How the Senate Can Fix the Big Beautiful Mess
Some considerations for Senate Finance ahead of tonight's OBBBA negotiations
The Senate is expected to unveil its version of the One Big Beautiful Bill Act (OBBBA) soon, with Senate Finance Committee Chair Mike Crapo set to brief Republicans tonight on their negotiating position. The House version of the bill may have cleared a key political hurdle, but it left behind serious policy baggage that now falls squarely on the Senate to clean up.
As I wrote in my May 28 piece, “The Senate now has the opportunity not just to extend tax relief but to improve it.” In other words, the House passed a sprawling tax-and-spending package that manages to be simultaneously too costly, too complex, and too weak on growth. The Senate can—and must—do better.
1. Trim the Fat: Eliminate Gimmicks and Restore Fiscal Discipline
The House-passed OBBBA adds more than $3 trillion to the deficit over the next decade, and the cost could rise to $5 trillion if temporary provisions are made permanent. Even with the House’s $1.5 trillion in offsets, the gap is unsustainable.
As my colleague Veronique de Rugy put it, “Considering our fiscal situation, the Moody downgrade, the spike in interest rates, yesterday’s weak auction, and the upcoming explosion in entitlement spending, legislators should be willing to put their narrow interests aside for once.”
One of the most egregious giveaways is the SALT deduction hike. The House bill quadruples the deduction cap from $10,000 to $40,000, a handout that, as I noted in an earlier post, “will significantly worsen the nation’s long-term fiscal imbalances.” The cost? Roughly $320 billion (relative to TCJA) over 10 years, with most of the benefits going to the wealthiest households in high-tax blue states.
In that article (“Blue State Bailout,” May 21), I wrote: “More than 90 percent of the tax benefits in this proposal would trickle up to the top 14 percent of earners… A Republican-controlled Congress would be subsidizing the property taxes of wealthy individuals in blue counties at the expense of hard-pressed workers in middle America.”
Senators should follow John Thune’s call for a “compromise position” on SALT — ideally by rejecting retroactivity and maintaining the current $10,000 cap.
2. Cut the Green Gimmicks and Focus on Real Growth
The House bill retains many of the green energy subsidies from the Inflation Reduction Act (IRA) through 2031, despite a partial phaseout. But as I’ve warned, these tax credits are costly, distortionary, and ripe for repeal.
As I argued in a recent post (“From Gimmicks to Growth,” May 28), “The expensive and distortionary production and investment credits are continued for another 3 years… These green subsidies distort capital allocation and increase energy costs.”
A Cato Institute study estimates that IRA subsidies could cost up to $1.97 trillion over the next decade. These funds would be far better spent on permanent pro-growth reforms such as full expensing and faster depreciation schedules — changes that could double the long-term growth impact of the tax bill.
In de Rugy’s words: “If the Senate further expands expensing to include structures… growth could reach about 1.6 percent.” (Veronique de Rugy, National Review, May 23)
In his latest piece, my colleague Joshua Rowley quantifies the savings: Removing all non-TCJA tax provisions and enhancements would save $1.3 trillion, enough to make core pro-growth reforms permanent and still shave more than $700 billion off the deficit.
3. Scrap Section 899: Don’t Fight Tax Cartels by Taxing Ourselves
Section 899 — the House’s retaliatory tax measure against foreign digital taxes and OECD rules — is a geopolitical misfire. While the OECD deserves pushback for its attempts to cartelize global tax policy, Section 899 does more harm than good to U.S. competitiveness.
In another recent post (“Section 899 Undermines U.S. Competitiveness,” June 9), I wrote, “By imposing punitive taxes on foreign capital… the U.S. is effectively taxing foreign pension funds, sovereign wealth funds, and multinational corporations that invest in American productivity.”
This provision will not raise revenue. According to the Joint Committee on Taxation, Section 899 is so self-defeating that it reduces long-term tax revenue due to the drop in investment. Alan Cole of the Tax Foundation put it bluntly: “It’s like tossing a grenade at your stuff while it’s inside our house.”
If Republicans want to push back against the OECD, they should do it strategically, — y cutting off funding, rejecting Pillar Two implementation, and reaffirming tax sovereignty — not by blowing up the U.S.’s own investment climate.
4. Close the Medicaid Loopholes, Don’t Just Talk About Abuse
One bright spot in the House bill is its attempt to limit provider tax schemes in Medicaid. But as I recently argued, the fix is incomplete. The Senate should tighten the loopholes and restore fiscal honesty to a program that consumes one-fifth of federal mandatory spending.
As I wrote in “End the Medicaid Shell Game” (June 11): “Congress should end this practice by prohibiting provider tax schemes that recycle payments to inflate federal Medicaid matches… It’s a budgetary illusion.”
The Senate should resist lobbying from provider associations and states, and instead codify a clean, enforceable prohibition on hold-harmless arrangements and recycled payments.
A Final Word: The Senate’s Mandate for Reform
The OBBBA should not be remembered as another bloated package of tax extenders and political handouts. It should be an opportunity to restore discipline, drive growth, and modernize the tax code for a new economic era.
“Senators have many ways to make this legislation more fiscally responsible and avoid passing the costs on to future generations… 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.”
Tonight’s Finance Committee meeting could mark the beginning of that pivot — but only if senators take the responsibility, and the opportunity, seriously.