Republicans are debating whether parts of their tax-reform package should be retroactive in order to boost the economy by quickly putting more money in people’s wallets.
Already under pressure to secure a significant legislative victory prior to next year's midterm elections, some Republicans argue that having tax changes take effect as early as January 2017 could help their case.
The House Ways and Means and the Senate Finance committees are weighing the issue as they write legislation that can be introduced after the August recess.
Those pushing for retroactive tax changes in recent days include several prominent Republicans.
House Freedom Caucus Chairman Mark Meadows (R-N.C.) said last week that retroactive tax cuts are important so that the benefits of the tax changes are realized sooner.
“We need to make it retroactive so that we unleash the cash and the capital that is sitting there that’s ready to be invested,“ Meadows said.
Publishing executive Steve Forbes, who backed President Trump during the 2016 presidential election, said Tuesday in an op-ed for his magazine that it's crucial for tax cuts to be retroactive.
“Very important, the GOP must make these reductions retroactive to the beginning of 2017,” he wrote. “We want this tax bill to kick up the economy ASAP. And it wouldn't hurt if people got big tax refunds next April.”
Former House Speaker Newt Gingrich (R-Ga.) and former Best Buy CEO Brad Anderson wrote in an op-ed in USA Today last week that Congress needs to pass tax cuts by Thanksgiving that are retroactive to the start of 2017 in order for Republicans to keep their majorities in Congress.
“By 2018, the tax cuts will have spurred economic growth and wage increases, giving Republicans substantial momentum and a popular record of success to tout during their campaigns,” they wrote.
Some conservatives have also said that cuts to capital gains tax rates and any expansion of businesses’ ability to immediately write off their capital investment should be retroactive to the date of legislation’s introduction. Absent such retroactivity, people could delay capital gains realizations and new investments, which could hurt federal revenues and the economy.
“You don’t want anyone to delay a decision or economic activity because the taxes are going to go down in the future,” said Grover Norquist, president of Americans for Tax Reform.
Republicans have taken steps in the past to ensure that taxpayers directly felt the benefits of tax cuts. As part of the 2001 tax cuts enacted by President George W. Bush, taxpayers received rebate checks.
The recent arguments for retroactive tax changes come as Republicans are seeking to show voters that they can govern following the Senate’s failure to pass legislation to repeal ObamaCare. Passing legislation that results in bigger refunds for taxpayers next spring could be politically advantageous.
“The best thing you can do if you’re running for reelection is show people you put money in their pockets,” said Sage Eastman, a lobbyist at Mehlman Castagnetti and former Ways and Means Committee senior counselor.
Marc Gerson, chair of Miller & Chevalier and a former Ways and Means Committee aide, said that from a political standpoint, taxpayers receiving larger refunds “has value.” He also said that there could be an economic value to retroactive tax cuts if people put the additional refund money they receive back into the economy.
But there are also drawbacks to making tax changes retroactive.
Cutting taxes on a retroactive basis would be more expensive. A number of key Republicans have said they don’t want tax reform to add to the deficit, so if tax cuts are more costly, lawmakers will need to find more ways to pay for those cuts.
Kyle Pomerleau, director of federal projects at the Tax Foundation, noted that there are only a limited number of offsets that Republicans are willing to consider. As a result, more expensive tax cuts could lead a tax bill to include fewer structural changes to the tax code that could benefit the economy.
Tax and budget experts also said there are reasons why retroactive tax changes may not create economic growth. They say such changes would add to the cost of the bill, but would not be an effective way to encourage new spending and investments.
“It has all of the costs of the tax cuts but none of the economic benefits,” said Committee for a Responsible Federal Budget President Maya MacGuineas, who added that “you don’t make investments in the rear-view mirror.”
Additionally, there could be challenges for the IRS in administering retroactive tax changes, though lobbyists said the political benefits would likely outweigh those concerns.
Even if tax changes aren’t retroactive, taxpayers might still be able to see a tangible benefit from lower rates before the midterm elections.
For example, if Trump signs a tax package into law in late fall that takes effect at the start of 2018, taxpayers next year could begin to see a smaller amount of taxes withheld from their paychecks and an increase in their take-home pay.
White House National Economic Council Director Gary Cohn last week cited a desire for taxpayers to see bigger paychecks in 2018 as a reason why the administration and congressional GOP leadership have set a goal of enacting tax legislation this year.
“The way the American public will know that we’re successful is when they get their first check in 2018, they can have more disposable income in their check,” he said.