NC Budget and Tax Center

Senate “Gang” considers using new revenues to reduce federal deficits

Earlier this week, the New York Times reported the efforts of a new bipartisan “gang” in the U.S. Senate to hammer out a framework for federal deficit reduction prior to the upcoming lame duck session of Congress. Along with grappling with long-term federal deficits, the gang is looking to address the looming fiscal challenges associated with the expiration of tax cuts passed under Presidents Bush and Obama and the threat of sequestration, the across-the-board spending cuts to critical defense and non-defense programs set to begin taking effect in January.

While the broad outlines seem encouraging, particularly the commitment to finding new revenues through tax reform, there are some concerns in the emerging framework that need to be addressed.  Along with ensuring that Medicare and Social Security benefits remain stable, perhaps the most pressing issue involves the ways in which the gang actually plans to find these new revenues.

As recent research by the Center on Budget and Policy Priorities makes clear, raising new revenues from an overhaul of the tax code requires grappling with the issues of where we start counting and when we stop.  In terms of where we start, the assumptions of the bi-partisan Simpson-Bowles Commission (the fallback position for the new gang if their new framework doesn’t work out) is that the tax cuts on incomes over $250,000 expire, and any new tax reform efforts need to start counting from that baseline.  Moving the goal posts by assuming all the tax cuts will be extended actually takes much needed revenues off the table, likely ensuring that less overall revenues will actually be found for deficit reduction.

Secondly, and perhaps more urgently, the gang needs to recognize that any tax reform effort intended to raise new revenue, well, must actually raise new revenues at the end of all the reform.  By definition, it can’t be revenue neutral like some tax reforms of the past (notably the 1986 reform).   In other words, when we stop counting, we need to make sure there’s additional revenue generated by an overhaul of the tax code.

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