August 6, 1999

Conference Agreement Tax Cut Would Cost
$2.6 Trillion in Second 10 Years

by Iris J. Lav and Robert Greenstein

The conference agreement tax bill has an official cost of $792 billion over the 10-year period from 2000 through 2009. But its actual cost would likely exceed $792 billion in the first 10 years and would reach approximately $2.6 trillion in the second 10 years, from 2010 through 2019.

The bill's official cost is held to $792 billion in the first 10 years through use of a gimmick. The bill sunsets many of its principal provisions after 2008 — including the reductions in tax rates, the marriage penalty relief, the capital gains rate cut and capital gains indexing, the increase in IRA contribution limits, and repeal of the alternative minimum tax. The official cost estimate assumes that these provisions will not be in effect in 2009.

In fact, as explained below, canceling some of these provisions would be virtually impossible as a practical matter, while sunsetting others — while technically possible — would be extremely difficult politically. If these provisions really ceased to be effective after 2008, the result would be a $54 billion income tax increase in 2009 — larger than the tax increase that occurred in 1991 following the 1990 deficit reduction deal President George Bush negotiated with Congress. (These comparisons adjust costs from different years for inflation.)

If these provisions are enacted, they almost certainly would remain in effect. Furthermore, the only reason the conference agreement sunsets these provisions after 2008 is so that the conferees could stuff a large number of tax cuts from both the Senate and House bills into the conference package and still make it appear on paper as though the bill did not exceed its $792 billion cost limit. Using realistic estimates that do not assume these provisions terminate after 2008, the bill is found to miss its $792 billion target by more than $50 billion.

The conference agreement also sunsets the entire bill after 2009 to avoid triggering a Senate rule under which the conference agreement would need 60 votes to pass the Senate. This sunset, too, should not be taken very seriously. Full sunset of the bill would result in an unprecedented — and unthinkable — single-year tax increase of $180 billion. That would be nearly three times larger than the tax increase that took effect in 1994 following enactment of the 1993 deficit reduction legislation.


How Large is the Cost?

Without the gimmicky sunset provisions, the bill's cost — which mushrooms from $62 billion in 2004 to $117 billion by 2006 to $168 billion by 2008 — would rise to $180 billion in 2009. By contrast, the official estimate shows the cost plummeting from $168 billion in 2008 to $126 billion in 2009.

After the initial 10-year period, the cost of the tax-cut package would explode. Using conservative estimates that are likely to understate the bill's long-term cost, we find:

These massive costs in the second 10 years would occur during the same period in which the baby boom generation begins to retire, Social Security and Medicare costs mount, and surpluses both in the Social Security budget and the non-Social Security budget are expected to stop growing each year and begin shrinking.

Even under the official estimates, the bill's costs grow explosively through 2008. The Joint Committee on Taxation estimates the bill would cost $156 billion in the first five years from 2000 through 2004, and $636 billion — more than three times as much — in the second five years from 2005 through 2009. The costs are far lower in the first five years than in the second five both because most of the bill's major provisions phase in gradually(2) and because several devices — such as a capital gains "mark to market" mechanism — are used to accelerate into the first five years some billions of dollars in tax payments that otherwise would be made in later years, making the bill's costs look smaller in the first few years.

Moreover, the $636 billion official cost for the second five years understates the likely cost in that period because it assumes the termination of various provisions after 2008, as discussed above. Without the bill's sunset gimmick, the cost is approximately $690 billion in the second five years.


Sunset Provisions

Some may attempt to argue that the large costs in the second ten years will not occur because of the sunsets. The sunset provisions do not mean, however, that the massive costs of the legislation in the second 10 years can be ignored.

Figure 1

Much of the bill's $2.6 trillion cost in the second decade would be unavoidable for practical or political reasons. Should the point of sunset ever be reached, Congress would be all but certain to extend all or most of these costly tax cuts.

Figure 2

The same type of practical problem — that once a particular tax change is made it would be a serious breach of faith for the government to reverse it — does not apply to raising tax rates back up (including raising the 14 percent rate back to 15 percent), reducing the standard deduction for married filers, and otherwise reinstating current marriage penalties. Such changes would, however, likely be seen as middle-class tax increases for which policymakers would be loathe to accept responsibility.

End Notes:

1. Costs for years after 2009 were projected as follows: the 2009 cost is derived by adding back the continuing cost of the provisions that would supposedly end after 2008. For years after 2009, the estimate assumes that the cost of the bill will increase at the same rate that CBO projects GDP will be growing at the end of the 10-year period, a nominal rate of 4.4 percent per year. Additional adjustments are made to reflect full phase-in of the repeal of the estate tax.

2. The phased-in provisions, most of which would not fully effective under the bill until some point between 2006 and 2009, include: elements of the rate cut, the standard deduction increase, marriage penalty relief, the repeal of the individual Alternative Minimum Tax, and the repeal of the estate tax. Indeed, much of the effect of the costly elimination of the estate tax, which would become effective for people who die in 2009, would be felt only after the end of the 10-year period, because there is a time lag between the death of an individual and the settlement of the individual's estate and thus the payment of tax on the estate.