Seven Options to Replace Byrded-Out Savings in OBBBA
The Senate Still Has Time to Reduce the Bill's Deficit Effect
As the Senate continues its work on the One Big Beautiful Bill (OBBBA), Senate Democrats have frequently reported that numerous provisions in the reconciliation bill have been struck for violating the Senate’s Byrd rule. Most, if not all, of the removed provisions appear to be cost-saving measures which, if left unreplaced, will further exacerbate the bill’s final cost.
No doubt, there will be legislators who brush off the lost savings by arguing that “we don’t have to pay for tax cuts.” That’s rhetorically true, but it’s also irrelevant. The only thing Congress must pay for is spending. But by reducing tax revenues Congress is choosing not to pay for spending. Or rather, Congress is choosing not to pay for spending right now and instead to shift the tax burden to future generations who have no vote on today’s decisions. It is the epitome of taxation without representation. As my colleague Veronique de Rugy recently elaborated:
The issue isn’t how to fund lower taxes. It's how much spending we should cut if people want to pay lower taxes, or how to scale the size and scope of government down to what today’s voters are themselves willing to pay for. Alternatively, it’s how best to raise taxes to pay for the government that voters say they want. If they want big government, they need to pay for it, not to kick the can down the road for future generations to pay. There is no third option that isn’t extremely immoral.
Fortunately, there are many ways Congress can reduce deficit spending. And because the majority of OBBBA’s cost stems from its projected $4.2 trillion revenue loss, it makes sense to focus on the tax code. Here are seven proposals that could minimize or offset lost savings after the “Byrd Bath” and reduce the bill’s deficit impact:
1. Stick to the Tax Cuts and Jobs Act’s (TCJA) Child Tax Credit (CTC). According to the Joint Committee on Taxation, the Senate’s proposed CTC expansion would cost $124 billion more than simply extending the TCJA version, while only boosting the credit by $200. As my colleague Susannah Petitt has pointed out, there are better ways to help families than expanding the CTC, which fails to achieve its goals of reducing child poverty, improving fertility, or increasing affordability. Petitt proposes a more targeted approach:
Policymakers should be more creative when it comes to pro-family policies. If the goal is to reduce the cost of goods, policymakers should reduce regulations on baby formula and roll back tariffs on food. If the goal is increased fertility, policymakers should relax zoning codes. If the goal is setting babies up for success, policymakers should create Universal Savings Accounts.
2. Remove the new deduction for seniors. The House version of OBBBA includes a new $4,000 deduction for seniors as a nod to President Trump’s campaign pledge to eliminate taxes on Social Security benefits. This new deduction is in addition to an existing deduction for the blind and elderly that equaled $1,550 last year. The Senate version raises the new deduction to $6,000, with a $91 billion price tag — a substantial cost for a policy that amounts to simple pandering to an age demographic already at the top of the wealth distribution.
3. Eliminate or reduce the R&D tax credit. Not to be confused with R&D expensing — the neutral pro-growth tax policy that the Senate bill makes permanent — the R&D tax credit is a complex tax subsidy with ambiguous effectiveness. Fully repealing the credit would increase revenues by approximately $250 billion.
4. End the municipal bond interest tax exclusion. Many legislators rightly criticize the State and Local Tax (SALT) deduction as a subsidy to high-tax states such as California and New York. But legislators pay less attention to the tax exclusion of municipal bond interest, which is a direct subsidy to high-borrowing state and local governments. Like federal debt, municipal debt represents a deferred tax on future generations. Ending the exclusion of interest on public purpose municipal bonds would increase revenue by about $260 billion.
5. Reduce the qualified pass-through income (QBI) deduction from 20% to 16.5%. While the QBI deduction is framed by proponents as a way to create parity between treatment of corporations and small businesses, the reality is that the 20% deduction gives pass-through business a tax advantage relative to corporations. As Cato’s Adam Michel has stated:
Often, the comparison is made between the 21 percent corporate tax rate and the 37 percent top individual income tax rate. However, the comparable rate for large C corporations must also account for the 20 percent capital gains and dividend taxes assessed on realized and distributed profits. Taken together, the total tax rate on corporate income is 36.8 percent, which is very similar to the top rate of 37 percent paid without the special pass-through deduction.
Further:
For qualifying businesses, the deduction lowers most pass-throughs’ top marginal income tax rate from 37 percent to 29.6 percent.
Short of corporation integration, which Kyle Pomerleau of the American Enterprise Institute (AEI) recommends, the next best way to create parity is to return to the pre-TCJA treatment of pass-through businesses by allowing the QBI deduction to expire entirely. Alternatively, Congress could reduce the deduction from 20% to 16.5%, saving approximately $100 billion.
6. Repeal college tax credits. The federal government has been subsidizing higher education since long before President Biden’s attempts at student loan forgiveness. These subsidies include the federal student loan program, the tax exclusion for interest on student loans, tax exclusions for scholarship and fellowship income, and college tax credits, among others. These policies increase demand for college education, likely leading to higher tuition prices rather than the intended effect of making college more affordable.
Repealing the two college tax credits, the American Opportunity Credit and the Lifetime Learning Credit, would save approximately $150 billion and put downward pressure on tuition prices.
7. Make part of the earned income tax credit (EITC) nonrefundable. According to CBO projections, the government is projected to issue $630 billion in EITC payments over the next decade. A large portion of this tax-spending will be improperly spent. The Government Accountability Office found that last year the EITC program had an improper payment rate of 27.3%, equal to $16 billion. Assuming the same rate over the next decade will mean $172 billion of improper EITC payments.
Part of this waste stems from fraud by claimants. The EITC’s phase-in and phase-out structure encourages misrepresentation of income taxes — either overreporting or underreporting of income — in order to maximize the benefit. But part of these improper payments is also unintentional, driven by the EITC’s complexity.
Critics of this proposal may quickly decry it as a tax hike on the poor. But the reality is that individuals receiving a refundable EITC pay no income taxes. Ipso facto, making the EITC partially nonrefundable at its current dollar value would merely reduce redistribution in the tax code without levying any new taxes on recipients. Making 20% of the EITC nonrefundable could save approximately $120 billion.
While it is disappointing that major savings are being stricken from the reconciliation bill, it is essential that Congress continue to work toward lowering the cost of OBBBA. This has less to do with economics — although there are certainly economic arguments to be made against more government debt — and more to do with morality. The question we should be asking ourselves is: Who should be paying for today’s government? My vote is for today’s taxpayers, not tomorrow’s.