As both chambers of Congress worked to pass their versions of the budget resolution, tax writers on the House Ways and Means Committee and Senate Finance Committee, along with their respective leadership, had to decide whether to use the current law baseline or current policy baseline when calculating the cost of changes to the tax code. The method they chose could cost taxpayers over $4 trillion — or nothing at all.
The current law baseline reflects the budgetary forecasting assumption that the Tax Cuts and Jobs Act (TCJA) will expire within the next 10 years, as it does under current law. These projections mean the government will collect more money through higher tax rates and the expiration of other tax provisions and incentives. Any changes to tax law Congress considers, like extending TCJA, will be measured against those higher collections. The Penn Wharton Budget Model, a nonpartisan forecasting tool frequently consulted by Congress, has estimated that permanently extending TCJA will cost over $4 trillion in the first 10 years, when measured using the current law baseline. Because the Senate’s Byrd Rule prohibits any impact on the national debt outside of the 10 year budget window, any extensions of TCJA, or preempting Social Security, tips and overtime from taxes, could not become permanent tax law. The current law baseline was used in the budget resolution passed by the House.
The current policy baseline, on the other hand, assumes the continuation of current, existing policy, even if it is set to expire. In this case, this baseline assumes the TCJA will continue, so it is not necessary to account for the costs to extend it or for the effect in the years outside of the 10 year window. For these reasons, while the cost of the current law baseline is -$4 trillion, the cost of the current policy baseline is essentially zero. Consequently, using the current policy baseline would allow permanent tax changes without violating the Byrd Rule.
The current policy baseline has never been used before and was included in the Senate’s version of the budget resolution. The Senate parliamentarian ruled that the decision of whether to use the current policy baseline is up to the committee of jurisdiction, which in this case is the Senate Budget Committee.
In the end, the budget resolution passed by both chambers used the current policy baseline. As Congress moves into the second step of the reconciliation process, in which they will need to specifically outline the ways they will raise revenue and cut outlays, leaders in both chambers will need to overcome objections from deficit hawks about the economic assumptions when using the current policy baseline. As members of Congress consider changes to tax law in reconciliation, there will be significant interest in raising revenue to mitigate some of these impacts on the debt and deficit. Members of the Ways and Means and Senate Finance Committees may strike tax incentives, like those for producing renewable energies, or increase the rate or base of existing taxes, like the endowment tax, to raise additional revenue.
