats are balking at its size and cost, which is not offset by corresponding tax increases or spending cuts. “It’s a massive, permanent giveaway on the unpaid-for tax-extender package, which is really destructive of our future,” Nancy Pelosi, the House Democratic leader, complained to reporters on Friday. “Evidently, the Republican deficit hawks are an endangered species now.”
In truth, most if not all of the expiring provisions have significant bipartisan support, and the question is not whether they’ll be renewed but at what level and for how long. It’s a long list that includes breaks for students, teachers, and homeowners (like the mortgage-interest deduction). Businesses get costly incentives for research and development and for buying new equipment. Democrats may go along with the Republican push to extend provisions boosting businesses in exchange for GOP support for renewing policies aimed at working families, like the child tax credit, as well as energy tax credits, including those from President Obama’s 2009 stimulus package. Finally, the bill would include a bunch of narrow provisions for specific industries, such as horse-racing, NASCAR, and teams that rescue people from mines.
Negotiators are now hammering out the details of the tax package in conjunction with the omnibus spending bill, and the politics of the two are intersecting. Democrats, for example, are reportedly trying to secure support for renewable-energy tax credits in exchange for consenting to a Republican push to end the 40-year ban on U.S. oil exports, which would be part of the spending bill. If a deal to permanently extend the tax provisions falls apart, Republicans have backup legislation ready to go that would extend them for two years at a lower overall cost, which is how Congress has typically renewed them for the last several years. “The size hasn’t been determined yet,” Representative Kevin Brady, the new chairman of the House Ways and Means Committee, said on Friday.
One irony in the whole debate is that the Republicans proposing to make these policies permanents are the same lawmakers who want to do away with many of them as part of a broad simplification of the tax code. Eliminating expensive breaks and “loopholes” is the only way to cut income-tax rates without blowing a much deeper hole in the deficit. Yet Republicans still have an incentive to make them permanent first, because once they are baked into the budget, it’ll make their eventual tax overhaul seem less costly by comparison.
Brady argued that if Congress was going to extend these tax breaks on an annual basis anyway, it was more fiscally prudent to simply make them permanent. “As we know, extending these one year at a time also adds up,” he told me. “And without the permanence, you don’t get the economic bang for the buck for many of these provisions.” As for the cost to the budget, Republicans have always made a basic distinction between spending increases and tax cuts. On a philosophical level, they don’t believe tax breaks need to be “paid for.” “It’s not an issue of raising the debt, it’s allowing people to keep their money,” Representative Tom Reed, a Republican from upstate New York, told me.
Yet $700 billion or $800 billion is still a lot of money, especially for lawmakers who will have to explain their vote to constituents who have been led to believe the nation is on the brink of fiscal crisis. “Those concerns still linger with me,” said Representative Reid Ribble, a Wisconsin Republican. “Right now, I’m leaning no on it, but I haven’t seen it.” Ribble and other Republicans acknowledged that a permanent extension of the tax policies would have been unthinkable a few years ago because of the sticker shock. But the fading deficit concerns and a Republican majority in the Senate have made it possible this year, just as Congress was able to agree to a similarly costly fix to Medicare financing this spring that was only partially paid for.
For budget watchers like Adler, Washington’s abandonment of fiscal restraint is more frustrating because although the deficit picture has markedly improved in recent years, the long-term outlook remains a problem. While deficits are projected to remain stable for the next few years, the budget is nowhere close to balancing, and health-care costs driven by the baby boomers’ retirement are expected to drive the deficit back up to $1 trillion by 2025, according to the Congressional Budget Office. Lawmakers never struck the fiscal “grand bargain” that Boehner and Obama had tried for, but the debt-limit deal of 2011 and the tax increases on the wealthy that were allowed to take effect in 2013 amounted to a modest down payment on deficit reduction. Congress has already agreed to break spending caps known as sequestration, and the tax bill under discussion could wipe out the “fiscal cliff”deal as well. If it passes, Adler said, “the fiscal debates over the last five years will now have raised zero revenue.”