Deputy Director, Federal Tax Policy
As Republicans craft their tax package, with tax cuts that would go overwhelmingly to the wealthy, and consider how they might offset its large cost, a debate has ensued in Republican circles over whether it should be “revenue neutral” or “deficit neutral.” Behind this jargon lies a policy choice with huge consequences for low- and moderate-income families.
“Revenue neutral” means policymakers must pay for tax cuts solely with other revenue increases, such as by scaling back tax breaks. “Deficit neutral” in contrast, means policymakers could finance the tax cuts that are skewed to the top with cuts in assistance that helps struggling families afford to pay the bills, put food on the table, keep a roof over their heads, and buy health care.
GOP leaders expect to move their tax bill with only Republican votes. To do so, they can use a process called “reconciliation,” under which a bill can’t be filibustered and, thus, can pass the Senate with a bare majority — the same process the GOP is using to try to repeal the Affordable Care Act. To use reconciliation, the House and Senate first must pass a budget resolution for fiscal year 2018 that creates a “reconciliation instruction” for a tax reform bill. The instruction may specify that the tax bill be revenue neutral or deficit neutral.
Revenue neutral. If the reconciliation instruction requires that the tax bill be revenue neutral, and if policymakers don’t resort to accounting gimmicks, they must pay for the tax cuts by reducing tax subsidies, closing tax loopholes, or finding new sources of revenue. All policy changes would be on the revenue side of the budget ledger.
Prior GOP budgets, including President Trump’s new budget, claimed to adhere to this standard. That is, while these budgets touted their (costly and regressive) tax plans, they showed tax reform having no effect on revenue levels.
Deficit neutral. A “deficit-neutral” reconciliation instruction would allow Congress to pass a tax bill through reconciliation as long as it doesn’t increase deficits. That would give Republicans the flexibility to pay for their tax cuts with either revenue increases, spending cuts, or some combination of the two. That means that a bill including large tax cuts could meet a “deficit neutral” requirement if the cuts in entitlement programs are at least as large as the tax cuts.
Some key Republicans have said they favor spending cuts to pay for tax cuts. “That’s what should be the solution…,” Senate Finance Committee Chairman Orrin Hatch said. “I’d like to find some spending cuts.” Freedom Caucus Chairman Mark Meadows has called for paying for tax cuts with major cuts in programs for low-income households, and he specifically suggested $400 billion in cuts over ten years in the Supplemental Nutrition Assistance Program (SNAP, formerly called food stamps) and Temporary Assistance for Needy Families — programs that help poor families put food on the table and afford basic needs.
Thus, a deficit-neutral tax bill likely wouldn’t be “just” a tax bill. Instead, if recent GOP tax and budget proposals are a guide, it would be a Robin Hood-in-reverse package of tax cuts for the wealthy financed by cuts to entitlements that mainly help low- and-moderate-income people, such as Medicaid and SNAP. After all, that’s precisely what the House Republicans have done in their bill to repeal and replace the Affordable Care Act; it pairs tax cuts skewed to the top with spending cuts that would leave an estimated 23 million more Americans without health insurance. Senate Republicans are reportedly retaining that same basic structure in their health bill.
Policymakers should reject this approach for tax reform, which would deepen poverty and widen income inequality in service of large new tax giveaways to the wealthy.