The Inflation Reduction Act tax credits are at risk

OPINION:

Way back in 2022, the Joint Committee on Taxation estimated that the Inflation Reduction Act would increase the federal deficit by $366 billion over the next 10 years. A handful of months after passage, that assessment was challenged by Goldman Sachs, which projected that the cost of the legislation would be closer to $1.2 trillion, the Cato Institute, which estimated the cost at $2 trillion over 10 years, and, inadvertently, the Treasury Department, which estimated that at current run rates the Inflation Reduction Act would cost $1.16 trillion in the coming decade.

All this is important for two reasons. First, the general direction makes it clear that the Joint Committee on Taxation is not good at guessing the cost of tax legislation. Consequently, as we wander into the festival of tax reform, we might want to think about getting rid of the ancient idea that the committee is somehow a neutrally competent referee of what provisions might cost. It is not and should not be treated as such.

Second, and perhaps more important, for several months now, the Republicans have been trying to make the math of tax reform work, concerning the scoring of tax reductions and, hopefully, matching revenue cuts and for the votes available for various proposals. The reality is that there are not enough votes to put all the tax reform preferences — extending the Tax Cuts and Jobs Act, stopping the taxation of overtime, tips, Social Security, etc. — on the credit card.

About three dozen House Republicans have already voted against the president’s preferences for spending during the debt ceiling debate. They remain in place and ready to be nettlesome.

On the other hand, a handful of House Republicans want to increase the deduction that the rich children in poorly managed states — think New York or California — can take for the excessive state and local taxes they have to pay.

Attempts to increase revenue, either by reverting to the previous top individual rates or increasing corporate taxes, have been floated and, generally speaking, sunk like concrete. Attempts to reduce spending have to date focused on reducing the growth of Medicaid funding by $500 billion to $880 billion over the next 10 years. For obvious reasons, that is not a popular approach, either.

The Republicans seem to have three choices: Reduce the amount we spend on poor women and children (the principal beneficiaries of Medicaid), increase the debt passed to the next generations, or cannibalize a rescored Inflation Reduction Act to pay for additional tax and spending reductions.

It has been noted, correctly, that there is substantial overlap between those who worry about the state and local tax deductions and those who have advocated, very gently, to keep the Inflation Reduction Act tax credits in place. It seems likely that, at some point, Republican leadership will give those Congress members an opportunity to choose between the two.

In the larger and smaller contexts, it seems more likely than not that the tax credits will be at risk. Which are voters and members of Congress more likely to consider imperative: preservation of Medicaid for women and children or the preservation of tax credits that flow to a relatively small group of companies and rich folks with electric vehicles? Among the Congress members who care about state and local taxes and the Inflation Reduction Act tax credits, are they more likely to prefer a relatively narrow tax credit or one that applies to pretty much every taxpayer in a particular state or district?

It is always difficult to guess the speed and trajectory of tax reform, but when one’s principal spending reductions are widely unpopular (and in fact are likely to be panned by the party’s own president), and when the competition includes tax provisions that directly benefit the donor base of the majority party (such as the state and local deductions that disproportionately affect residents of wealthier states), your climb becomes that much more difficult.

Eventually, the choices will be boiled down to their essence.

• Michael McKenna is a contributing editor at The Washington Times.