Congressional budget estimators say the tax code overhaul will cost at least $1 trillion over 10 years if economic growth is considered, and nearly $1.5 trillion under conventional scorekeeping. Meanwhile, the Committee for a Responsible Federal Budget, a nonpartisan watchdog group, says the real impact is likely to be as much as $2.2 trillion, including interest payments on the added debt and considering that lawmakers, facing political pressures, aren’t likely to let certain tax breaks expire as scheduled.
As government number-crunchers readily admit, they are not “forecasters” — they simply try to weigh the impact of a particular policy change against what might happen without it. A host of factors beyond lawmakers’ control can come into play to influence the eventual deficit outcome.
Consider the first tax cut enacted under President George W. Bush in May 2001. The Congressional Budget Office had envisioned $5.6 trillion in surpluses over the next decade. The tax cut was expected to reduce that surplus by more than a quarter. Yet no one foresaw the wreckage that the next 10 years of war, natural disaster and recession would bring: $6.1 trillion in deficits, according to a 2012 CBO analysis.
“The whole purpose of scoring is to allow consistent comparisons of alternatives. … Scores aren’t really forecasts,” said Douglas Holtz-Eakin, who was CBO director when Congress enacted Bush’s second tax cut. “We don’t know much about the world 10 years from now.”
In its 2012 report, CBO found that about 27 percent of the $11.7 trillion swing from surpluses to deficits was due to “economic and technical factors” outside the control of legislators. But CBO cautioned that its analysis was imprecise, writing that “for most legislation, there is no way to identify the actual impact on spending or revenues over time, and a retroactive analysis of actual costs is not possible.”
Among the major “economic and technical factors” are interest rates, which affect federal borrowing costs. Interest rates are influenced by external elements such as investors’ risk tolerance for U.S. debt and the Federal Reserve’s interventionist monetary policies. As the Fed unwinds its massive recession-era purchases of government-backed debt instruments and hikes the benchmark interest rate at which banks lend reserve balances to each other overnight, it seems likely that borrowing costs will ultimately head higher — though when that occurs is anyone’s guess.
Roll Call looked at a number of budget estimates of major enacted legislation over the years and found the ultimate deficit impact in the aftermath often bore little relation to expectations at the time — including factors that lawmakers and economists alike could not foresee.
The bottom line based on Roll Call’s findings: it’s impossible to say with confidence that deficits will look $1 trillion to $2.2 trillion worse in 10 years as a result of the new tax cuts. But at a time when U.S. debt continues to grow to unprecedented levels and major benefit programs are headed for financial difficulty, it seems unlikely that another round of tax cuts will make the fiscal picture look better.
Reagan tax cut
According to the Treasury Department, the 1981 Economic Recovery Tax Act enacted under President Ronald Reagan was the largest tax cut in modern history as a percentage of federal receipts and as a share of the U.S. economy over four years. At the time, the Joint Committee on Taxation — CBO’s partner in making revenue estimates — said the tax cut would cost $747 billion over five years.
The cut wasn’t enough to combat the ongoing recession, which was longer and deeper than the CBO anticipated.
Almost immediately, lawmakers got cold feet about deficits and embarked on a series of tax increases to try to arrest the revenue decline. Even so, actual revenue losses exceeded expectations.
1986 tax overhaul
The celebrated Tax Reform Act of 1986, billed as a model in some ways for the 2017 effort, was different in one key respect: It was designed to be deficit-neutral under conventional scoring.
Although Congress enacted spending cuts late in the year, CBO’s deficit projections widened early in 1987 given a worsening economic outlook and higher-than-anticipated spending on programs such as Medicare, Medicaid, farm price supports and the ongoing federal response to the savings and loan industry crisis.
The deteriorating budget picture led Congress to enact major tax increases in 1987 and 1990. None of it mattered. The recession lingered and spending ballooned with the first Persian Gulf War.
On average, despite the tax increases, federal revenues during fiscal 1987 through 1991 ended up roughly in line with what CBO had projected in January 1987. But in fiscal 1990-91, revenue was slightly lower and deficits were twice as large as initially projected.
1997 balanced budget deal
The 1997 budget agreement anticipated a balanced budget in five years due to $198 billion in cuts to programs ranging from the military to Medicare and revenue from the auction of government-owned spectrum to broadcasters. The deal also included about $80 billion in net tax cuts over five years, including a reduction in the long-term capital gains tax rate and creation of the child tax credit.
Negotiators also assumed a “fiscal dividend” from faster-than-expected economic growth and lower interest rates stemming from reduced deficits. But the economy surged in the years prior to the Sept. 11, 2001, terrorist attacks. The budget recorded a $69 billion surplus in fiscal 1998, four years ahead of schedule. Tax revenue for the four fiscal years ending in 2001 was $660 billion higher than CBO had projected after the balanced budget deal was enacted, and spending was about $90 billion lower.
Bush’s second tax cut
The Joint Committee on Taxation projected that the 2003 Jobs and Growth Tax Relief Reconciliation Act would cut $297 billion in tax revenue in the first five years.
But roughly 35 percent of the estimated revenue loss didn’t happen. In fact, in fiscal 2006 and 2007, tax revenue actually exceeded CBO’s pre-tax-cut forecast for those years by about $111 billion, or 2.3 percent. Inflation grew faster than expected, boosting tax revenue.
Medicare and Medicaid costs
At the time of its creation in 2003, CBO estimated the new Medicare prescription drug entitlement would increase spending by $552 billion in the first decade. Ultimately, the numbers came in 35 percent lower.
In a 2013 post-mortem on the agency’s initial forecast, then-CBO director Douglas Elmendorf noted that growth rates in drug spending had dropped because patents had expired for a number of brand name drugs, leading to more consumption of cheaper generics. Enrollment in the new Part D program was also lower than the CBO initially thought it would be, Elmendorf said at the time.
Even without legislative changes, CBO in recent years has found its projections for Medicare and Medicaid spending to be overly pessimistic.
In February 2013, the agency projected that expenditures for the two programs over the next decade would be $382 billion lower than it had forecast several months earlier in August 2012 — a 3.5 percent difference.
When Roll Call reviewed the CBO’s most recent estimates for that 10-year period, combined with actual results through fiscal 2016, the discrepancy had grown to 6 percent.
Back in 2011-12, when lawmakers were debating hundreds of billions worth of cuts to Medicare and Medicaid as part of unsuccessful “grand bargain” deficit talks, such numbers might have drastically changed the conversation.
Farm bill and food stamps
The CBO in May 2013 estimated that the Supplemental Nutrition Assistance Program, also known as food stamps, would cost $764 billion over 10 years before the 2014 farm bill was written to trim $8 billion over that time period.
But due to changes in the economy, the projected costs are now $71 billion lower over fiscal 2014 through 2023. The farm bill was supposed to cut SNAP by $2.4 billion over fiscal 2014 through 2017, but program costs wound up being nearly $28 billion less than projected, mostly due to factors lawmakers or CBO never foresaw, such as lower food prices.
Treasury borrowing costs are the great unknown that might dictate if and when Congress again gets serious about reducing deficits, said Donald Marron, a former acting CBO director and member of George W. Bush’s Council of Economic Advisers.
CBO in late 2012 believed the low interest rate environment — the 10-year Treasury note at the time was yielding below 2 percent — was a temporary phenomenon.
In February 2013, just after the “fiscal cliff” deal averted across-the-board tax increases and added $4 trillion to 10-year baseline deficits, the agency estimated a return to 5 percent on the 10-year note by late 2017. CBO said increased borrowing costs would add $941 billion to deficits over fiscal 2013 through 2022, mainly as a result of the tax cuts.
Instead, the 10-year Treasury yield is still hovering around 2.4 percent. CBO thinks it may hit 3 percent by this time next year, but doesn’t see 4 percent anytime in the next decade.
The result of this low-rate environment has been remarkable savings on interest payments — the cost to service the debt has been $544 billion less than when CBO assumed all of the Bush-era tax cuts would expire on schedule. That swing is equivalent to a nearly $1.5 trillion, 10-year spending cut, in spite of profligate actions by Congress.
As the agency acknowledged in a report last month, since the early 2000s CBO has overestimated interest rates, especially following recessions, as the Fed lowered rates and kept them low longer than expected.
Recession and response
In the depths of the Great Recession, Congress enacted the American Recovery and Reinvestment Act of 2009, estimated at the time to cut taxes by more than $200 billion over two years. With the recovery still shaky the following year and amid historic midterm losses for the Democrats, Congress extended both rounds of Bush tax cuts temporarily.
After the 2012 elections, Congress extended most of the Bush tax cuts again in the fiscal cliff legislation, while letting lower rates for the highest earners expire.
The combined revenue hit over fiscal 2009 through 2014 was about $1.6 trillion below January 2009 projections as a result of the three major tax bills, according to CBO. However, the actual revenue dip from the early 2009 forecast was about $2.9 trillion, or 80 percent higher, given the recovery was much slower than expected.