You Can’t Just Wish Away Deficit Effects by Assuming Something is Permanent

Some lawmakers are making the case that expiring tax cuts should be considered permanent in order to hide the $3.9 trillion increase in deficits that would result from extending the expiring portions of the Tax Cuts and Jobs Act (TCJA).  An argument for this approach is that it would be parallel to how some temporary spending items are treated.

On the surface it sounds like a fair point; in certain cases, temporary spending is considered to be permanent. However, this is not a sound argument for using a current policy baseline in the upcoming effort to extend the TCJA and it would open a large loophole whereby the fiscal impact of tax cuts is never fully accounted for.  

The deficit effects of extensions need to be recognized at some point, either on the front end – when legislation is passed – or when legislation is extended.

Although generally the CBO baseline is based on current law, certain temporary spending (along with temporarily authorized revenue to certain trust funds, like gas tax revenue) is considered permanent in the baseline. Most significantly, SNAP (food stamp) benefits, farm subsidies, veterans’ benefit cost-of-living adjustments, and the Temporary Aid for Needy Family (TANF) program are assumed to be permanent in the baseline despite the fact they are legally temporary and require new legislation to be extended. This means a simple extension would score with no budgetary cost.

Importantly, these programs are then also treated differently on the front end and are assumed to continue in the baseline beyond their expiration, with the full costs of permanency reflected when the temporary measures are enacted. In other words, a temporary increase in one of these programs would be scored as permanent at the time. This means higher budgetary effects up front but none at the time of extension (assuming no changes to the policy.)  

This upfront accounting is not applied to any tax cuts, outside cuts to the gas tax and other trust fund revenue. As a result, the temporary measures under the TCJA were scored as temporary at the time. And it was the expirations scheduled in the TCJA that allowed it to meet the $1.5 trillion limit set in reconciliation and prevent long-term deficit increases that would have violated the Byrd Rule. Had the TCJA been scored as permanent, its score would have been significantly higher at the time of passage, and it would not have been consistent with the reconciliation limit. The very reason the tax polices were made temporary was to keep the costs within the reconciliation limit and make the price tag smaller. 

Switching to a “current policy baseline” now would allow politicians to add close to $4 trillion to the deficit, through 2035, without ever having recognized the costs. It would also open the door to massive amounts of future borrowing. Imagine if a “current policy baseline” had wiped away the reported cost of extending the COVID-era unemployment benefits, rebate checks, Child Tax Cuts expansion, and aid to states – politicians could spend trillions more without ever having to recognize the cost. 

Bottom line – deficit effects have to be recognized at some point; either when the legislation is initially passed, or if and when it is extended. Not recognizing those costs of TCJA extension is a gimmicky attempt to “disappear them,” but trying to hide them doesn’t make them any less real or damaging to the fiscal situation.