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In a letter to House Speaker Paul Ryan (R-WI) on April 25, 2017, the chief of staff of the Joint Committee on Taxation (JCT) projected that the revenue loss for a three-year cut in the corporate tax rate to 20% would be significant and that there would be "nonnegligible" losses in the tax years immediately following the 10-year budget window. The letter suggests that even "sunsetting" a corporate rate cut to 20% after such a short period of time will create problems under the Senate's budget reconciliation rules that could subject a bill containing such a provision to a 60-vote point of order.

A bill losing revenue beyond the budget window runs afoul of budget reconciliation rules that Republicans are eyeing for tax reform legislation, though there may be ways to counterbalance the out-year effects. Under the budget reconciliation rules, any provision of a reconciliation bill that increases net outlays or decreases revenues during a fiscal year after the years covered by the reconciliation bill would be subject to a point of order, and that point of order could only be waived with 60 votes. That out-year revenue loss could be offset by other provisions in the same title of the reconciliation bill in order to skirt the reconciliation rules, but this just highlights the balancing act tax policy makers will have to undertake to ensure the reconciliation rules are followed assuming the tax legislation is going to have to pass the Senate in a largely partisan manner.

It also highlights how the out-year effects are different for a corporate versus an individual tax cut. In 2001, Congress passed and President Bush signed a significant individual tax rate cut, but were permitted to skirt the Senate budget reconciliation rules by sunsetting the tax cuts after 10 years. JCT's letter to Ryan said the out-year revenue effects of sunsetting the three-year corporate rate cut were more complicated and involved increased carryforward of the credits for years beyond 2020 and lowering of the repatriation baseline from the temporary increase in repatriation of foreign earnings of US companies during the period of reduced tax.

The letter, which said a corporate tax rate reduction to 20% for 2018-2020 would cost $490 billion over 10 years, follows April 20 comments by George Callas, Speaker Ryan's senior tax counsel, that "you could not do a straight-up, un-offset three-year corporate rate cut in reconciliation. The rules prohibit it. You might be able to do two years."

The release of the JCT letter comes ahead of President Trump's planned announcement on tax reform. Press reports indicate the President may call for a corporate income tax rate of 15% and pass-through entity tax rate of 15%, which would be consistent with Trump's campaign tax plan. It has also been reported that he may propose a switch to a territorial tax system.

The JCT letter is attached.

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ATTACHMENT

Ryan JCT Letter