House Tax Bill Seen Hiking Bills on Some Lower Earners Long Term

(Bloomberg) -- Congressional Republicans scrambled on Sunday to respond to economic studies that suggest the House’s tax-overhaul bill would benefit the highest earners most in the long run and would fail to pay for itself through economic growth.

Together, the studies -- one from an official congressional scorekeeper and the other from a conservative-leaning policy group -- reflect the challenges congressional Republicans will confront as they try to push tax legislation through the House in roughly two weeks’ time.

“This is a clear middle-class tax cut,” House Speaker Paul Ryan said in response to questions during an appearance on “Fox News Sunday.” “No two ways about it.” On Saturday, Senate Majority Leader Mitch McConnell went even further: “At the end of the day, nobody in the middle class is going to get a tax increase,” he said during an interview with MSNBC’s Hugh Hewitt.

Both were stressing the line they and President Donald Trump have sought to convey over several weeks -- that their tax plan would benefit the middle class and not the highest earners. But experts say at least some middle-income families would see tax increases due to the elimination of certain breaks, and studies of the House bill raise questions about which income groups would be best served -- both in the short term and the long run.

The bill would provide an immediate tax cut for all income groups -- with short-term benefits focused on middle-income earners, according to an analysis released by Congress’s Joint Committee on Taxation. But by 2023, the changes would mean higher federal tax bills for some, including those who make between $20,000 and $40,000 and those who make between $200,000 and $1 million, according to the JCT analysis.

Meanwhile, households earning $1 million or more a year would see continued reductions -- and by 2025, that group would be getting the most benefit of any group studied, according to JCT, one of Congress’s official scorekeepers for tax legislation.

McCarthy’s Pledge

While the JCT didn’t specify why benefits for lower earners would fade, the House bill would phase out some provisions that would tend to help them by 2023. For example, an enhanced child tax credit would expire that year. House Majority Leader Kevin McCarthy said Sunday that House tax writers had to include that provision because of congressional budget rules.

“But I promise you this, as the growth comes in, those will be kept,” McCarthy said during an appearance on CBS’s “Face the Nation.”

The JCT’s analysis looks at nationwide averages, but for some taxpayers -- especially those in high-tax states including New York and New Jersey -- results may vary. That’s because of a provision in the House bill that would eliminate the individual tax deduction for state and local income taxes -- and cap the deduction for state and local property taxes at $10,000.

“This particular bill, by taking away the state and local tax deduction, has a particularly devastating effect on New York and New Jersey,” said Representative Peter King, a Long Island Republican, said on ABC’s “This Week.” “And it would have an extremely damaging effect on my constituents who are middle -- in some cases upper middle -- but mostly middle income.” King said he can’t vote the bill as it stands, adding that he’s hearing objections from Trump voters in his district.

Property-Tax Cap

Representative Tom MacArthur said he welcomes the bill’s provisions for preserving and capping the property tax break and eliminating the alternative minimum tax, which tends to hit taxpayers as they enter the upper middle class. Keeping the property tax deduction represents “a huge win for middle-class taxpayers,” said MacArthur, a New Jersey Republican. He spoke on Fox’s “Sunday Morning Futures” program.

Meanwhile, the long-term effects of the House bill were drawing particular attention.

Economist Lily Batchelder, who served as an economic adviser to Democratic President Barack Obama, said on Twitter that by 2027, people earning $1 million or more annually would see an after-tax increase of 2.2 percent in their incomes, based on the JCT findings. “Middle class gets far less or nothing,” Batchelder said on Twitter.

The House Ways and Means Committee, which will begin public hearings on the bill Monday, responded to the JCT analysis with an extensive news release over the weekend that said the study “omits the economic effects” that the tax changes would create. Conservatives say the changes would spur faster economic growth that would lead to higher incomes.

Corporate Rate

Trump’s economic advisers have suggested that by itself, the plan to slash the corporate tax rate to 20 percent from 35 percent would increase average household income by at least $4,000 over the long run. But other economists have questioned that assertion -- and pointed out that the concept of “average income” would allow for huge increases at the top of the income scale and comparatively meager ones elsewhere.

The Tax Foundation, an independent, right-leaning group in Washington, sought to factor such economic changes into its analysis. It found that over the long run, the House bill’s changes would lead to a 3.9 percent higher gross domestic product, would add 975,000 full-time equivalent jobs and would lead to wages that are 3.1 percent higher than they would be otherwise.

When factoring in economic growth, all taxpayers’ after-tax incomes would be 4.4 percent higher by 2027, the group’s analysis found -- with somewhat lower benefits for those in the top 10 percent of the income scale. Households whose incomes put them in the bottom four-fifths of earners would see increases ranging from 4.5 percent to 4.9 percent, according to the study. The top 1 percent of earners would see after-tax benefits of 3.9 percent.

‘Dynamic Scoring’

The reason for the differences has to do with “dynamic scoring” -- a method of determining the revenue effects of changes that tries to incorporate their effects on the larger economy. But the method is somewhat controversial in that economic models vary and can produce different results. It’s also opposed by budget hawks, who say it’s imprudent to assume that a fiscal policy change will lead to growth and new tax revenue when macroeconomic trends depend on many unpredictable variables.

In its emailed response to the JCT findings, the Ways and Means panel cited that Tax Foundation study -- and other data from the policy group showing that people at the top half of the income scale pay the vast majority of U.S. income tax. Those data show that “the top 10 percent of taxpayers paid 71 percent of all income taxes,” according to the news release. “For this reason, any reductions in income taxes will necessarily provide those who share in paying income taxes, while also preserving relief for low- and middle-income families.”

Still, the Tax Foundation’s study wasn’t all good news for the House bill’s prospects. It said the bill would lower federal revenue by $1.98 trillion over 10 years -- before accounting for any economic growth. After accounting for growth, the bill would still reduce revenue -- by $989 billion, the study found.

That’s bad news for fiscal conservatives. On Sunday, Republican Senator James Lankford of Oklahoma said he’d vote against any measure that balloons the federal debt.

“It’s one thing to be able to cut taxes,” Lankford said on NBC’s “Meet the Press.” “It’s another thing to be able to say, ‘How are we going to deal with our debt and deficit.”

--With assistance from Catarina Saraiva Mark Niquette and Ben Brody

To contact the reporter on this story: Sahil Kapur in Washington at skapur39@bloomberg.net.

To contact the editor responsible for this story: John Voskuhl at jvoskuhl@bloomberg.net.

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