As introduced, the House and Senate tax bills are projected to increase deficits and could trigger the Statutory Pay-As-You-Go Act of 2010 (the “PAYGO law”). Without any other legislation to offset the increase, required annual sequestration cuts could ensue. Annual sequestration could include the elimination of federal subsidy payments, either partially or entirely on direct-pay taxable bonds issued under the American Recovery and Reinvestment Act of 2009 (including Build America Bonds, Recovery Zone Economic Development Bonds, Qualified Zone Academy Bonds, Qualified School Construction Bonds, Qualified Energy Conservation Bonds, and Clean Renewable Energy Bonds).

The House Ways and Means Committee’s draft tax bill (the “Tax Cuts and Jobs Act”), released on November 2, 2017 and passed by the House on November 16, 2017, and the description of the markup of the “Tax Cuts and Jobs Act” of the Chairman of the U.S. Senate’s Committee on Finance, released on November 9, 2017 are projected to increase deficits by $1.5 trillion and $1.4 trillion, respectively, over the next ten years (as introduced, these bills were discussed in our November 7 Public Finance Advisory, House Tax Bill Eliminates Private Activity Bonds, Advance Refundings, available here and our November 10 Public Finance Advisory, Senate Tax Plan Diverges From House Version here).

If either tax plan is signed into law by the end of the calendar year, the OMB may be required to issue a sequestration order within 15 days of the end of the session of Congress to reduce spending in fiscal year 2018 in the range of approximately $126 billion to $136 billion to comply with the PAYGO law, unless subsequent legislation is enacted to offset the deficit increase, waive requirements under the PAYGO law or change the effect of the PAYGO law. Waiving the PAYGO law would require 60 votes in the Senate. Due to limits on reductions to Medicare, CBO estimates that the amount that may need to be sequestered to address the increased deficit projected as a result of either tax plan will far exceed the amount of available annual resources, including subsidies on direct-pay taxable bonds.

A sequester is not guaranteed upon the passage of either tax plan. Since the PAYGO statute was enacted seven years ago, 16 laws with estimated budgetary effects on direct spending and revenues included provisions waiving the requirements of all or part of the PAYGO law. While not a part of either pending bill, it is possible that final tax legislation, if enacted, could alleviate the impact of the PAYGO law on direct-pay taxable bonds.