Republicans are talking about adding a 'trigger' to the tax bill -- and it could end up being a disaster for the economy

  • Some Republican senators want to add a “trigger” to the GOP tax bill that would reverse certain tax cuts if economic growth does not materialise from their legislation.
  • Advocates for the trigger say it would serve as a backstop in case the federal debt gets out of control.
  • Economists, tax analysts, conservative groups, and other GOP lawmakers think it’s a bad idea.

Led by Sen. Bob Corker, Senate Republicans are considering adding provisions to their tax bill that would trigger automatic tax increases if their tax legislation explodes the federal deficit, in an attempt to square the bill with Republicans’ mantra for fiscal responsibility.

But the idea is already drawing criticism from lawmakers and blowback from conservative groups. And it could damage the legislation’s prospects for economic growth.

The idea behind the ‘trigger’

The Trump administration has argued that tax reform would pay for itself with economic growth. But analyses agree that the GOP bill would grow the deficit substantially over the next 10 years – even when adjusting for the impact of possible economic growth.

The projections have raised the concerns, most prominently from Corker and Republican Sens. Jeff Flake and James Lankford. Corker and Lankford’s solution: Insert a so-called “trigger” in the bill that could increase federal revenues if the Tax Cuts and Jobs Act (TCJA) does not produce the promised economic growth to mitigate the deficit increase.

According to Corker, Senate GOP leadership agreed in principle to include a revenue-raising trigger in the bill when it comes to the Senate floor.

While it is unclear the mechanism used to increase revenue, Corker told CNBC on Tuesday that taxes would likely increase on corporations and individuals to make up any potential shortfall.

But it could dampen economic growth, make recessions worse

Despite Corker’s insistence that the trigger would not be “anti-pro-growth,” many economists and tax experts say it could be counterproductive for Republicans’ tax reform goals – and possibly harm the US economy.

The possibility of a tax hike at some point in the future would likely depress companies’ willingness to invest in the near-term and mute the tax bill’s promised economic benefits.

“If lawmakers cut the corporate rate to 20%, but there’s a 50-50 chance that a trigger causes the rate reduction to reverse, corporations will not assume that they will have a 20% rate on their investments going forward,” Scott Greenberg, senior analyst at the Tax Foundation, tweeted Tuesday. “This means that corporations would invest less in response to the 20% rate than they otherwise would have. The trigger would become a self-fulfilling prophesy.”

Eric Toder, the co-director of the Tax Policy Center, said it is hard to know the potential effects of the trigger since there are few details. But he noted that an economic recession could lead to a decline in revenue and possibly set off the trigger.

“You’d be worried about raising taxes in a recession. That would not be a good economic thing to do and could make a recession worse,” Toder told Business Insider.

Lankford told CBS News on Wednesday that the senators were trying to develop a safeguard to prevent the trigger hitting during recessions, but there could still be a smaller tax increase in that case.

Toder also agreed that a trigger could affect the way that businesses invest, because the profit from a large investment could end up being taxed more than the proposed 20% corporate rate.

“If a business would be taking deductions today at a 20% rate and the income is coming later maybe at a 24% or 26% rate, maybe they won’t want to invest now,” he said.

Marty Sullivan, chief economist for Tax Analysts, thought the trigger is a good idea – but only because he doubts the bill will create much economic growth anyway.

“It’s sloppy, stupid, full of all types of uncertainty and arbitrary rules, but at least it does put a guardrail up in case the deficit gets out of control,” Sullivan told Business Insider.

Sullivan said the inherent uncertainty of the tax bill’s partisan nature – Republicans are passing it through a method that would require only GOP votes – will make it unlikely for businesses to invest anyway.

Toder said that if Republicans believe there is a need for a trigger at all, they should reevaluate the entire bill.

“If they’re really concerned about the deficit and concerned that the growth effect that would eliminate those deficits won’t materialise then they shouldn’t be passing this bill,” Toder said.

Conservative groups and some GOP lawmakers hate it

While the idea is gaining steam from a faction of the Senate Republican conference, the trigger has received blowback from influential groups.

The US Chamber of Commerce, a key voice in the tax debate, came out against the idea on Tuesday. JD Foster, the chief economist for the Chamber, wrote in a blog post that it is “a terrible idea.”

Freedom Partners, another conservative pro-tax cut group, also decried the idea.

“It’s hard to imagine a more counterproductive policy than imposing automatic tax hikes on an economy that isn’t growing as fast as expected,” Nathan Nascimento, executive vice president of Freedom Partners, said in a statement. “Furthermore, the very threat of looming tax hikes could be a drag on growth all by itself.”

The Club for Growth, an influential conservative grassroots group, also rejected the idea of a trigger. And the conservative group Americans for Tax Reform, led by prominent figure Grover Norquist, also opposes it.

Several of Corker’s own Republican colleagues have also debated the merits of the trigger. Perhaps most colourful among them was Sen. John Kennedy of Louisiana.

“I am not going to vote to implement automatic tax increases on the American people,” Kennedy told reporters. “If I do that, consider me drunk. I’m not voting for that.” (On Wednesday, he said he “might have to get drunk and vote for it.)

As a solution, some Republicans are reportedly considering an altered trigger – one that would automatically cut spending instead of raise taxes. Sen. Ted Cruz even floated the idea of a trigger that would cut taxes more if economic growth did not materialise.

While the exact details of the trigger are still being worked out, the Senate is expected to begin debate on the TCJA on Wednesday and vote on the bill by the end of the week.

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