A Look Back on the Bush Tax Cuts as a Tax Bill Nears

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By Colleen Murphy

Republicans must decide which provisions of a tax bill to make temporary and which can be made permanent as they negotiate the nuances of their plan.

Party leaders can look back to the Bush-era tax cuts of 2001 as they write a bill that can pass without Democrats, because it illustrates the give-and-take they face in the coming weeks. Republicans, particularly members of the House Ways and Means Committee, have long said that permanent tax reform brings the most lasting economic growth. Although some now say that elements of the plan will have to be temporary, an individual tax cut could still bring a political win.

While the Bush cuts, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), were also passed using the filibuster-proof reconciliation process, there are some key differences with the Republican tax plan. Chiefly, the Bush cuts stemmed from several years of budget surpluses—and much of the package was ultimately made permanent in 2012.

The current Republican framework also includes steep corporate tax cuts, which are likely to be temporary and could be funded with a permanent tax increase such as one on future foreign earnings.

The Bush Cuts

The Bush-era bill reduced the rates of the top four tax brackets by 3 to 4 percentage points each and added a new 10 percent bracket for low-income households. It also increased the standard deduction for married couples and doubled the child tax credit to $1,000. Those changes were initially set to last through 2010.

EGTRRA reduced federal revenue by $161.24 billion per year when scored on a static basis, according to the Tax Foundation. And because the changes were set to phase in over five years, they “did not appear to have a noticeable effect on GDP in the two years following enactment,” the Tax Foundation said.

Overall economic growth and investment from 2001 to 2007 was below the average growth rate for comparable periods of other post-World War II economic expansions, according to the Center on Budget and Policy Priorities. Those two indicators should have shown “any positive ‘growth effects’ of the tax cuts,” the CBPP said.

“In general, temporary tax policy is less effective, especially if your goal is to promote economic growth or increase the efficiency of the tax code,” said Kyle Pomerleau, director of federal projects at the Tax Foundation. “It’s much more constructive to change the structure of the tax code.”

The Sept. 27 Republican framework would collapse the seven brackets into three and set the bottom rate at 12 percent. It would double the standard deduction and increase the child tax credit, though the tax-writing committees still must land on an amount. Republicans would need several trillion dollars in offsets in order for the bill to be permanent—an unlikely prospect.

Some Republicans hold out hope that a few Democrats will back a tax plan, particularly those in tight 2018 re-election races. But it is unlikely that more than a handful would back a GOP tax bill.

“To get true permanency, you really do need the House and Senate coming to agreement on a bipartisan plan. When you do reconciliation, you’re worried about the budget window,” Rep. James B. Renacci (R-Ohio), a member of the House Ways and Means Committee, told Bloomberg BNA. A new Congress in two or four years will also be “tweaking and changing” anything done now, so nothing is ever truly permanent, he said.

But permanent changes do bring the benefit of predictability, said Henry M. Ordower, a law professor at Saint Louis University School of Law.

“If you’re going to make a change in the tax law there’s no reason to make it temporary. What you’re doing is affecting revenue estimates,” he said.

State of Play

There’s a sense of urgency among lawmakers that middle-class taxpayers need relief, and an understanding that an individual tax cut will help them in the lead-up to the 2018 midterm elections, Henrietta Treyz, managing partner and director of economic policy research at Veda Partners LLC, told Bloomberg BNA.

And because so much of the 2001 tax cuts ended up being made permanent, lawmakers aren’t afraid of putting in place temporary individual cuts now, she said. Most of the individual provisions in the tax bill will need to be temporary because they are so expensive and would add to the deficit, she said.

While individual tax cuts and an increased child tax credit are “politically beneficial,” Republicans are also focused on economic growth—which doesn’t come from changes on the individual side, Rep. David Schweikert (R-Ariz.), a Ways and Means member, told Bloomberg BNA.

“This is a really uncomfortable conversation,” he said.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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