From Gimmicks to Growth: The Senate Can Make the Tax Bill Better
Some Recommendations on how the Senate can improve the Big Beautiful Bill
Last week the House passed the One Big Beautiful Bill Act, which renews the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA). The bill now moves to the Senate, where Senators have penned a goal of passing a modified version of the bill by July 4.
As my colleague Veronique de Rugy notes:
“[T]he legislation has the merit of avoiding serious tax increases on the American people… But it’s not a good bill. First, it is bad tax policy, especially compared with the original TCJA. It gets an F for tax simplification, base-broadening, and personal rate schedule.”
In a similar vein, Elon Musk recently criticized the House bill, noting that he was “disappointed” by the cost of the legislation, which far outweighs any savings from his efforts to cut waste and reduce the size of the federal workforce.
The Senate could hugely improve the existing bill by reducing its large deficit impact. The Congressional Budget Office (CBO) estimates that over ten years, the bill will result in $2.3 trillion in additional deficit spending.
Adjusting for likely interactions between titles, the Rules Committee print, and additional interest costs, the bill is likely to cost about $3.1 trillion over the decade. If temporary provisions are made permanent, the cost could rise to more than $5 trillion.
While the House bill includes around $1.5 trillion in spending savings over 10 years, senators should aim to increase these savings to $2 trillion or more to minimize the deficit impact of enacting tax cuts. There are several options available to reduce the cost of this bill.
First, scaling back the proposal to quadruple the SALT cap to $40,000 would significantly increase savings. At a cost of roughly $660 billion, this handout to high income households in coastal cities and counties will significantly worsen the nation’s long-term fiscal imbalances. The most fiscally prudent course of action would be to extend the existing $10,000 SALT deduction cap beyond 2025.
Second, while the House bill phases out many Inflation Reduction Act (IRA) credits, it falls short in eliminating these costly corporate subsidies. The expensive and distortionary production and investment credits are continued for another 3 years, while other credits continue through 2031.
Using a transparent budget scoring methodology, a Cato Institute study estimates that the IRA subsidies will cost between $936 billion and $1.97 trillion over the next 10 years. What’s more, as I have previously mentioned, these green subsidies distort capital allocation and increase energy costs. IRA green credits should be eliminated immediately.
Eliminating or restricting short-term tax giveaways and gimmicks would save hundreds of billions that could be better directed to growth-enhancing reforms. Genuine tax reform that drives economic growth and improves the livelihoods of American workers should instead focus on making the tax code simpler, neutral, and non-distortionary.
Policymakers have well over 100 options for tax expenditures to reform or repeal that will increase savings in a way that simplifies the tax code. The House bill adds or broadens at least 20 tax expenditures—Senators could start by scaling those back.
While the House bill includes modest reforms to Medicaid, the Senate should be bolder and ensure that the program serves those it is supposed to. As Veronique de Rugy points out at National Review:
“Medicaid reforms should address this core problem: the federal government currently pays more to cover able-bodied adults than pregnant women and vulnerable populations like children and the disabled. A sensible step, in addition to the ones already taken, would be reducing federal payments for able-bodied adults from 90 percent down to 80 percent, redirecting some savings toward better care for genuinely vulnerable populations.”
Senators have many ways to make this legislation more fiscally responsible and avoid passing the costs on to future generations in the form of higher taxes, more inflation, and slower growth.
If an additional goal of tax reform is to raise worker wages and employment opportunities, then policymakers should focus on making full and immediate expensing permanent. If full expensing is only temporary, it creates uncertainty for businesses, which can discourage long-term investment decisions and hinder plans for expansion
Another growth-inducing reform would be to allow faster write-offs for investments in residential and non-residential structures. These changes could effectively double the long-term growth impact of the tax bill in its current form.
The Senate now has the opportunity not just to extend tax relief but to improve it. By scaling back costly giveaways, eliminating distortionary subsidies, and committing to a simpler, more growth-oriented tax code, lawmakers can turn the current bill from a missed opportunity into a meaningful reform. Tax policy should not be about short-term political wins, but about long-term prosperity.