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By Kaustuv Basu
The political pressures of the 2018 midterm elections are prompting some Republicans to push for a retroactive tax reform bill.
Rep. Mark Meadows (R-N.C.), chairman of the ultra-conservative House Freedom Caucus, and some others want parts of the bill to apply retroactively to Jan. 1, 2017, or another date in the past, so taxpayers see an immediate benefit during the 2018 tax filing season. The retroactivity idea comes as some Republican lawmakers fret privately about the lack of a clear legislative victory so far and how it might affect their re-election prospects.
But retroactive changes are difficult to administer and would make a tax reform bill more expensive, while the economic benefits from such a move aren’t clear-cut, several lobbyists and former tax staff members told Bloomberg BNA.
Rohit Kumar, a former top aide to Senate Majority Leader Mitch McConnell (R-Ky.), said retroactivity is an interesting idea but comes with huge challenges.
“The challenge with making tax relief retroactive to Jan. 1, 2017, is that it would be nearly impossible to make the revenue raisers similarly retroactive,” Kumar said. “That would cause 2017 to consume a disproportionate share of the total revenue pie and could erode the quality of the final product.”
House Ways and Means Committee Chairman Kevin Brady (R-Texas) has said no decisions have been made on whether to make a tax bill retroactive but that it is “still under consideration.”
“Retroactive tax increases are always a horrible idea,” Brady told reporters Sept. 8.
If the goal is to provide an individual tax cut before the 2018 elections, that could be achieved through prospective rate cuts and adjustments to the 2018 withholding tables, a tax lobbyist told Bloomberg BNA.
A more plausible scenario might be choosing immediate effective dates that are tied to, for example, the date of the first committee action, to address concerns about freezing business decisions and the capital markets.
The lobbyist, who spoke on condition of anonymity to be able to comment more freely, said that the President George W. Bush’s 2001 tax cuts were made retroactive and rebate checks were issued to provide immediate economic stimulus. The 2001 rebate checks weren’t considered particularly successful, the lobbyist said, and there was evidence that some people saved rather than spent the money.
Accounting firm Grant Thornton LLP predicted in a January tax reform outlook that effective dates for a tax bill were likely to be “largely prospective.”
“The 2001 tax cuts provided retroactive rate relief, but only in the context of a budget surplus when the goal was to deliver tax cuts, not enact revenue-neutral tax reform,” it said.
Still, there could be some room for retroactivity. “[N]arrower individual provisions could be made retroactive to as early as the date they are first made public. This would normally be applied to changes that are viewed as closing ‘loopholes’ or that would allow significant tax-motivated gaming if prospective,” the outlook said.
C. Eugene Steuerle, an Institute fellow at the Urban-Brookings Tax Policy Center, said that for a lot of bills, the effective date is the date the bill is made public, but not necessarily for every provision in the legislation. Almost every provision has to be examined on its merit, he said. “It’s hard to come up with a general rule for every type of provision,” Steuerle said.
The political pressure to deliver a “victory” will only increase as the weeks roll by, a former House Democratic staff member told Bloomberg BNA. If people have more money in their pockets, Republicans can claim victory whether it leads to economic growth or not, the former staff member said.
The former staff member, who wasn’t authorized to comment on the matter and spoke on condition of anonymity, said the stakes are so high that Republican leadership might go for a retroactive tax bill to get some of the more conservative lawmakers on board. Doing so would cost more money, and Republicans would have to settle for a less ambitious bill, the former staff member said.
If Congress doesn’t pass a tax bill until 2018, making a tax bill retroactive to Jan. 1, 2017, would be difficult to stomach, the former staff member said.
The Committee for a Responsible Federal Budget, citing Tax Policy Center numbers, said in a Aug. 16 blog post that the president’s tax cut proposals could cost from $150 billion to $340 billion in the first year. “Avoiding retroactive tax cuts would make the package cheaper and easier to make revenue-neutral,” the CRFB said.
Retroactive tax cuts are inconsistent with the goal of tax reform, CRFB President Maya MacGuineas, told Bloomberg BNA. “Paying people or companies to do things they have already done doesn’t change their behavior one bit,” she said.
MacGuineas said although the 2001 tax cuts under Bush were retroactive, the government at that time was projecting huge surpluses on the horizon.
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