THE OLD BASELINE GAMES: It’s definitely down-in-the-weeds stuff, and likely more than a year out from when Washington might come to an agreement over how to handle the expiring parts of the Trump tax cuts. But there already is some chatter over how Congress could fiddle with budget baselines to make tax-cut extensions look more palatable and smooth the passage of a big tax bill next year. This might seem to be more of a Republican issue, and something that could be more in play if the GOP completed a full sweep in November, though that's tough to say with any certainty at this point. (For their part, lots of Democrats would have no issue raising taxes on the rich and corporations as part of a 2025 tax deal.) One way to make tax-cut extensions look less expensive, at a time of growing concern about the $35 trillion and counting federal debt? By using what’s known as a current policy baseline, something that Sen. Mike Crapo (R-Idaho) floated recently. A current policy baseline would basically assume that keeping the temporary tax cuts that Republicans enacted in 2017, including lower rates, a broader standard deduction and a special deduction for pass-through businesses, wouldn't add to deficits. (A current policy baseline, to be fair, would also assume that a revenue-raiser like the cap on state and local deductions would stick as well.) The assumption more or less has been that lawmakers would use a current law baseline, under which CBO projects that it would cost in the neighborhood of $4 trillion over a decade to keep all the expiring parts of the Tax Cuts and Jobs Act. MORE ON THIS in a bit, but first thanks for coming back for more Weekly Tax — where we’re playing our share of The Highwaymen in honor of Kris Kristofferson. (Did you know he was a Rhodes scholar?) Today marks 56 years since Boeing first showed off its newest airplane — the 747, the first ever “jumbo jet.” Tell us something huge. Email: bbecker@politico.com, bfaler@politico.com, bguggenheim@politico.com and teckert@politico.com. You can also reach us on X at @berniebecker3, @Brian_Faler, @ben_guggenheim, @tobyeckert, @POLITICOPro and @Morning_Tax. Want to receive this newsletter every weekday? Subscribe to POLITICO Pro. You’ll also receive daily policy news and other intelligence you need to act on the day’s biggest stories. LOOKING AHEAD: This isn’t exactly new ground for Crapo, who’s at the ready to be Senate Finance chair if Republicans take control in November. Crapo has long said that he doesn’t think that the deficit impact of pro-growth tax cuts need to be offset, including over and over during the debate over the bipartisan tax bill that he opposed this year. (That sounds more like budget gimmickry to others, for whatever it’s worth.) Undoubtedly, many policymakers mean it when they say that the rising red ink could constrain their ambitions in 2025. But that’s also easy to say now, and Crapo’s comments seem to have raised the eyebrows of deficit hawks around town. “There will undoubtedly be efforts to pretend that extending the tax cuts is free — obviously this is not the case,” said Maya MacGuineas of the Committee for a Responsible Federal Budget. “Extending policies that are scheduled to expire — and were scored as expiring — would clearly add to the national debt.” In the big picture, there is a very long way to go until any deal is struck, various congressional budget rules could make it more difficult to use alternative baselines and there could be some political backlash if Washington tried to use what could be seen as budgetary sleight-of-hand to make tax cuts look more affordable. But it’s already possible to see why that idea still might become increasingly attractive to policymakers. Veterans of previous tax negotiations say that it will get harder for lawmakers and other officials to hold on to their deficit concerns when talks get deeper into the details and they search for broadly acceptable ways to pay for potential tax relief. “It is extremely difficult to come up with offsets that you can get consensus on, even within a party,” Mary Burke Baker of K&L Gates said on a webcast that the firm hosted last week. “I wouldn’t be at all surprised to see some sort of machinations with the baseline when push comes to shove.” On top of that, voters might say that they’re concerned about ballooning deficits. But it’s also not necessarily clear that they’ll punish voters for approving policies that add more red ink. (To put that another way: TCJA’s relative unpopularity doesn't really seem to have been spurred by the fact that it cost around $1.5 trillion.) "We’ve consistently seen over time near-term policy preferences taking priority over long-term deficit and debt concerns," Rohit Kumar of PwC told Pro Tax recently. "You don’t end up with a $34, $35 trillion national debt without that being true across generations of elected officials." A final point: It might not have much effect on what lawmakers do next year. But George Callas, who was a senior House GOP tax aide in 2017, argued that a current law baseline made more sense for next year’s tax negotiations, precisely because of decisions that Republicans made in crafting their tax law — including having individual provisions expire after eight years. “My view is that the TCJA resolved the differences between baselines and Congress now operates on a current law baseline,” Callas, now at Arnold Ventures, told Weekly Tax. SINCE WE’RE IN THE WEEDS: Here’s a term you might have started hearing more when it comes to tax policy — horizontal equity (or inequity). In essence, horizontal equity is the idea that taxpayers that make the same amount of money should pay the same amount in taxes. It’s a principle that’s increasingly being discussed because of a range of proposals from the presidential campaigns, like scrapping taxes on tips, that experts say would wrongly favor certain kinds of income over others. But horizontal inequity is also an issue with the current tax system, as Yale’s Budget Lab notes in a new report out today. The group also is releasing a new interactive tool that allows users to further explore how and why different people making similar incomes can pay varying amounts of tax. That’s currently more of a problem among higher earners, though it’s something that happens at all income levels. In fact, a full 95 percent of households in the top bracket pay below their statutory rate — a figure which bumps up to 99 percent for the top 0.01 income percentile of earners. Meanwhile, only around a quarter of filers in the bottom bracket pay below their statutory rate. The Budget Lab also found that rolling back provisions that contribute to those inequities could raise some $560 billion in 2026. But beyond sheer numbers, the group’s Natasha Sarin said the fact that people making the same amount can have such different tax burdens contributes to the public’s general feeling that the tax code is unfair. That’s something policymakers should keep in mind during next year’s negotiations, Sarin added. “They need to be looking not just through the lens of cost, but also asking, ‘What does this do to overall equity?’” Sarin said. “That’s an important part of rebuilding trust in the tax system.” Still, it’s worth noting that there are legitimate policy arguments for at least some of the provisions that cause these horizontal inequities in the tax code, like the preferential treatment of capital gains, the mortgage interest deduction, the deduction for state and local taxes and the Child Tax Credit. It’s also worth pointing out that the Budget Lab’s new report doesn’t take into account another reason that the tax burdens of the rich have been in the news recently — the fact that the super wealthy don’t pay taxes on their accumulated assets. (That’s something that many on the left want to change, but plenty of people on the right believe is perfectly acceptable.) The Budget Lab’s John Ricco did say that the group is looking to release further research on horizontal inequity soon that would incorporate policies like no tax on tips or overtime.
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