April 22, 2004

April 22, 2004 | WebMemo on Federal Budget

PAYGO on Tax Cuts Could Bring Back the Estate Tax

Now that both the House and Senate have passed budget resolutions for fiscal year 2005, the budget debate moves into conference. The central concern of conferees has been whether the pay-as-you-go, or PAYGO, budgeting mechanism should apply to tax cuts. If PAYGO on tax cuts were in force, however, the likely result would be massive tax increases, as the Bush tax cuts of 2001 and 2003-including the elimination of the estate tax-expire on schedule. Because this would prolong double taxation and put family businesses at risk, the conferees should reject PAYGO on taxes.

Senate PAYGO Would Force Massive Tax Increases

If PAYGO is applied to tax cuts-which it is in the Senate's resolution but not in House's-taxes would almost certainly go up. While PAYGO allows current entitlement programs to grow unchecked, it would likely lead to the expiration of the current tax cuts. Merely retaining the tax relief that Americans now enjoy would, under PAYGO, require 60 votes in the Senate and a waiver in the House. To avoid this supermajority requirement, lawmakers seeking to prevent tax increases would have to either: A) raise other taxes; or B) reduce mandatory spending by a larger amount than has ever been enacted. Option A is still a net tax increase (raising one tax to avoid raising another), and option B is probably politically unrealistic.

Under current law, the burden of the estate tax will be reduced in 2005, 2006, 2007, and 2009, before it is repealed entirely in 2010. With PAYGO on taxes in place, however, the estate tax would most likely be reinstated-with a top rate of 60 percent and a $1 million exemption-on January 1, 2011. These terms are far worse than those in effect today: a 48 percent top rate and a $1.5 million exemption.

Conclusion

During the conference process compromise is a necessity, but conferees should stand firm against applying PAYGO to tax cuts. Allowing the Senate's PAYGO provision to move forward would seriously endanger the President's tax cut program, which is doing so much to help the economy, and once again put America's family businesses at risk of double taxation and liquidation to pay the onerous estate tax.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies