Congressional Experts See Revenue Gain With Tax Reform

Congressional tax experts Friday disputed Treasury Department estimates that the 1986 tax revision law, which was designed neither to increase nor decrease the federal deficit significantly, would cost the government more than $20 billion a year in lost revenues.

Instead, according to an analysis by the Congressional Budget Office, the sweeping tax overhaul should produce a slight revenue gain, compared to previous law, in its first five years of operation and is projected to generate modest annual increases beginning in fiscal year 1991.

“We do not subscribe to the notion that tax reform is grossly non-neutral in its revenue effects,” a senior CBO official said. “From all the evidence we’ve seen, it appears to be very well balanced.”

The dispute broke out because of a Washington Post report Friday that the Treasury Department had concluded that the tax changes approved by Congress in 1986 would cost the federal government about $20 billion in lost revenues during the next fiscal year.

$700-Million Loss

In fact, the new budget estimate marks only a step up from Treasury’s projection a year ago that tax reform would lose $13.5 billion, compared to previous law, during the fiscal year beginning Oct. 1.

By contrast, the CBO projects only a $700-million revenue loss for 1990.

Despite the dispute, which analysts characterized as relatively minor, given the difficulties of estimating future tax revenues, CBO and the Treasury Department agree that revenues will be significantly larger in 1990 than they previously had thought because the economy has advanced at a faster pace than expected.

In 1990, the CBO now expects overall federal revenues to be $1.069 trillion, while the Administration projects revenues at $1.059 trillion--a difference of $10 billion.

The difference between the two estimates, according to a CBO official, mainly reflects a disagreement over the effect on government revenues of eliminating a number of individual tax deductions. CBO and congressional tax experts believe that broadening of the income tax base will produce more revenues than Treasury analysts do.

Some tax experts also attributed the difference partly to different economic assumptions about future economic growth, inflation and interest rates--a dispute that cannot be settled until the economy’s performance is known.

For instance, the Reagan Administration, unlike most private forecasters, expects interest rates to fall sharply in the years ahead. Thus, compared to congressional tax analysts, it does not count on generating as much additional revenue because of elimination of the consumer interest deduction.

Agreed on Estimate

Moreover, an Administration budget official pointed out that the economy had grown faster than expected since enactment of tax overhaul in 1986. “That actually generates more revenues,” he said, “but the Treasury calculations make it look like the difference between the old rates and the new rates are costing us revenues.”

Shortly after the new tax law was enacted, Congress and the Treasury Department generally agreed on an estimate that combined revenues for the five budget years from 1987 through 1991 would be $300 million less than under the old law.

A year ago, however, Reagan’s budget estimated that total revenues over the same period would fall short of what would have been expected under the old law by $23.2 billion. This year’s budget more than doubles the projected revenue loss to $48.5 billion.

But the latest CBO figures, which are also designed to reflect changes in the economy and updated expections of tax collections, reflects the agency’s estimate that the tax law will generate an extra $8 billion over that same five-year period.

The differences widen even further for future years. For example, in 1992, when the Treasury estimates a revenue loss of $20.9 billion, CBO expects a revenue gain of $8.4 billion.