Yes, Virginia, the New Supercommittee Can Include Tax Hikes

So, there's a debt ceiling "deal" in Washington after months of haggling. The outline has some things to commend it (substantial and enforceable spending cuts, no immediate tax increases), and some things that have prevented NTU from supporting it (doesn't require passage of a Balanced Budget Amendment). But one of the most confusing aspects has been the so-called "Supercommittee" the debt ceiling bill establishes. This evenly-divided 12-member Joint Select Committee would be required to pursue $1.5 trillion in deficit reduction to report before Thanksgiving and, should a majority of 7 or more committee Members support its recommendations, Congress would be required to give the resulting bill expedited floor consideration (AKA no amendments, no filibuster) in both chambers by Christmas.

But note that its goal isn't spending reduction, it's deficit reduction. That's a code that should set off alarm bells for conservatives as setting the stage for tax increases. In fact, if you look at the legislative language of the new version you'll find that there is no prohibition on inclusion of tax hikes. So why is it that Republican proponents of the bill have claimed this shouldn't be cause for concern? Speaker John Boehner's own presentation to his conference said that the structure would "effectively mak[e] it impossible for the Joint Committee to increase taxes." Who's right here; does the bill allow for tax increases or not? The answer is that it does indeed allow for tax increases, and here's why.

The Speaker is referring to the fact that the committee will be required to operate on the Congressional Budget Office's "current law" baseline, which assumes that ALL of the Bush tax cuts expire and the Alternative Minimum Tax dramatically expands. That means that once those changes kick in at the end of 2012 we're looking at $3.5 trillion worth of built-in tax increases over a decade. As such, any monkeying with marginal income tax rates that would leave them below the full Clinton levels (i.e. an attempt to extend all Bush tax cuts except those for the "wealthy") would actually be scored as a "tax cut" from the assumed $3.5 trillion hike in the baseline, thus failing to fulfill the committee's required goal of reducing the deficit. In order to produce something that would score as a "tax increase" by altering marginal rates, you'd have to go above and beyond Clinton levels and increase taxes even more than the $3.5 trillion that's baked into the cake, something that I can't imagine any Republican agreeing to.

So the Speaker is right that the structure of the committee effectively protects against marginal rate increases or any wholesale tax reform that would yield dramatically more revenue than the additional $3.5 trillion that's already built in, but here's what is being ignored. The Supercommittee could very easily take a number of actions that would both hike taxes compared to where they are today and score as a deficit-reducing tax increase on CBO's current law baseline. For example, they could implement a cap of the mortgage interest deduction with the intention of reducing that benefit for wealthier Americans. That policy would likely amount to a substantial tax increase and would count as a deficit-reducer on CBO's current law baseline. The same is true of any number of changes to credits, deductions, or exemptions. The Supercommittee could also resort to tax surcharges, much the way the 2010 health care law did. They could easily add a brand new tax surcharge of, say, 5% on incomes over $1 million. This is essentially creating a new layer of taxation on top of the existing marginal rate structure. Such a surcharge would amount to a substantial tax increase and would count as a deficit-reducer on CBO's current law baseline.

As you can see, it's not accurate to say that the committee's structure makes tax increases impossible. It makes changing marginal tax rates close to impossible, but it doesn't really do anything to constrain the ability of the committee to modify credits, deductions, and exemptions in a way that could bring hundreds of billions in new tax revenue to pay for Washington's overspending. But proponents of this bill say that there are two more backstops: the appointees to the committee, and the House of Representatives. They say that if we appoint conservatives to the committee that they'll refuse to agree to a report including tax hikes. That may well be true, but I don't know how confident I am given that apparently dozens of Senate Republicans are supporting the so-called "Gang of Six" proposal which seeks a $2.3 trillion tax hike achieved in large part through modifications to credits, deductions, and exemptions. All the committee needs to secure expedited consideration of its proposals is for one Republican to join all six Democrats.

As for the House of Representatives and its strong Republican anti-tax majority, that too is of little comfort. If Democrats united in support of a package including tax increases, they'd easily secure Senate passage and would only need 25 Republicans to join the 193 Democrats to secure House passage. Normally I'd be confident that Republicans could muster a sufficient number of votes against a tax increase, but the Gang of Six experience and the profusion of rhetoric conflating reductions in tax burdens through credits/deductions/exemptions with actual government spending gives me serious pause.

This has been a long post, but the bottom line is this: the Supercommittee can include tax hikes and you can bet your bottom dollar that President Obama and Congressional Democrats, many of whom feel burned by this current debt ceiling deal, will push extremely hard to make sure that it does exactly that.