Weekly SSRN Tax Article Review And Roundup: Glogower Reviews Kysar's Tax Law And The Eroding Budget Process

This week, Ari Glogower (Ohio State) reviews a new work by Rebecca Kysar (Brooklyn, moving to Fordham), Tax Law and the Eroding Budget Process, 81 Law & Contemp. Probs. 61 (2018).

Rebecca Kysar’s new work describes the evolution of the budget process and its effect upon tax policy, through a detailed study of the process leading to the 2017 tax legislation. At the same time, the work also describes how political pressures are changing the budget process and eroding longstanding norms.

The work begins with a brief history of the reconciliation process since its inception in the Congressional Budget Act of 1974. In this account reconciliation—which allows the Senate to pass legislation conforming to budget instructions with a simple majority—was originally intended as a way to assist Congress in reducing deficits and balancing the budget. The process was soon expanded, however, as a way to sidestep the filibuster for a broader range of legislation and social policy. To curb this trend, the Byrd Rule was adopted in the 1980s, which limited the ability of Congress to use reconciliation for legislation that is extraneous to the budget or that increased deficits beyond the specified budget window.

Both reconciliation and the Byrd Rule increased in prominence in the 1990s. During this period of rising political polarization, the majority increasingly resorted to reconciliation to pass social policy legislation, and the minority frequently invoked the Byrd Rule to oppose these efforts.  This decade also saw the increasing trend of using reconciliation to reduce budget surpluses, in a departure from the process’ original purposes of raising—rather than reducing—revenue. This trend intensified in the early 2000s, when Congress used reconciliation to pass large tax cuts.

Kysar argues that the repurposing of reconciliation to facilitate tax cuts or spending increases was the “original sin” that has led to increasing reliance on—and manipulation of—the process in recent legislation.

For example, the work documents the many manipulations in the 2017 tax legislation, including the strategic use of sunsets to conform with budget targets, debates over the length of the budget window, the choice of baselines against which revenue effects should be measured, and the battle over the reliance on official authorities (the JCT and the CBO) and outside groups in estimating fiscal effects of the proposed changes.  

As the work makes clear, there are no simple solutions to any of these manipulations. For example, adopting standardized rules for the length of the budget window, the use of sunsets, or the choice of the baseline could just as easy lead to distortions and manipulation. A longer budget window could help account for longer-term fiscal impacts and eliminate the potential games played with shorter windows but could also lead to greater uncertainty in the scoring process and would be much more sensitive to modeling assumptions. Similarly, there are plausible arguments for preserving the “current law” baseline (which assumes, for example, that sunsetting provisions will in fact expire) as well as a “current policy” baseline (which would assume they will be extended), but inconsistent use of the two is almost certain to invite abuse. Similarly, there are certain to be ongoing debates about the role of official estimators and the methodologies used, as well as the risk in shifting to estimates by outside groups who may have different methodologies and policy motives.

Of course, as the work acknowledges, the background problem is partisanship, and the difficulty of enacting policy in an era of extreme political polarization. Furthermore, the reconciliation rules are endogenous to Congress, and are not subject to outside enforcement. The work concludes by considering opportunities for reform within these background constraints. First, Congress could build budget constraints into the substance of law, in the fashion of the deficit trigger proposed by Sen. Corker and others during deliberations over the recent tax legislation. The nuclear option—abolishing the Senate filibuster—would eliminate the need for the manipulable reconciliation process, at the cost of losing the Byrd-rule protections and further undermining long-term fiscal prudence.

More broadly, the work argues that reconciliation should be understood as a way to prevent a current Congress from shifting costs to future generations. From this perspective, the work suggests one final option to limit reconciliation manipulations: Allow reconciliation for deficit-reducing legislation (which arguably aligns with the process’ original intention), but not for legislation that increases deficits.

Of course, preventing reconciliation from being used for deficit-increasing legislation could also hinder future spending, and critical investments in the social safety net.  In this respect, this final consideration points towards the heart of the current debate over tax and fiscal policy. The 2017 tax legislation is estimated to pile nearly $2 trillion onto the national debt over the next decade, and will primarily benefit the wealthiest Americans. This dramatic policy change reveals that congressional Republicans have no general objection to policies that increase the deficit per se. Rather, the relevance distinction is between deficit-increasing policies that benefit the wealthy through tax cuts, and deficit-increasing policies that fund social spending on the hoi polloi. At the same time, Democrats have been reticent to emphasize the fiscal irresponsibility of the legislation, as this same critique may be used as in objection to future public spending.

This is perhaps what the debates about the 2017 tax legislation boil down to—not a strong commitment by either party to limiting deficits, but rather a debate about the policy goals justifying deficits, and how the proceeds from borrowing should be used. Should the proceeds be used for private investment by the wealthy, or for public investment or more evenly distributed private wealth and investment? Dialing back reconciliation might lead to greater fiscal prudence by both parties, but this would only be justified from the perspective that all deficits are undesirable, regardless of the amount or use of the proceeds.

Professor Kysar’s new work is timely and important. Here’s the rest of this week’s roundup:

• Allison Christians (McGill), Introduction to Tax Policy Theory
• Shane Heitzman (USC) and Rebecca Lester (Stanford), Net Operating Loss Carryforwards and Corporate Financial Policies
• Young Ran (Christine) Kim (Utah), Carried Interest and Beyond: The Nature of Private Equity Investment and Its International Tax Implications, 37 Virginia Tax Review 421 (2018)
• Joel S. Newman (Wake Forest), Two New York Tax Cases, 34 Touro Law Review 301 (2018)
• Pat Oglesby (Center for New Revenue), Marijuana Revenue Competition — Look Out Below, 88 State Tax Notes 541 (May 7, 2018)
• Darien Shanske (UC-Davis) and David Gamage (Indiana), Why (and How) States Should Tax the Repatriation, 88 State Tax Notes 317 (Apr. 23, 2018)
• Eric Smith (Weber State University), Due Process Implications Related to State Notice and Economic Nexus Laws, 70 Tax Lawyer 833 (2017).
• Kevin Sweeney (Chamberlain Hrdlicka), The Tax Risks and Benefits of Offshore Private Placement Insurance, Thomson Reuters Checkpoint’s Practical Tax Strategies (Apr. 2018)