The Role of the 25 Percent Revenue Offset in Estimating the Budgetary Effects of Legislation
"When excise taxes, customs duties, and other types of “indirect” taxes are
imposed on goods and services, they tend to reduce income for workers or
business owners in the taxed industry and for others throughout the economy. Consequently, revenue derived from existing “direct” tax sources—such as
individual and corporate income taxes and payroll taxes—will also be reduced.
To approximate that effect, the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and the Treasury Department’s Office of Tax Analysis (OTA) apply a 25 percent offset when estimating the net revenue that legislation imposing some form of indirect tax is expected to generate. In other words, the estimated proceeds from the indirect tax are reduced by 25 percent to account for the resulting reductions in income and payroll taxes. The offset is made
in addition to accounting for behavioral responses to the new tax."