Tax deal likely much more expensive than official estimate, experts warn

A tax deal that includes business deductions and a bump in the child tax credit (CTC) could come to a vote in the House as soon as this week.

But the deal’s $78 billion price tag, which is covered by the cancellation of a different business tax credit, likely obscures the bill’s true cost in the hundreds of billions of dollars.

The business breaks in the deal, which allow businesses to pay less in tax now and more in the future, are likely to be extended before the tax code resets at the end of 2025. That means the future revenue owed to the government and currently factored into estimates may never come in, and the longer-term deficit could balloon as a result of the deal.

If just two of the main business credits in the deal — allowing for accelerated write-offs on capital investment and research and development costs — are extended, it could add more than $400 billion to the deficit, or more than five times the top line cost of the bill.

“Extending the expansion of bonus depreciation … and retroactively allowing for the continued immediate deduction of research and development expenses would increase deficits by $404 billion (excluding debt-service costs) over the 2023–2032 period,” the Congressional Budget Office (CBO) wrote in a 2022 analysis of those credits, citing the Joint Committee on Taxation (JCT).

These estimates exclude the long-term costs of another main business break in the bill that allows greater interest payment deductions, as well as the cost of paying for the added debt as it accrues interest over time.

The debt-service costs would exceed $70 billion for just the first two credits alone, the CBO noted, almost as much as the top-line credits themselves.

Republicans are hoping to extend business credits beyond 2025, when many huge tax breaks that were passed as part of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire.

House Ways and Means Chair Jason Smith (R-Mo.) has already been selling the tax plan with an eye toward those extensions — a key priority for many lawmakers, especially Republicans fond of the TCJA.

“This legislation locks in over $600 billion in proven pro-growth, pro-America tax policies with key provisions that support over 21 million jobs,” Smith said this month, using a longer-term estimate.

Budget experts say this number fits with the presumed extension of the tax cuts.

“The $600B figure … is consistent with earlier estimates of the 10-year costs of these provisions if made permanent,” Joe Hughes, a policy analyst with Institute on Taxation and Economic Policy, told The Hill.

“Two of the business provisions have to do with the timing of tax payments, so when they are only extended temporarily, the revenue score understates their true cost by assuming the government will make up some of the revenue loss in the out-years. Of course, proponents of these provisions never intend for them to truly expire,” he said.

Adam Michel, director of tax policy studies at the libertarian-leaning Cato Institute, described the official revenue scoring of the bill by the JCT as “a bit of a choose your own adventure.”

“Because most of the bill’s changes expire in 2025, the JCT estimate does not account for the very likely scenario that Congress would make these provisions permanent — or extend them again temporarily — in a year or two,” he said.

Taking the package as a whole, the business deductions and CTC would cost $1.4 trillion over 10 years — $600 billion for the business breaks and $800 billion for the CTC expansion, Michel said. The bill’s revenue raiser — a cancellation of the employee retention tax credit to the tune of $77 billion —is a one-time savings far outweighed by the extended credits.

Other think tanks and budget advocacy groups have also commented on how much higher the real cost of the tax plan proposed Smith and Senate Finance Chair Ron Wyden (D-Ore.) is than its sticker price.

The Committee for a Responsible Federal Budget puts the cost of the Wyden-Smith plan at $650 billion over the next decade “if arbitrary sunsets are abandoned and the policies are made permanent without further offsets.”

Michel cautioned that the static revenue losses produced by the plan’s business tax breaks will go down when businesses start paying taxes on the profits enabled by the investments they were incentivized to make, arguing losses could be “overstated by 50 percent or more.”

But even at the 50-percent estimate, the roughly $300 billion for the business breaks over the next 10 years is almost four times the amount of the $77 billion in revenue raised by the bill.

The prospect of a major increase in the deficit caused by a piece of bipartisan legislation comes after several near-government shutdowns and a default scare triggered by fights over the debt.

Republicans have railed against deficit spending, and Democrats have conceded to spending caps in the name of deficit reduction.

“In fiscal year 2023, the federal government ran a deficit of $1.7 trillion, $320 billion more than the previous fiscal year. It was the largest annual budget shortfall ever recorded outside of the COVID-19 pandemic years and effectively doubled last year’s deficit,” Republican Sens. Steve Daines (Mont.), Mike Crapo (Idaho), James Lankford (Okla.) and others wrote in a December letter to CBO chief Phillip Swagel, warning about the burden of interest costs while rates are above 5 percent.

Deficit levels are a growing concern among regular Americans, according to recent polls.

The share of the public that says that bringing down the budget deficit “should be a top priority for the president and Congress” in 2023 increased by 12 points since 2022, according to a survey from Pew Research Center published last May.

Both Republicans and Democrats were more likely last May than in 2022 to say it should be a top priority. However, “Republicans are still much more likely to prioritize this than Democrats are (71 percent vs. 44 percent),” Pew reported.