Ripple Effects

Tonight, Fox News will undoubtedly be highlighting the report by the CBO and the JCT that the passage of the Dream Act “would increase budget deficits by $25.9 billion over the 2018-2027 period, boosting on-budget deficits by $30.6 billion and decreasing off-budget deficits by $4.7 billion over that period.” At least in part, the calculations are clearly incorrect because the report does not take into account the provisions of the new tax bill.

Here’s the pertinent portion of the report that deals directly with the tax effects (pages 15-16 of the pdf):

Higher revenues, according to JCT’s estimates, would largely stem from increased reporting of employment income by people who would legally be allowed to work under the legislation. That increase in reported wages would cause increases in receipts, mostly in the form of Social Security taxes, which are categorized as off-budget. In addition, CBO and JCT estimate that an increase in the number of people paying penalties associated with not having health insurance would increase revenues by $0.7 billion over the 2018-2027 period.

Those increases in revenues would be mostly offset for two reasons. First, increased reporting of employment income would result in increases in tax deductions by businesses for labor compensation, including those businesses’ contributions to payroll taxes. As a result, corporations would report lower taxable profits and pay less in income taxes. Noncorporate businesses, such as partnerships and sole proprietorships, also would report lower taxable income, which would decrease individual income taxes paid by the partners and owners. The decrease in income tax receipts would total $3.8 billion over 10 years. Second, CBO and JCT estimate that there would be a $1.2 billion decrease in revenues over the 2018-2027 period associated with increases in the nonrefundable portion of the premium assistance tax credit provided through the health insurance marketplaces established under the Affordable Care Act.

The new tax bill would increase the bottom line cost because it does away with the heath insurance penalties (an increase of $0.7 billion), but decrease the bottom line cost because, by lowering the tax rates on businesses, the tax decreases the $3.8 billion that the CBO/JCT estimates will be lost if the Dream Act is past due to increased business tax deductions.

Going one step further, the CBO/JCT estimates that the Dream Act will cost the federal government $11.8 billion in subsidies for health insurance purchased through the marketplaces. (Pages 10-11 of the pdf.) Of course, this assumption is incorrect, since it does not factor in the reduction of the subsidies anticipated as a result of the tax bill.

Finally, the report anticipates that passage of the Dream Act “would increase outlays for the . . . child tax credits, which are refundable, by $5.5 billion over the 2018-2027 period.”  (Page 12 of the pdf.) Of course, this is now incorrect since the tax act first increases the amount of the child tax credit, but then lowers the threshold when it phases out.

I will update this posting when I can get better numbers from the CBO on the tax bill. Suffice it to say, however, the headline numbers on the CBO/JCT report on the Dream Act are simply wrong.