Tax Cut Law Forces Change in Offset for Excise Tax Change Proposals

April 3, 2018

The cost of increasing the federal gasoline tax just got lower. (The financial cost to general revenues, not the political cost.)

As a result of the mammoth tax cut law enacted three months ago, the Congressional estimating body that scores tax legislation for budget purposes has revised its methodology for analyzing proposed increases in federal excise taxes, like the gasoline and diesel taxes and the various aviation taxes.

The nature of excise taxes is such that any increase in such taxes results in someone, somewhere, having less income, which in turn results in reduced collections of income and payroll taxes. (Think of the gas tax as an example – if an increased gas tax caused the fuel costs of a trucking company to increase by $1 million a year, that company would just increase the business expenses it deducts on its tax return by $1 million, reducing its taxable income by the same amount, leading to lower income taxes paid.) See this 2011 document for a more detailed explanation.

It is impossible to know the precise amounts by which each individual excise tax increase would affect payroll and income taxes, so the Congressional estimating bodies have long used a rounded guesstimate of 25 cents of reduced income/payroll taxes for every dollar of increased excise taxes. As an example, ETW’s preliminary analysis of the Chamber of Commerce’s proposed 25 cent per gallon gasoline tax increase two months ago estimated that the staggered increase would raise a gross amount of $380 billion over ten years to be deposited in the Highway Trust Fund, but the 25 percent offset would reduce income and payroll tax receipts by $95 billion, for a net tax increase of $285 billion.

But the 25 percent rule of thumb was created in a time when the corporate tax rate was 35 percent. That rate was cut to 21 percent by the recent tax cut bill, and individual income tax rates were also cut by less drastic amounts. These tax cuts upend the assumptions used to determine the income/payroll tax offset for excise tax increases.

Accordingly, on March 27, the Joint Committee on Taxation (the official estimating body which scores tax legislation for Congressional budget scorekeeping, just as the Congressional Budget Office scores spending legislation) issued a revision to the income/payroll tax offset estimation procedure. Instead of a flat 25 percent offset, the new rules use a graduated offset that increases in each calendar year.

Income and Payroll Excise Tax Offsets… CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25 CY26 CY27 CY28
21.5% 21.7% 21.8% 21.9% 22.0% 22.1% 22.1% 22.2% 24.3% 24.4% 24.4%

The reason the offset percentage changes each year, in the words of the JCT document:

The gradual increase in the offset is explained by forecasted income growth, which increases the average marginal individual income tax rate. The increase in 2026 is due to the expiration of certain tax provisions after December 31, 2025. As a result, the estimated income and payroll excise tax offsets return close to the long-time standard offset factor of 25 percent.

The fact that the offset percentage changes each year, and that the percentages are presented in calendar years, not fiscal years, makes it harder for outsiders to precisely calculate how JCT will score excise tax changes. (The document says : “these offsets will be applied to calendar year excise tax effects and then fiscalized.”)

However, if you simply treat calendar years as fiscal years, the reduction in offset rates would reduce the money lost by income and payroll tax collections by the Chamber’s 25 cent per gallon gas tax increase from $95 billion over ten years to about $86 billion over ten years. And, as the saying goes, a billion here, a billion there, and soon you are talking real money.


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