Last week the Congressional Budget Office (CBO) released a letter that reviewed how its revenue forecasts have declined over the past two years. While we can’t know for sure (and the letter itself declines to speculate), the evolution of CBO’s projections suggests that the Tax Cuts and Jobs Act (TCJA) may cost considerably more in foregone revenue than was originally forecast.
In December 2017, just as Congress was about to pass the mammoth Tax Cuts and Jobs Act, the congressional Joint Committee on Taxation (JCT) provided the official budgetary score for the bill: It would reduce revenues by about $1.5 trillion over 10 years based on conventional budget scoring—exactly the fiscal target congressional Republicans had set for themselves. After accounting for the macroeconomic effects of the law, (dynamic scoring), JCT estimated the bill would reduce federal revenues by about $1 trillion over the coming decade. Some proponents of the bill even argued that its macroeconomic effects would be so large that the bill would actually increase revenues.
We can get an idea of how the forecasts are turning out so far by comparing pre-TCJA revenue projections with the latest projections. There haven’t been any other major alterations to federal tax law or dramatic developments in the economy since 2017, so that comparison should provide a reasonable rough estimate of TCJA’s revenue effects.
In June 2017 (pre-TCJA) CBO projected that revenues would total $43.016 trillion over 2018-2027. In its latest post-TCJA projections from August 2019, CBO projected that revenues would dip to $41.409 trillion over the same period, a decline of about $1.6 trillion compared to the JCT’s $1 trillion projection from December, 2017. CBO recognized some of that revenue shortfall as early as April 2018, when it updated its projections.
What happened? The biggest reason is that projected taxes paid by businesses fell by much more than expected. Before the law was passed, JCT estimated that business and international provisions of TCJA would reduce revenues by $329 billion over 2018-2027. That was a conventional estimate that excluded macroeconomic effects. Thus, the actual revenue loss should have been less than that if the law improved the overall economy.
However, CBO’s latest forecast projects corporate income taxes will be lower by $750 billion over 10 years compared to its pre-TCJA projections, an additional decline of over $400 billion. The comparison is not perfect because the “business and international” provisions include more than just corporate income taxes, but the categories largely overlap. By comparison, projected individual income taxes are down by only about $100 billion more than was expected in JCT’s 2017 estimate. Of course, projected tax receipts may have changed for reasons other than the TCJA; corporate income tax receipts in particular are volatile and difficult to predict. Still, the evidence is suggestive that the TCJA may have reduced corporate income taxes more than anticipated.
Whatever the reason, the change in forecasts suggests that the TCJA has and will cost more than expected.
