The Trump administration is considering backdating tax reform to the start of the year, according to Treasury Secretary Steven Mnuchin. While such a maneuver is feasible, it may not be politically palatable, especially on the corporate front.
Mnuchin said that making tax legislation backdated to January 1, 2017, is "absolutely" something the White House is considering in an interview with CNBC's Delivering Alpha conference on Tuesday, predicting such a move would be a "big boon to the economy." But tax experts are skeptical of the prospect of rendering legislation retroactive.
"Backdating tax reform is a really poor idea," said Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. "Backdating grants windfalls for past activity, which is hard to justify economically. Announcing a tax plan, simultaneously with effective dates, is the conventional approach."
Republicans have yet to release their full proposal for tax legislation, but it is likely their bill will include tax reductions for corporations and a simplification of the individual tax code as well. What revenue-raisers might be included, or whether the bill will be budget-neutral, remains to be seen.
It is not clear from Mnuchin's comments whether the administration is considering making all aspects of the eventual tax reform bill retroactive or just parts of it, or which groups it would target. Taxpayers would likely applaud back-dated tax cuts. Revenue-raisers, not so much.
"Because Congress is generally reluctant to enact retroactive tax increases, it seems very unlikely to me that any of the pay-fors would be retroactive," said John Gimigliano, head of KPMG's tax legislative services group. "The more likely scenario is that some of the tax benefits are retroactive, but that also costs money, potentially a lot of money. It could be an expensive proposition."
Backdating corporate tax cuts would deliver a major windfall to American companies at the expense of sizable revenue losses to the federal government.
Not only could such a gift to businesses be looked down upon by American voters, but it would also complicate the GOP's plan to pass tax legislation through budget reconciliation, a process that requires only a simple majority in the Senate but brings with it limitations on adding to the deficit beyond the span of a decade.
"The general premise is that anything that's retroactive is likely to be the candy part of the equation and not the medicine part of the base-broadening," said Jon Traub, managing principal of the tax policy group at Deloitte. "So more money that's spent early on tax cuts without being offset by commensurate base-broadening increases the fiscal pressure on the 10-year budget window."
"If you make relief retroactive to January 1, you wouldn't do revenue raisers to January 1. Which means 2017 just becomes a year of un-offset tax cuts, and it becomes a very expensive year as a result," said Rohit Kumar, head of the tax policy practice at PwC and a former aide to Senate Majority Leader Mitch McConnell.
House Ways and Means Committee Chairman Kevin Brady (R-TX) in an appearance on CNBC on Wednesday said "all [is] under discussion" when asked about Mnuchin's openness to backdating tax reform. However, he has in the past shot down the idea of retroactive revenue raisers. "Retroactive tax increases are always a horrible idea," he told reporters on September 8, according to Bloomberg.
To be sure, rendering certain elements of corporate tax law retroactive is not unprecedented. There are cases where Congress has done it in the past, such as retroactively extending research and development credits. The assumption there has been that companies have been making decisions under certain expectations. But that's not the case here.
"You can question whether some of these provisions, whether companies really have reliance they're going to be done and made business decisions based on the promise of them being done," Traub said. "If the answer is no, there's no real reliance there, then in some sense, you're just subsidizing companies for activities they otherwise would have engaged in."
Instead of backdating corporate tax cuts, the GOP could instead opt to render individual reforms retroactive. Returning money to individual taxpayers would probably be more politically appealing to lawmakers, especially as the 2018 election cycle approaches. Moreover, they could pick and choose which benefits to make retroactive.
Treasury Department representatives did not return requests for comment on which parts of tax legislation the administration is considering backdating.
Backdating tax reform to January 2017 also assumes a bill will be passed this year. While many in the GOP continue to insist a bill get through by year-end, most speculate legislation won't reach the president's desk until 2018.
If legislation passes in early 2018, it's possible and even likely that it would be backdated to the start of the year, Kumar said. But reaching back to 2017 is unlikely.
"In a world where you've got a finite number of dollars you can dedicate to tax reform, if you have one year on the front end that's completely unpaid for, it ends up consuming a disproportionate amount of total resources available," he said. "It likely degrades the quality of the final product."
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