Using Tariffs to Offset Income Tax Cuts Faces Skepticism on Hill

Members of the House Ways and Means Committee majority, who will lead the extension or expansion of the first Trump term income tax cuts, are expressing some hesitancy about using tariffs as a pay-for.

Rep. Nicole Malliotakis, R-N.Y., who was not in Congress when the Tax Cuts and Jobs Act passed, said in a hallway interview at the Capitol, "I think it's gotta be on a case-by-case basis, it's gotta be specific to achieve a goal. I don't necessarily think it's a pay-for, but it could be paying for some things."

She said it's hard to give her view on including tariffs in a bill to extend TCJA, without knowing what the proposal is. Reporters told her that President-elect Donald Trump was talking about a global tariff, not a targeted one to protect certain industries or punish certain trading partners. She replied, "I imagine that's a position right now, and that could evolve. We need to figure out what are our goals and needs as a nation and then figure out the most strategic way to get there. And [hiking] tariffs is a tool in the tool box, but I think we need to have a bigger discussion before we can really move forward on this."

Longtime committee member Rep. Vern Buchanan, R-Fla., said in a hallway interview, "Everything's going to be on the table. We're just getting started, and we haven't spent much time on that yet. Let's just see how it plays out."

Rep. Dave Schweikert, R-Ariz., hosted a Joint Economic Committee hearing Nov. 19 called "Building on the Success of TCJA:The Tax Policy Debate," where only Democrats talked about tariffs as a pay for.

Democratic witness Samantha Jacoby, deputy director of federal tax policy for the Center on Budget and Policy Priorities, argued that TCJA was skewed to the highest earners, and that extending its provisions would provide an annual benefit of $48,000 to the top 1% but only about $500 annually for households making less than $100,000. (Half of U.S. households have less than $80,610 in income).

"Imposing broad-based tariffs as an offset would double down on the 2017 law’s regressivity," Jacoby said, as well as create a significant economic risk.

Several congressmen who serve on Ways and Means did identify the debt trajectory as problematic as they consider how to extend or expand TCJA. Rep. Don Beyer, D-Va., who acknowledged that Democrats' ability to shape policy will be limited next year, said his No. 1 priority is deficit-neutral tax reform. (Beyer later co-sponsored a bill that seeks to restrain the incoming Trump's ability to hike tariffs on all countries in January).

House Budget Committee Chairman Jodey Arrington, R-Texas, who also is on Ways and Means, said Congress will have to be "clear-eyed [and] sober-minded" as it tackles tax policy next year. "I think there’s a myth by some of my Republican colleagues that we can just grow out of the 125% debt to GDP hole we’re in," he said, adding: "I’m not convinced all tax cuts pay for themselves. I don’t believe it."

He also said that with the growth path of Social Security and Medicare, that hole is only going to get deeper. "We have to take on this opportunity to rein in spending," he said.

Schweikert also talked about ways to reduce health care spending during the Joint Economic Committee hearing. Before the hearing, he sat down with International Trade Today to talk about tariffs and tax policy.

He said, "Those tariffs don't really pay that much in the way of tax receipts." He said all goods imports for the most recent fiscal year were around $3.2 trillion. "So even if you take a peanut butter spread approach, and said you were going to do a universal tariff, the scale of the tariffs to produce receipts that are useful would be just monstrous."

That depends what the scale of the tax cuts is. The TCJA rate cuts expire at the end of 2025 (with some items, such as immediate deductions for capital purchases, already expired). To extend the individual tax cuts (and pass-through business tax changes) expiring in 2025, without making changes to a cap on state and local taxes, or lowering taxes further, is estimated to cost $3.4 trillion over 10 years. Bringing back certain expensing rules, reversing the global minimum tax, phasing out green tax credits early and ending more generous Obamacare subsidies would increase the cost to $4.1 trillion, according to the Center for a Responsible Federal Budget.

A 10% tariff on all imports -- if, of course, the value of imports was steady over that time -- would collect about $3.2 trillion over 10 years -- if Trump means adding 10 percentage points to all imports. If goods already dutiable at more than 10% are exempt, and if goods are only going to go from current tariff levels to 10%, that would reduce the revenue available -- so would exclusions for goods not grown or made in the U.S.

From July 2018 through Oct. 30, 2024, CBP has collected $235.29 billion in Section 301 duties and $18.35 billion in Section 232 tariffs. If the Section 301 tariffs were codified and used as a pay-for over 10 years, they would only cover about 12% of the costs of extending the current tax cuts. (Again, assuming higher tariffs on Chinese goods promised from Trump didn't shift trade flows.)

Even if Republicans did want to use tariffs as a pay-for, "then you have to go back and add in the economic effects," Schweikert said. "And that's where so much of the tariff discussion has not been particularly useful. The second degree, third degree effects on U.S. manufacturing, fabricating ... ." He also said Congress hasn't thought about whether imports that aren't produced in the U.S. should be subject to tariffs. He called this "his biggest frustration" with his colleagues. "They come up with an idea, they don't understand its effect on other things."

If tariffs are to be hiked sharply, Schweikert said, the $800 de minimis allowance will have to change, but you'd also have to consider the likelihood of increased transshipment of goods subject to particularly high tariffs.

"There are things that are wonderful politically, rhetorically, and then really marginal math," he said.

Schweikert said he'd like Republicans to "look at a border adjustment."

Schweikert wasn't referring to a carbon border adjustment tax, as has been proposed by Sen. Bill Cassidy, R-La., but rather what has been called a destination-based cash-flow tax, or DBCFT. That kind of border adjustment is somewhat like a value-added tax, used in Europe and Canada, but unlike a VAT, this tax allows companies to count the costs of U.S. wages as a business expense, but not the cost of imports. Because of that, it favors domestic production.

Schweikert noted that Republicans had originally hoped to lower the corporate income tax rate with DBCFT as a pay-for, "but it was intellectually difficult for folks to understand" how DBCFT counteracted other countries' VATs. Those countries refund VATs for exports, and charge a VAT on American imports, and Schweikert said DBCFT neutralizes those actions.

"That's very different than either targeted tariffs and large-scale tariffs," he said.