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Why the House tax bill has no future in the Senate
By Evan Horowitz
Globe Staff

Now that House Republicans have released a detailed tax-cut plan, it might seem like the right time to start asking about the potential effects. Will lower corporate taxes boost the economy as promised? Who gets the biggest gains? How many families will actually face tax hikes?

But these questions are premature. That’s because there’s a fundamental problem with this bill: It can’t pass in the Senate.

That’s not a statement about the uncertain legislative fight that lies ahead. True, the bill seems to be unpopular with the public at large; and right now, a number of powerful lobbying groups are mobilizing in opposition, including homebuilders and real estate brokers upset about new limits on tax breaks for mortgages and property taxes, along with small business groups concerned about not getting a fair share of the bill’s benefits.

But that’s not the real issue. The deeper problem is that House Republicans are pushing a bill that doesn’t seem to comply with Senate rules. And a fix could prove tricky.

Here’s the challenge. To ease passage, the Senate is using a special, once-a-year approach called reconciliation. The upside of reconciliation is that bills can pass with just 50 votes — no risk of filibuster. However, reconciliation bills come with special restrictions, including a requirement that they not increase the deficit after 10 years. That’s a key part of the so-called Byrd rule, and it hovers like a rain cloud over the House bill.

When House Republicans released their bill Thursday, it included the first full accounting of proposed cuts and offsetting increases. The corporate tax rate would drop from 35 percent to 20 percent, the estate tax would be slowly repealed, the middle class would benefit from expanded child tax credits — and the package would be partially paid for by eliminating a host of tax breaks that are particularly valuable for upper-middle-class families in high-cost areas like Massachusetts.

With all the costs and benefits spelled out, it finally became possible to calculate the real effect on the federal deficit. And the nonpartisan Joint Commission on Taxation did just that, estimating that the bill would increase the deficit by a total of approximately $1.5 trillion over the first decade.

That’s fine for years one through 10, but to satisfy the Byrd rule and pass Senate muster, this deficit spending has to stop — on a dime — in year 11. And there’s nothing in the bill to make that happen: no tax breaks that expire in the out years, no new tax hikes either. In fact, the cost of this bill actually rises in years seven through 10, which suggests it’s likely to keep rising after the first decade.

So while the bill meets House rules, the Senate can’t pass it. It must be altered, and pretty dramatically. Assuming — conservatively — that the annual deficits stop rising in year 10 and stay put, the Senate would need to fill an annual hole of $167 billion, according to the joint commission. Which isn’t easy.

Say they want to fill that gap by making certain tax cuts lapse in year 10. Fully reinstating the estate tax in 2028 would only net $40 billion. Paring back the child credits provides just $45 billion.

Even eliminating the signature element of this bill, its corporate tax cuts, would just barely cover the expected deficit — providing around $170 billion. But that creates problems, too, because if you make this cut temporary, you blunt its economic effect and reduce the likelihood that it will stoke economic growth.

Alternatively, senators could take the opposite tack: tackling deficits by raising taxes starting in 2028. But if there were any low-hanging dollars, the House would already have plucked them. Instead, you’d need to do something dramatic like boosting the capital gains rate or introducing a national sales tax.

So far, senators aren’t saying much about how they plan to meet this challenge. But the early responses would only seem to complicate the issue. Senators Marco Rubio and Mike Lee are calling for an even larger child tax credit than the one introduced by the House, which would further increase the long-term deficit. Their colleague, Senator Ron Johnson, wants a more flexible — and probably more costly — approach to lowering the tax rate on pass-through businesses, including small partnerships, independent contractors, and some larger firms that don’t pay corporate taxes.

There is one quick solution, but it’s bound to look opportunistic. Senators could rewrite the Byrd rule so that reconciliation bills only had to be deficit-neutral after 20 years, or 30. That way, all the cuts in the bill could be technically temporary — set up to disappear after several decades — and yet remain on the books long enough to have a fuller effect.

One way or another, though, this problem has to get solved. Right now, Republicans don’t have a workable tax bill. What they have is a proposal that might be able to pass the House but is certain to stall in the Senate.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at evan.horowitz@globe.com.