A Market-Oriented Reconciliation Agenda for Affordability

Reconciliation is a narrow but powerful legislative tool that allows Congress to change federal taxes, spending, and receipts on a fast-track basis. Used properly, it can improve affordability not by capping prices or altering regulatory mandates, but by removing federal policies that raise costs, distort incentives, suppress supply, and weaken fiscal credibility.

Many of today’s affordability challenges are not the result of market failure, but of federal tax preferences, subsidies, and financing structures that inflate demand, discourage new supply, misprice health care, and shift costs forward through deficits and inflation. Reconciliation provides a way to unwind those distortions.

The proposals below are organized around four channels through which reconciliation can materially lower the cost of living:

● immediate, year-round tax relief that reduces price wedges;

● reforms that remove demand distortions and expand supply in housing and health care;

● restructuring of health care subsidies and payment systems to restore price sensitivity;

● deficit reduction to lower interest rates and inflation risk.

And while some of these proposals will be more politically feasible than others, together they outline a market-oriented approach to affordability grounded in neutrality, competition, and fiscal sustainability.

I. Immediate, Year-Round Tax Relief

1. Eliminate or Reduce Tariffs on Consumer Goods and Key Intermediate Inputs

Setting politics aside: the most immediate and visible affordability lever available to Congress is to eliminate or reduce tariffs. Tariffs are federal taxes paid by U.S. consumers and firms that appear directly in higher prices for everyday goods and higher costs for domestic producers. The reconciliation bill should reduce or eliminate tariffs on household goods widely consumed and on intermediate inputs. While tariff revenues may temporarily reduce measured deficits, they do so by raising prices and suppressing trade and investment; rolling them back improves affordability while strengthening the underlying tax base. They have also failed to deliver the manufacturing renaissance promised by the administration, as seen by the U.S. manufacturing sector closing 2025 in contraction, losing 63,000 jobs due to weak demand, higher costs, prolonged uncertainty, discouraged hiring, and investment.

On the political nature of tariffs: for legislators facing electoral pressure, there is value in demonstrating a willingness to check executive authority regardless of which party controls the White House. The successful use of the Epstein discharge petition shows that Congress can overcome presidential opposition when members align around salient voter concerns, such as the unaffordability consequences of tariffs.

2. Implement Universal Savings Accounts (USAs)

Congress can strengthen household affordability year-round by creating a single, universal savings account available to all households regardless of income or employer sponsorship. Universal Savings Accounts would allow contributions under a simple, neutral tax structure—such as after-tax contributions with tax-free withdrawals—and could consolidate or permit rollovers from existing tax-advantaged accounts to reduce complexity. While USAs are not a price cut in the narrow sense, they improve affordability by increasing households’ ability to absorb price shocks, job transitions, and unexpected expenses without reliance on high-cost credit. As a tax-based reform affecting revenues, USAs are well-suited to reconciliation and avoid the pitfalls of targeted subsidies or mandates.

3. Establish De Facto Territorial Taxation for Individuals

The United States is the only advanced democracy, and one of only two countries in the world, to tax individuals on worldwide income based on citizenship, regardless of where that income is earned or where the individual resides. This system imposes high compliance costs, discourages labor mobility, and often results in double taxation despite existing credits and exclusions. While Congress moved U.S. corporations to a quasi-territorial system in 2017 by narrowing the tax base, individual taxation remains fundamentally extraterritorial.

President Trump promised to fix that. Congress can do so through reconciliation by reforming the definition of taxable income rather than rewriting nationality or immigration law. Specifically, lawmakers can exclude foreign-source income from the individual tax base—earned income, investment income, and capital gains, while continuing to tax U.S.-source income normally. Structured as a tax-base exclusion or elective regime, this reform would achieve de facto territorial taxation for individuals, comply with reconciliation rules, simplify compliance, raise after-tax income for Americans abroad, and align individual taxation with modern territorial principles.

II. Reduce Demand Distortions and Expand Supply in Housing and Health Care

4. Eliminate the Mortgage Interest Deduction

The mortgage interest deduction is a large demand-side housing subsidy that disproportionately benefits higher-income households and tends to capitalize into higher home prices in supply-constrained markets. Eliminating the deduction, either outright or through a transition for existing mortgages, would reduce federally subsidized bidding pressure and improve neutrality between housing and other investments. Repeal is a straightforward revenue increase with clear reconciliation precedent and an affordability rationale rooted in price discipline rather than artificial demand support.

See a principled approach to tax expenditures.

5. Eliminate the Home-Sale Capital Gains Exclusion and Replace It with a Neutral, Income-Limited Exclusion

Current law provides a special capital gains exclusion for primary residences, privileging housing relative to other assets and encouraging lock-in and overinvestment in owner-occupied housing. Congress can repeal this housing-specific exclusion and replace it with a capped, income-limited capital gains exclusion applied neutrally across asset classes. Properly designed, this reform can preserve reasonable tax treatment for middle-income households while eliminating housing favoritism that distorts prices and mobility.

See a principled approach to tax expenditures.

6. Eliminate the Deductibility of Medical Expenses

Eliminating the deductibility of medical expenses would be a sensible, reconciliation-eligible step toward a broader, more neutral tax base. The current deduction is poorly targeted, benefiting a small share of higher-income itemizers and subsidizing high levels of medical spending after the fact rather than improving access or cost discipline. It distorts consumption choices by giving preferential tax treatment to one category of spending over other essential needs, without addressing the underlying drivers of health care costs. Repealing the deduction would raise revenue without increasing marginal tax rates, reduce reliance on narrow carveouts, and strengthen fiscal sustainability—thereby lowering inflationary and interest-rate pressures over time—while remaining fully consistent with a free-market, affordability-focused reconciliation agenda.

See a principled approach to tax expenditures.

7. Eliminate Credit for Low-Income Housing Investments (LIHTC)

The LIHTC is a highly complex, narrowly targeted subsidy that raises construction costs, channels housing production through politically mediated allocation processes, and primarily benefits developers, syndicators, and state housing authorities rather than tenants. By favoring subsidized projects over market construction, it can crowd out unsubsidized housing and slow overall supply growth, especially in high-cost areas where affordability pressures are most acute. Repealing the credit would broaden the tax base, reduce deficits, and remove a distortionary form of industrial policy in housing, while shifting federal policy toward more effective, market-oriented tools—such as neutral cost recovery for structures—that lower costs and expand housing supply across the board rather than through carveouts.

See a principled approach to tax expenditures.

8. Eliminate Self-Employed Medical Insurance Premiums

Eliminating the special deduction for self-employed health insurance premiums would advance a more neutral, market-oriented tax code and fit cleanly within reconciliation. While often framed as equity for the self-employed, the deduction creates a carveout that privileges one form of work and one category of consumption, distorting choices between employment arrangements and between insurance and other compensation. It subsidizes the purchase of health insurance through the tax code without addressing underlying cost drivers and adds complexity to an already fragmented system of health-related tax preferences. Repealing the deduction would broaden the tax base, reduce deficits without raising statutory rates, and reinforce a consistent principle: compensation and consumption should be treated neutrally across workers, supporting affordability indirectly by strengthening fiscal sustainability and reducing inflationary pressure over time.

See a principled approach to tax expenditures.

9. Sell or Lease Underutilized Federal Lands and Properties Near Metropolitan Areas

The federal government owns substantial amounts of underutilized land and property, including parcels near major metropolitan areas where housing demand is strongest. Congress can authorize the sale or long-term lease of specified federal properties through reconciliation, with proceeds recorded as offsetting receipts. Properly drafted as a property disposition measure rather than a regulatory mandate, this approach can unlock private redevelopment and increase housing supply without federal zoning intervention.

10. Implement Neutral Cost Recovery for Structures

While recent legislation permanently restored full expensing for equipment, residential and multifamily structures remain subject to long depreciation schedules that raise the cost of new construction. Implementing neutral cost recovery—through full expensing or accelerated, inflation-adjusted depreciation—would reduce the effective tax rate on housing investment and expand supply. As a change to depreciation rules, this reform is a classic reconciliation-eligible revenue provision and a natural extension of pro-investment tax policy. Part of the reason neutral cost recovery has not been included in past reconciliation packages is that it has a relatively large cost outside of the 10-year budget window, seemingly violating the Senate’s Byrd rule. But this specific aspect of the Byrd rule applies to the reconciliation package as a whole, meaning inclusion of sufficient budget offsets outside the 10-year window would satisfy this requirement.

III. Restructure Health Care Subsidies and Payment Systems to Restore Price Sensitivity

11. Reduce Affordable Care Act Subsidy Growth

Premium subsidies under the Affordable Care Act are calibrated to administratively defined benchmark plans that often exceed what consumers would choose in the absence of federal support. Congress can reduce subsidy growth by lowering benchmark generosity, tying subsidies to lower-cost plan options, or capping benchmark growth. In addition, requiring all subsidy recipients to contribute at least a modest share of premiums would reduce spending, discourage fraud, and restore basic price sensitivity without eliminating access to coverage.

12. Restructure Medicaid Financing to Reduce Cost Shifting and Overspending

Medicaid’s matching-grant structure encourages states to overspend, expand enrollment among able-bodied populations, and exploit financing arrangements that maximize federal transfers. Congress can use reconciliation to eliminate enhanced matching rates for expansion populations, tighten or eliminate financing arrangements such as provider taxes and intergovernmental transfers, and move toward capped or block-grant financing. These reforms directly reduce federal outlays while improving state accountability and long-run affordability.

13. Reduce Medicare Overpayments and Excess Utilization

Medicare affordability can be improved by reducing federally induced price distortions rather than expanding price controls. Congress can slow spending growth by tightening income-related premiums for higher-income beneficiaries, reducing excess payments to Medicare Advantage plans through benchmark and risk-adjustment reforms, and adopting site-neutral payments for identical services delivered in different settings. Modest increases in beneficiary cost-sharing can further reduce low-value utilization without undermining access.

IV. Lower Interest Rates and Inflation Through Deficit Reduction

14. Eliminate Distortive and Costly Tax Expenditures

The reforms above address sector-specific distortions; the following section addresses remaining tax expenditures economy-wide. Congress can reduce deficits and improve affordability by repealing or phasing down tax expenditures that distort investment decisions without clear justification. Eliminating or sunsetting such provisions broadens the tax base, improves neutrality, and reduces fiscal pressure that ultimately contributes to higher interest rates and inflation. Each repeal is a direct revenue change squarely within reconciliation. Examples include:

· Credit for increasing research activities

· Municipal bond interest exclusion

· Corporate SALT deduction

· Advanced manufacturing production credit

· Advanced manufacturing investment credit

· Special deduction for Blue Cross and Blue Shield companies

For more examples, see A Principled Approach to Tax Expenditures.

15. Reduce Mandatory Spending and Strengthen Fiscal Credibility

Affordability is inseparable from macroeconomic stability. Persistent deficits and rising borrowing costs raise interest rates across the economy and increase inflation risks. Congress can use reconciliation to reduce outlays by restructuring Medicaid and nutrition assistance programs, closing eligibility loopholes, devolving financing responsibility to states, eliminating permanent agricultural subsidies, and increasing employee contributions to federal retirement systems. These measures would slow debt growth, reduce interest costs over time, and lower the risk that inflation becomes the mechanism of fiscal adjustment.

Conclusion

Reconciliation can be used to advance a coherent, market-oriented affordability agenda. By lowering federally imposed price wedges, removing tax and spending distortions that inflate demand and suppress supply, correcting health care pricing failures, and reducing deficits to strengthen fiscal credibility, Congress can address affordability at its roots rather than treating symptoms. Each proposal reflects a consistent principle: affordability is best achieved through neutral tax policy, expanded supply, and sustainable public finances, not through price controls or mandates.