Last week, when Senator Hatch introduced his late-night modification to the Senate’s tax overhaul legislation just before the Senate Finance Committee vote, there was a curious provision buried at the very back — a revenue trigger. The provision, titled “Revenue-Dependent Repeals,” would, under certain conditions, automatically repeal a series of business tax increases made by that very same modification to help pay for the permanent corporate rate cut. Essentially, the trigger provides that, if revenues turn out to be somewhat higher than expected — but not high enough to avoid unsustainable deficits or even fully make up for this legislation’s tax cut up until that point — the trigger would go off, handing an even bigger tax cut to large businesses.

There are potentially many billions at stake. The trigger is set to go off starting in 2026. If revenues have exceeded a given threshold through that point, tax provisions raising $45 billion from businesses in 2026 and about $80 billion in 2027 would disappear. Much of that would benefit the largest companies (and, thus, mostly their owners) and multinational corporations specifically. The trigger would eliminate over half the revenue that the Senate bill raises from businesses in 2027 to pay for the corporate rate cut. And, that’s even as a tax increase on individuals through the chained CPI (raising about $30 billion in 2027) and effects of mandate repeal (raising about $50 billion) remain in place — and as all of the individual tax cuts that are scheduled to expire at the end of 2025 also remain that way.

The figure below shows the composition of the revenue raised by the Senate bill in 2027 to finance the corporate rate cut — and illustrates the large share of business revenue subject to the trigger.

There is good reason to think that the trigger may run afoul of the rules and norms governing the reconciliation process, and so may not survive for that reason. However, it should be abandoned for more reasons than that. The trigger is misguided in several ways:

· First, the Senate legislation costs more in the long-term than current estimates suggest. This trigger creates a one-sided bet, to the benefit of businesses (with the ultimate beneficiary disproportionately being the owners of those businesses). Just as there is a chance that revenues exceed expectations, there is also a chance that they disappoint. But, if revenues exceed expectations, more tax cuts are delivered to businesses; if the opposite is the case, there’s no automatic fall-back provided. In scoring a trigger like this, revenue estimators should use a central estimate (an “expected value”) taking into account the probability of both good and bad revenue outcomes. It is unclear why JCT is now saying the trigger would have “negligible” revenue effect. Whatever the reason, it is clear that the estimate is not now incorporating the one-sided nature of the bet. Within the budget window, the expected revenue loss would be some significant fraction of the over $120 billion at issue in 2026 and 2027, and the effects would continue from there.

· Second, the trigger would potentially put the government on something of a revenue treadmill — undermining revenue gains, whether from positive dynamic effects of the tax cuts themselves or other economic factors. Importantly, the trigger could go off even if revenues through 2026 are hundreds of billions below what would be expected if the tax cuts weren’t enacted in the first place. To say that a bit differently: debt could still be hundreds of billions higher through 2026 than now projected (in the absence of the tax bill), and this revenue giveaway would still happen. This then generates a tension with the claim by tax cut advocates that the Senate tax bill will pay for itself due to economic growth. That was always a very unlikely outcome, but it is made all the harder by the fact that the legislation would give up tens of billions of revenue, if revenues happen to exceed expectations whether due to dynamic effects or, more likely, changes in other economic factors.

· Third, if revenues are running higher than expectations, these $120 billion of business tax cuts in 2026 and 2027 shouldn’t be the highest priority items. Repealing these provisions is being put in front of relieving tax increases on low- and middle-income families and health insurance coverage for millions, among other more important budgetary priorities. If Republicans believe these raisers are somehow particularly harmful, the answer to that is to give up on these raisers in the first place and to have a higher corporate tax rate as a result in the legislation. The answer is not to keep the low corporate rate and turn these raisers off at the future expense of low- and middle-income Americans still left paying for the corporate rate cuts.

Some may say none of this matters, assuming the trigger stays. After all, it’s nine years away; the tax cut cliff in 2025 on the individual side may force some congressional actions; and so on. But, then why is the trigger in there to begin with? It’s because policymakers — and the interest groups to which they’re signaling — recognize the power of legislative inertia. It can be hard to change law, and this gives businesses a leg up on grabbing resources if revenues happen to surprise somewhat on the upside.

How the Trigger Works

The Hatch modification specifies that the trigger goes off if “on-budget” revenues in the nine years from fiscal years 2018 through 2026 exceed $27.487 trillion by $900 billion. (On-budget revenues exclude those from Social Security and the postal service.) In that case, a series of revenue raising provisions are automatically repealed. It appears, in fact, that the revenue raising provisions are eliminated, in part, on a retroactive basis (since the legislation specifies that repeals are in effect starting at the beginning of calendar year 2026). So, the provisions get retroactively eliminated for 2026 and then going forward.

There is no explanation for the revenue target given in the description of the trigger, but it is possible to take a guess. The $27.487 trillion figure is consistent with the June 2017 CBO revenue baseline reduced by $150 billion per year (reflecting the targeted $1.5 trillion in tax cuts). The trigger then goes off if the revenue levels exceed this by $900 billion — a $100 billion per year annual surprise relative to current projections adjusted for revenue loss from the tax cuts. The $100 billion per year is consistent with some advocates’ claimed “dynamic” bonus from the tax cuts — the extra revenue expected from additional growth. (Such claims are far above consensus forecasters like those from the Penn-Wharton Budget Model and the Tax Policy Center.)

The actual Senate bill ends up front-loading tax cuts so that revenue loss in the first nine years averages somewhat more than $150 billion per year. Thus, for the trigger to go off (and relative to law with the Senate bill enacted as is), revenues would need to exceed current projections by just over $1 trillion over the nine-year period, or an average of a little over $110 billion per year.

If the trigger goes off, six revenue-raising business tax provisions get automatically repealed. Most of these provisions were scheduled to kick on in some future years and raise considerable revenue to help cover the cost of a permanent corporate rate cut — with much of this revenue coming from the largest corporations and especially multinationals. The six provisions — and the amount they raise in 2026 and 2027 — are listed below. Notably, the trigger does not continue any of the individual tax cuts scheduled to expire in 2025 or relieve any of the effects of the permanent chained CPI or repeal of the mandate.

Altogether, these six provisions raise about $80 billion in 2027 — about 60 percent of the business revenue provisions in the Senate bill (outside of the corporate rate cut). The provisions also raise $45 billion in 2026, revenue which would be eliminated on a retroactive basis.

Why the Trigger Is a Bad Idea

1. The Legislation Costs More Than Is Now Being Estimated

The JCT score now lists the revenue trigger as having only “negligible revenue effect” starting in 2025. JCT does not describe what underlies its estimate, but it is clear that does not present the true cost of this one-sided bet. In short, the legislation costs more than is now being estimated.

The intuition here is simple: There is significant uncertainty around the future revenue levels. As described in the next section, there is some real chance the trigger goes off looking at past errors in revenue projections, and even if the tax cuts themselves have little or no positive effect on the economy. But, there is also some very real chance revenues end up short of current projections, and the legislation does nothing to respond to that scenario. There is a trigger only if revenues surprise on the upside, and not on the downside.

So, heads (revenue surprise), businesses automatically win new tax cuts; tails (revenue shortfall) and businesses face no automatic consequences. It’s a nice deal for businesses that benefit; less so for everyone else.

I have written elsewhere about how triggers can potentially be used constructively especially in light of Congress’s frequent inability to respond to new conditions. However, this gets it exactly backwards. What is the much harder situation for a future Congress to deal with is an unexpected revenue shortfall. That is the situation most likely to lead to harmful delay in response.

In any case, there is risk on the upside and the downside. The legislation now only gets rid of revenue raisers if revenues are high, and does not build in the kind of trigger that would do the most good — one that would for instance increase the corporate rate if revenues were low on a sustained basis.

To accurately reflect the cost of such a trigger, revenue estimates should take into account both upside and downside risks in scoring this kind of one-sided bet. The central estimate should represent a weighted average (an “expected value”) taking into account both the chance of this triggering off and it not. CBO itself has described how to properly estimate the cost of such one-sided bets and implemented that methodology in the past. The cost should then be some significant fraction of the $120 billion on the chopping block in 2026 and 2027 (and more in years thereafter) if the trigger goes off.

It is not entirely clear why JCT is assigning a “negligible” revenue estimate to the trigger. Historically, CBO has said that such “budget process” triggers — ones targeting certain overall spending or revenue levels — aren’t “scoreable;” CBO simply won’t estimate budgetary costs or savings from such measures. As described below, that would result in the provision violating the restrictions of the reconciliation process. And, in its first estimate of the effects of this trigger, JCT appeared to follow that tradition and simply didn’t score any budgetary effect from it. But, in a revised score, JCT lists the trigger as generating a “negligible” revenue effect starting in 2025 and, in a footnote, further suggests the estimate is mixing the effects of the triggered repeal of the revenue raisers and some “reporting requirements and penalties” that become effective in 2025 and that got thrown into the same section of the Senate legislation at the last minute. As a result, it’s not possible to discern whether JCT is in fact scoring the trigger — and saying it’d be expected to have only a very small revenue effect (which would not be accurate) or simply not scoring it at all, with the “negligible” revenue effects coming from some reporting requirements and penalties that may be in the same section of the legislation but are essentially unrelated.

In any case, if JCT is choosing to score the trigger and thus potentially making it eligible for inclusion in the reconciliation bill, then JCT estimates should reflect the true expected cost of such a one-sided bet, and policymakers should take that significant cost into account — a cost which is not currently reflected in the bill’s cost estimates.

2. Senate’s Dynamic Revenue Treadmill

The trigger also sets up something of a revenue treadmill. Tax cut advocates claim that dynamic effects will help the tax cuts pay for themselves. However, if it turns out that there is a positive revenue surprise whether due to the effects of the tax cuts on the economy or any number of other factors, the bill begins handing back over some of the revenue.

Importantly, the trigger could go off even if revenue levels are lower through 2026 than provided for under current law. The revenue target is set about $400 billion below current law revenues (i.e. revenues before any tax cuts). This means that deficits and debt could still be hundreds of billions higher through 2026 than under current law projections, and the trigger would still increase tax cuts to businesses (and do so on a retroactive basis for revenue raised in 2026!). Furthermore, the overall deficits and debt could still be on an unsustainable trajectory and the trigger would go off, with deficits in excess of 5 percent of GDP at that point and debt rising as a share of the economy.

One possible response to this charge is that the corporate rate cut is fully paid for starting in 2027 under JCT estimates, and so any positive revenue surprise would go toward reducing the deficit at that point. According to this logic, the trigger is then only giving away the possibility of net deficit reduction, and not undermining the claim that growth would at least pay for the tax cuts. However, the JCT estimate turns out to not properly account for the one-sided effects of this trigger, as described above. (The scenarios in which there’s higher than expected revenue help offset the scenarios in which the opposite is true — or they would without there being a one-sided trigger!) Further, the trigger could eliminate a positive revenue surprise that could help make up for the higher deficits allowed through 2026 under the trigger. Put simply, higher growth can’t pay for costs accrued through that point if the positive revenue effects are then given away.

3. A Question of Priorities

Finally, the trigger reflects a severe problem of misplaced priorities. If revenues turn out to be higher than expected, the legislation gives businesses and especially large multinationals a first claim on the additional resources, alleviating tax increases being used to pay for the permanent corporate rate cut. This is even as many low- and middle-income Americans would still experience tax increases under the legislation — via the chained CPI slowing down cost of living adjustments — and even as the loss of health insurance from mandate repeal continues. In short, there are better uses for a positive revenue surprise.

To be sure, some of the revenue raisers that the trigger turns off may be relatively poor tax policy. Take the limitation on net operating loss deductions, not allowing the NOLs to offset more than 80 percent of current year income. It’s not clear why businesses shouldn’t be able to apply previous losses without such limitation, and it’s possible that the limitation distorts business activity, penalizing companies with more volatile year-to-year operations. However, if trading off against items like tax increases on middle class families or loss of health insurance for millions (as it is), then getting rid of this revenue raiser should take lower priority. If Republicans dislike this and some other business revenue raisers, then there is a trade- off that would make sense: don’t cut the corporate rate as much and take those revenue raisers (worse than a higher rate) off the table.

Would the Trigger Ever Go Off?

The trigger is not just symbolic. If left in the legislation, there is a real possibility that it could actually go off — based on the history of revenue projection errors by CBO and JCT. I don’t here try to calculate a specific probability of the trigger going off, though that should be possible with additional analysis, but simply to illustrate that the trigger could have real effect.

One way to look at the conditions under which the trigger goes off is in terms of the unexpected revenue needed to set off the trigger relative to current projections. Revenue over the 9-year period from 2018–26 would have to average about four percent higher than current projections for the trigger to go off.

How does that compare to prior errors in CBO revenue estimates? CBO in 2015 published a report evaluating its revenue projection record. CBO calculated the errors in its projections over a six-year projection horizon (including the current year) — and starting with the projection made in 1982, with complete data on such errors through the 2009 projection. I use these data to look at average errors in the revenue projections. (I specifically look at the five-year period looking ahead starting with the next year. I leave out the current year since the 2018–26 period starts with the next fiscal year.)

The mean absolute error of CBO five-year revenue projections (averaging both negative and positive surprises as positive figures) is seven percent of revenues. Looking at only the five-year periods in which there was a positive revenue surprise (ten of the twenty-eight periods and mostly in the 1990s), the mean error is still seven percent of revenues.

The seven percent average obviously is greater than four percent positive surprise needed to set off the trigger — suggesting there is a significant chance that the revenue trigger would go off. That comparison is not exactly apples-to-apples. The comparison is conservative in one sense: average errors over a nine-year period are likely to be higher than over a five-year period. On the other hand, the chance of a negative revenue surprise is greater than a positive revenue surprise, somewhat diminishing the probability of the trigger going off. The average error across all the periods is about negative two percent of projected revenues, meaning that the CBO revenue projections have been systematically biased upwards, mostly because they don’t project recessions.

In any case, these figures illustrate how it is entirely possible for there to be a revenue surprise that sets off the trigger, and even without any positive dynamic effects from tax cuts. After all, the positive revenue surprise in the 1990s came after a series of tax increases.

Why the Trigger May Be Inconsistent with the Byrd Rule

The trigger is an unwise policy. It may also be incompatible with the reconciliation process that Republicans are using to fast-track the tax cuts. (Thanks to Richard Kogan for his insights on this question.) Specifically, based on past precedent, the trigger should probably be a “Byrd rule” violation, requiring 60 votes to waive the related point of order in the Senate.

There are two possible ways the provision could violate the Byrd rule:

· The first is that CBO and JCT may not score the trigger as having a budgetary effect. And, one of the requirements of the Byrd rule is that provisions in reconciliation legislation have budgetary effect (that isn’t ancillary to non-budgetary effect). This would follow previous tradition when it comes to budget process triggers — such as the deficit targets set in the old Gramm Rudman Hollings legislation or discretionary spending caps. CBO has traditionally not “scored” such budget process measures, and so their inclusion in reconciliation legislation is thought to be in violation of the Byrd rule. Some of these triggers have been enacted in previous reconciliation bills, but apparently only because there were 60 vote majorities in the Senate willing to see the relevant provisions in the legislation.

· Second, if CBO and JCT decide to score the expected effects of the trigger, then it perhaps overcomes the first Byrd rule problem only to run into a second one. In that case, the estimated trigger cost might very well mean that the legislation is adding to deficits after the end of the ten-year budget window, which would also be a Byrd rule violation — and, again, generate a 60 vote point of order.

In short, if the trigger doesn’t score as having a revenue effect due to JCT and CBO tradition with regard to budget process triggers, then it’s probably a Byrd rule violation for that reason, and, if it does score, it could yet again be a Byrd violation as any such estimate should fully take into account the one-sided nature of the bet.

Senate leadership has in the past deferred to the judgment of the parliamentarian on the Byrd rule, and the parliamentarian’s final judgment won’t be known until it is. Irrespective of whether the provision is or isn’t found to violate the Byrd rule, it should be dropped from the legislation. It should be dropped as an ill-considered attempt to address uncertainty but one that only aggravates some of the worst parts of the legislation, including prioritizing business tax cuts over everything else and racking up higher and higher deficits.