Taxes, Growth Rate and Dynamic Scoring

Source: By DTN's Washington Insider • Posted: Wednesday, March 8, 2017

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Icahn Defends RFS Point-of-Obligation Position

A plan to restructure the point of obligation for verifying adherence to Renewable Fuel Standard (RFS) mandates is being defended by Carl Icahn as he maintains that without changes, independent refiners and small filling station owners could be forced out of business.

Icahn’s high-profile role pushing the issue has fed criticism because of his status as an unpaid special regulatory adviser to President Donald Trump as well as a majority owner of CVR Energy Inc. Federal ethics rules prohibit government employees from profiting from their government service, but those rules do not apply to Icahn, who is not paid for his service to the White House.

Ethanol proponents, including Iowa Governor Terry Branstad — President Donald Trump’s nominee to be ambassador to China — have slapped down talk that adoption of Icahn’s proposal was imminent. “It’s not going to happen,” Branstad said. “I’ve been assured about that by a lot of people … We are pleased with that.”

Icahn dismissed criticism of his proposal and cast the issue as straightforward. “I own a refinery so obviously I have an interest in it, but there are 12 other refineries that are getting killed worse than mine,” Icahn said. “I own a refinery. Who knows it better than me? Why shouldn’t I advocate?”

The plan put forward by Icahn was the result of a compromise with some independent refineries and the Renewable Fuels Association (RFA), a leading trade group. But the plan — and Icahn’s personal involvement in it — has drawn fire from other groups, including Growth Energy, which represents two of the four-biggest US ethanol producers.


Chinese Commerce Minister Slams Trade Protectionism

Criticism of increasing international trade protectionism was levied March 3 by China’s Minister of Commerce, Zhong Shan, ahead of an annual government meeting that could herald policy announcements.

Foreign trade has begun to grow again in recent months, Zhong noted, “but concerns are looming on rising trade protectionism in some countries that is likely to bring uncertainties to the outlook,” according to a report by the state-run Xinhua news agency.

The Chinese government will move away from “simply expanding the volume to improving structural quality” in trade, said Zhong. He vowed to “strengthen China’s role as a big trading nation and push for its increasing prowess in the sector.”

China’s foreign trade reached 2.18 trillion yuan (about $316.4 billion) in January, up 19.6% over last year. The total value of exports and imports fell 0.9% last year to 24.33 trillion yuan, following a 7% decline in 2015.

Washington Insider: Taxes, Growth Rate and Dynamic Scoring

Well, there are tax proposals almost everywhere you look these days, and they frequently vary hugely from each other. So, it is not surprising that The Hill is carrying a somewhat cynical piece from ex-legislator Judd Gregg, who has strong tax policy creds as a former governor and three-term senator from New Hampshire, as well as former chairman and ranking member of the Senate Budget Committee and as ranking member of the Senate Appropriations Committee.

Gregg says that people who subscribe to the idea of fiscal integrity in budgeting and federal spending recognize the current administration agenda as a challenge. They have goals of increasing defense spending sharply while cutting most other discretionary spending—at the same time leaving untouched both Social Security and Medicare and enacting major tax reforms that include large individual and corporate rate reductions.

For Gregg, these objectives seem incompatible—he likens them as a deal including “a bridge in Brooklyn they can sell that allows them to do all this without significantly affecting the nation’s debt.” However, Gregg believes the administration has a better idea—called dynamic scoring.

He notes that Treasury Secretary Mnuchin told CNBC in his first extensive interview that “it was the administration’s intent to use dynamic scoring. He said this a few times, just to make the point clear.”

Gregg argues that scoring on tax reform (from the Joint Committee on Taxation) and on spending issues (from the Congressional Budget Office) “might bind the Congress. But the administration is going to be unbound because it will use dynamic scoring.”

The issue, Gregg says, is that Mnuchin thinks the economy will grow at a yearly rate of 3% during the Trump era—although most economists are projecting a growth rate of about 1.5% for the foreseeable future “so 3% represents a rather large jump.”

This is important, Gregg says, since if the economy were to grow at 3%, “then it is entirely possible that the Trump team could accomplish all the things they want without aggravating the national debt problem significantly.” In fact, if you start compounding a 3% growth rate and take it out ten years — the usual term of the budget window — they can probably declare that they will reduce the debt in real terms.

So, a 3% growth rate is a laudable objective, Gregg agrees. But how does the Trump team get there in the face of the general consensus that it is not possible in current, or immediately foreseeable, conditions?

Gregg thinks that “administration officials will, of course, make the perfectly plausible case that since there is a general consensus amongst economists that 1.5% is the likely growth rate, that number must be wrong. Economists rarely get things right, especially as a group.”

Economic growth is a function primarily of increases in productivity coupled with increases in work. Thus, Gregg’s question is what in the Trump game plan gives these folks, such as the Treasury Secretary, the confidence that they will see a steady 3% growth rate?

The answer seems to lie in the belief that tax cuts and tax reform, coupled with a roll-back in regulatory overheads, will lead to a sharp expansion in productivity and work. This, in turn, will give the necessary lift to reach 3%. And, “the core concept is correct.” Gregg says. “It is reasonable to project that if people have an incentive to work hard, be more entrepreneurial, and invest capital more efficiently, then growth will occur.”

Also, if it pays more to work than to stay at home and collect support payments, this reduces the cost of government and increases work, which leads to growth.

Nevertheless, Gregg is critical. “There is a problem with these assumptions,” he says and it is a “cart and horse” issue. The administration officials “cannot get their tax reform plans and budget to make sense unless they have 3% growth. They cannot get their 3% growth if they do not have in place their tax reform and budget.”

So, Gregg expects to see what he calls “magic wand” budgeting–“dynamic scoring.” Once it is assumed that there will be 3% growth, problems of making ends meet disappear—even if they do not have in place the policies they claim will generate 3% growth.”

It makes Washington, “a place where you can get anything you wish depending on how you score it,” he says.

So, we will see what happens. Certainly, the pressure to produce strong budgets and positive results is immense, as is the temptation to employ scoring “dynamics.” Still, there are many budget hawks who have fought the battle over “dynamic outlooks” before and clearly understand the economic stakes involved—which are somewhat higher than usual and involve agriculture, especially as the farm bill debate gets underway. Thus, the budgeting fight clearly is important to producers and should be watched closely as it evolves, Washington Insider believes.