Reconciliation math will help determine fate of tax exemption

The scoring method that Republicans use to determine the price tag of their massive budget reconciliation bill could shape the threat facing the municipal bond tax exemption.

Negotiating a paper-thin Congressional majority, GOP leaders and the Trump administration are debating the most politically viable path to extending the Tax Cuts & Jobs Act's major provisions set to expire this year. That includes a debate over how to estimate the cost of the tax reforms. The Congressional Budget Office puts the cost at $4.6 trillion over the next decade. But that figure ? which Republicans have yet to agree to ? could be affected by different methods of pricing the tax provisions.

Relying on so-called dynamic scoring, which takes into account the macroeconomic impacts of the tax policy changes when providing revenue estimates, may prove more flexible and thus more favorable to the tax exemption than conventional scoring, which for the most part does not take into account economic changes.

A separate scoring debate turns on whether Congress should rely on a "current law" baseline, the traditional scoring method used by the CBO and Joint Committee for Taxation, or a "current policy" baseline.

Supporters of using a current policy baseline, which has never been used in legislation, argue that because the tax provisions are already in law, they don't constitute new expenses. It would bring the cost of extending the TCJA extension down to zero and eliminate deficits past the 10-year window, which is prohibited by the reconciliation process.

The method is being promoted by influential lawmakers like Senate Finance Committee Chair Sen. Mike Crapo, R-Idaho, who is the idea's lead cheerleader. House Ways and Means Committee Chair Jason Smith, R-Mo. and Senate Majority Leader John Thune, R-S.Dak., have also voiced support for the method.

"To the Republicans, the sticker price is very important," said Bobby Kogan, senior director of federal budget policy at the liberal think tank the Center for American Progress, who previously served on the Democratic staff at the Senate Budget Committee as chief mathematician and head of budget scorekeeping.

"They're trying to solve for $4 trillion, which is a lot of money, and they're struggling because the politics is difficult," he said. "The small margins is why it's so important and why Crapo has been talking about it for months."

The scoring method will be cemented as part of the budget resolution, which will outline and unlock the reconciliation process. House Speaker Mike Johnson, R-La., has said he wants to pass a budget resolution with reconciliation instructions in February.

In 2017, during the crafting of the Tax Cuts and Jobs Act, the House relied on a dynamic score but the Senate did not, after the Senate parliamentarian ruled it would not comply with reconciliation instructions.

"With the TCJA, dynamic scoring did dampen the effect on the deficit pretty considerably ? by almost one third," said Will McBride, the chief economist at the Tax Foundation. Conventional scoring put the TCJA ten-year cost at $1.5 trillion, compared to $1 trillion with dynamic scoring, McBride said.

"Certainly that's the intention this go around as well, they want a package that will grow the economy relative to the current law and are very much counting on a dynamic score having a smaller impact."

Crapo, in a recent Fox News (NWSA) interview, laid out his argument for using current policy baseline: "If you're not changing the tax code, you're simply extending current policy ? you are not increasing the deficit," he said. "We grow the economy, we save people from massive tax hikes ? tax increases that hurt them terribly, and we give permanency to the tax code. We've got to get some kind of sensibility into the way that we score."

Current policy baseline accounting has never been used to craft legislation and is "a red herring," said William Hoagland, as senior vice president of the Bipartisan Policy Center who previously spent 25 years on the Senate staff.

"It's the debate of the day up there, and my sense right now is the chair of the House Budget Committee, Jodi Arrington, sees it as somewhat of a gimmick and his preference would be we use what we've done historically, which is current law," Hoagland said. "I sense the chairman of the Senate Budget Committee, Lindsey Graham, feels somewhat similar."

The Senate parliamentarian will likely play a key role in the debate, as happened in 2017, said Kogan, who wrote a December paper that warned "switching baselines does not change the true cost of legislation ? it obscures it."

During the original TCJA, the Senate parliamentarian ruled that dynamic scoring ran afoul of reconciliation rules, forcing the Senate to rely on conventional scoring instead, he said.

This time, the question remains whether Republicans heed the parliamentarian's call, Kogan said. "If she is in keeping with previous advice, they won't be able to do this short of firing or ignoring her," he said. "We're setting up a huge fight here."

The scoring debates illustrate the political complexity of navigating such a thin majority. The politics may end up derailing the entire tax reform talk this year, warned Hoagland.

"I am beginning to think we're likely to look at another extension of current law for another year or so because I don't think the time they're going to be able to resolve all of this," Hoagland said.