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Current Law vs. Current Policy, and Other Budgetary Matters for Pensions to Watch
The first two weeks of April will be critical to President Trump and Congressional Republicans as they seek to cement their prospects to enact far-reaching legislation on tax and spending cuts.
By: Tony Roda, Williams & JensenThe first two weeks of April will be critical to President Trump and Congressional Republicans as they seek to cement their prospects to enact far-reaching legislation on tax and spending cuts. During this period, House and Senate Republicans will be hard at work on a joint budget resolution which, once adopted by both chambers, will unlock the budget reconciliation legislation.
The budget reconciliation process was enacted as part of the Congressional Budget and Impoundment Control Act of 1974. It allows for expedited consideration of certain tax, spending, and debt-limit legislation. Reconciliation can be used to address most mandatory entitlement spending, including Medicare and Medicaid. The most important procedural aspect of reconciliation is that it is not subject to filibuster in the Senate and may be approved in that chamber by a simple majority vote. It is, therefore, a powerful legislative tool for President Trump and Congressional Republicans to enact their fiscal wish list.
At the top of the list of priorities for the reconciliation bill is the extension and broadening of the Tax Cuts and Jobs Act of 2017 (TCJA), enactment of which was a priority for President Trump in his first term. In addition to the extension of TCJA, President Trump also has emphasized his desire to zero out taxes on tips and overtime income, as well as on Social Security benefits.
Estimates are that a simple extension of the TCJA will result in revenue losses over the next 10 years of $4.6 trillion. Repeal of taxes on tips, overtime, and Social Security income would result in additional lost revenue of up to $5 trillion over the next 10 years, according to the bipartisan think tank, the Committee for a Responsible Federal Budget. Fiscal hawks in the House are demanding spending cuts of $2 trillion. Squaring all of this will require the House and Senate to bridge differences in their approaches to the budget resolution and secure approval from the President.
An intra-GOP debate has emerged in recent weeks over what is known as the “current law baseline” versus the “current policy baseline”. In past budget reconciliation bills, the current law baseline has been the scoring method used for tax changes. What this means is that, if under current law a tax provision has an expiration date, then extending that provision beyond the expiration date would result in a new revenue loss to the U.S. Treasury, of course assuming the provision is favorable to taxpayers.
In contrast, the same example under a current policy baseline method would not result in a new revenue loss because it is simply an extension of current policy, which under this approach is the assumed baseline going forward. Some Senate Republicans seem enamored of the current policy approach for obvious reasons. It would allow them to extend the TCJA without implicating the need to offset the new revenue loss with revenue raisers or additional spending cuts. Fiscal conservatives in the House, however, do not seem favorable to this new approach. The decision on the scoring methodology will be made in the budget resolution, so we will know a great deal about the size of the overall package and the need for revenue raisers in the next few weeks.
There also is disagreement between the House and Senate on how many reconciliation bills to process. The House would pass only one reconciliation bill, which would include all tax, spending, border security, energy policy, and defense-related issues. The Senate wants to proceed with a smaller reconciliation bill first. This initial bill would include energy policy, border security, and defense-related provisions, and would leave major tax and spending changes to a larger second reconciliation bill.
If the House and Senate are successful in April in hammering out a joint budget resolution, then the goal would be for the two chambers to begin work on a reconciliation bill or bills in May with an eye toward presenting a bill to the President for his signature sometime in the late spring or early summer.
Further complicating the fiscal front is the need to raise the nation's debt ceiling. The Congressional Budget Office (CBO) estimates that the U.S. Treasury will exceed its statutory debt limit between May and October, but the timing will be greatly affected by the actual tax receipts collected by Treasury. As reported by The Washington Post, anonymous sources at the Treasury Department are suggesting that the cuts to compliance and enforcement personnel at the Internal Revenue Service could lead to taxpayers taking aggressive tax positions beginning with the 2024 tax year filings and, consequently, lowering overall tax receipts collected by as much as 10 percent. Only time will tell.
Be assured that NCPERS will closely monitor the budget process in Congress and report any significant developments to its members.
Tony Roda is a partner at the Washington, D.C. law and lobbying firm Williams & Jensen, where he specializes in legislative, regulatory, and fiduciary matters affecting state and local pension plans. He represents the National Conference on Public Employee Retirement Systems and state-wide, county, and municipal pension plans in California, Colorado, Georgia, Kentucky, Nebraska, Ohio, Tennessee, and Texas. Tony has an undergraduate degree in government and politics from the University of Maryland, J.D. from the Catholic University of America, and LL.M (tax law) from the Georgetown University Law Center.
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