Some Thorny Tax Questions for Now and Later

Special Guests: George Callas

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This week on Facing the Future, we look at some of the thorny short and long-term tax questions facing Congress in the waning days of 2022. To help us sift through the morass of tax policy options and how they impact taxpayers, the economy, and the federal budget, we were joined by one of the best ‘tax guides’ in Washington DC, George Callas. George is currently Executive Vice President for Public Finance at Arnold Ventures, but prior to that worked on Capitol Hill for more than 15 years in various capacities, including as tax counsel to the House Ways and Means Committee, and as a key aide to former House Speaker Paul Ryan. 

George helped draft one of the signature legislative achievements during the Trump Administration, the Tax Cuts and Jobs Act (TCJA) of 2017. Two other Capitol Hill veterans, Concord’s policy director Tori Gorman and chief economist Steve Robinson, joined me for the conversation. Our discussion began with the fate of “tax extenders”, a collection of credits, deductions, exclusions, exemptions and special rates embedded in the tax code that will expire if not extended by Congress. Callas noted that not all of these extenders created equal.

“Some of them probably are effective incentives,” said Callas. “Reducing the cost of capital and increasing the net present value of an investment will lead to more of it. For some of them, there is an economic case to be made. Others I think are more special interest provisions where because of political influence we just use the tax code to pick winners and losers and subsidize winners not because of economic merit, but because of political influence. In those cases, my view tends to be that those types of tax breaks distort economic decision-making and lead to a less efficient allocation of resources. So maybe they’re effective in rewarding a politically favored industry, but I don’t know that they’re effective in improving the overall functioning of the economy.”

There are various reasons why some of these tax extenders should be made permanent, and others should remain temporary or allowed to expire. Callas is pessimistic that Democrats and Republicans will be able to strike a deal on tax extenders as the clock runs out on the 117th Congress – including the top Democratic priority of reinstating the expanded child tax credit. 

“I have always been on the skeptical side that there will be a tax package,” said Callas. “But If there is a tax package, there’s bipartisan support for a package of retirement savings changes. That’s probably number one on the list, and the child tax credit is very high on the list of things that would get in. But to have a tax package in this lame duck with tax extenders first requires a deal on an omnibus on the appropriations side. If Congress just does a continuing resolution for the short term to keep the government from shutting down, and punts the larger question of appropriations into next year, that CR is too light of a vehicle to carry a tax package. If you have a deal on government funding for the fiscal year, then you have something heavy enough to carry a tax title.”   

Extension of these tax extenders would likely add billions of dollars to projected deficits, because according to Callas, very rarely are any of them paid for by revenue offsets or spending cuts. 

“In the past, it’s been sort of this bipartisan kumbaya, yeah, we can do stuff your side likes, and stuff our side likes, and we just won’t pay for it, because it’s December, and Merry Christmas everyone. But, inflation makes it harder to do a bunch of deficit financed tax cuts and spending. That is one reason that I am more skeptical than I have been in previous Decembers about a package coming together,” Callas said. 

Coming down the road in just a few years is a major tax extender that Callas calls the great fiscal question of our time. The individual portions of the 2017 Trump Tax cuts are set to expire after 2025, the year after the next presidential election. Will Congress extend those cuts? Letting them expire would certainly bring in trillions of dollars more in revenue to the federal government over the next decade, which would help put the budget on a more sustainable path.  But even if Democrats keep the White House, will letting taxes go up sharply be politically feasible? 

“It’s actually a really complicated, difficult discussion,” said Callas. “You have a huge number of revenue raisers and  base-broadeners as well as tax cuts. The 10-year cost of making all of those provisions permanent is about a little over $3 trillion dollars. But that hides the fact that it’s actually about $6 trillion in gross tax cuts, and about $3 trillion in gross revenue raisers. So there’s a lot of tax increases too, and some of those are trade-offs. Part of the expansion of the child tax credit that expires at the end of 2025 was a trade-off for the revenue raiser of repealing personal exemptions. So in 2026, personal exemptions come back and the child credit goes down.”  

We also discussed with George different ideas for raising long-term revenue for the federal government, which is going to be needed to fix programs like Medicare and Social Security and begin to slow the growth of our national debt. Callas said despite the polarized politics of the day, there is actually a chance that our politics may come around to support fiscal sustainability.

“Because of inflation and high interest rates, are we heading back into a climate where we were in the 1980s and ‘90s where there was real political pressure to do deficit reduction? That might be the counter – high inflation is a tax. High interest rates are a tax. How do we ‘cut those taxes’? The way to do it is by reducing the deficit,” said Callas.

Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join our guests as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.

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