By Reshma Kapadia

Republicans want to extend the 2017 Tax Cuts & Jobs Act and are considering a different accounting approach to lower its reported cost, a move that could rattle investors worried about the country's growing fiscal deficit.

At issue is whether the extension of the tax cuts are accounted for in the budget negotiations as an added cost.

Negotiations are under way related to the budget resolution and reconciliation process that is the vehicle for the tax cuts and other priorities of the Trump administration. In an interview with Politico, Sen. Majority Leader John Thune said he was waiting for the Senate's parliamentarian to sign off on changing the accounting approach for the tax-cut extension for the next stage of budget talks. Veda Partners' Henrietta Treyz says investors should be watching how the discussions between Republican leaders and the Senate's parliamentarian play out. The outcome, she says, could be as impactful, if not more so, than the tariff policy investors are fixated on.

Reconciliation was once a largely procedural process of passing the official budget but has since morphed into a complicated dance as a divided Congress try to cram in as many policy proposals as possible. And that in turn has highlighted the role of the parliamentarian, a nonpartisan official who advises on whether lawmaking follows Senate rules, says Beacon Policy Advisors' Christopher Niebhur.

The Republicans are proposing using "the current policy baseline" instead of "current law baseline" to account for the cost of extending the 2017 tax cuts set to expire this year.

Treyz expects a decision by early next week given signals from the Republicans that the Senate's budget could be released next week.

Typically, the nonpartisan Congressional Budget Office $(CBO.AU)$ scores legislation with the assumption that provisions in the current law take effect. In the case of the tax bill, that means it would expire at the end of the year and extending it would cost $4.6 trillion that needs to be accounted for in reconciliation.

But Republicans want to take the unprecedented step of using "the current policy baseline" in the reconciliation process. That's an approach typically used for mandatory programs like Supplemental Nutrition Assistance Programs (SNAP) used to provide benefits to low-income families. When CBO scores SNAP it uses its cost over a 10-year period. But the Republicans are proposing that the tax law extension be treated as no additional cost.

If the parliamentarian determines that the 2017 TCJA can be scored using a current policy baseline, the deficit authorization in the FY25 Budget Resolution will be about $3 trillion and cover only a temporary extension of the 2017 individual tax rates at the end of the day.

But if she allows the current policy baseline approach, it would essentially wipe away the $4.6 trillion hit to the deficit from tax extension. That added debt would still be a reality and push the country's debt-to-GDP ratio by 2054 to 214% -- 47% higher than using the approach outlined by current law, Treyz says. That could pave the way for making the tax cuts permanent since, on paper, the extension wouldn't cost anything.

"Once you do this, there is no turnoff of the spigot. Fiscal restraint is over," Treyz says. That could rattle investors already worried about the deficit, potentially pushing investors to short the U.S. dollar and push bond yields higher, she adds.

Bridgewater Associates founder Ray Dalio has been sounding the alarm about the country's debt situation this week in meetings with House Republicans to urge them to rein in spending and tackle the country's unsustainable debt trajectory. Earlier this year, he told Barron's the U.S. is at risk of a "financial heart attack" that requires urgent action.

What else could get investors' attention and create some volatility in bond markets: If there is a move to overrule the Senate parliamentarian or a growing view that the administration is "monkeying around" with how the CBO scores legislation, says George Pearkes, macro strategist at Bespoke Investment.

That said, he says how big an impact is unclear, especially as investors are able to create their own estimates of the deficit, regardless of what the CBO puts out. Sonal Desai, chief investment officer for Franklin Templeton Fixed Income, agrees that the near-term impact is unlikely to be dramatic, as long as it is clear that the estimated trajectory of the deficit doesn't change much from what investors are already expecting.

It could though bring renewed attention to the country's growing deficit -- and give investors something else to worry about beyond tariffs.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 28, 2025 15:27 ET (19:27 GMT)

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