The tax cut plans of the president and House Republicans got a reality check last week when the House Committee on the Budget approved a resolution that would authorize $4.5 trillion in tax relief in a follow-on reconciliation bill. Here's the problem – that's not enough to cover even a straight extension of the expiring provisions of the Tax Cuts and Jobs (TCJA). 

The Congressional Budget Office (CBO) estimated that making the TCJA permanent would cost $4.6 trillion over 10 years. And that was eight months ago, which means that figure would be even higher today, perhaps approaching $5 trillion.

Adding to the squeeze, President Trump campaigned on an array of new tax cuts, including exclusions for tips, Social Security benefits, and overtime income. While the final bill very likely will not include everything the president has proposed, one or more of his proposals will certainly be included. An increase in the state and local tax (SALT) deduction limitation will also need to be included.  

How can House Republicans lighten their lift? One obvious choice is to forego TCJA permanency and provide a shorter-term extension. A five-year extension has been batted around in GOP circles, which would punt the issue to the next president. Treasury Secretary Scott Bessent pushed back on this idea a few weeks ago and prominent GOP senators, including Majority Leader John Thune (R-SD) and Finance Committee Chairman Mike Crapo (R-ID), recently made their displeasure clear in a letter to President Trump. "We will not support a tax package that only provides temporary relief from tax hikes," they wrote.

Another way to get there would be to substitute CBO's baseline scoring with a current-policy baseline. Doing so would ignore the TCJA's expirations and assume they are permanent, meaning the cost of extensions aren't included in the scoring, freeing up trillions of dollars in additional tax reductions. Chairman Crapo and House Committee on Ways and Means Chairman Jason Smith (R-MO) both back the idea. Crapo explains, "If you're not changing the tax code, you're simply extending current policy — you are not increasing the deficit. The bottom line here is that it's a $4.3 trillion tax increase, not a $4.3 trillion deficit." The efficacy of a current-policy baseline is pretty clear, but whether it's possible is a different question that we dove into last month. 

Congressional Republicans could also look for additional spending cuts as a financing mechanism, although they are already required to provide $2 trillion in deficit reduction to maintain the $4.5 trillion of tax relief. They also have the option of raising tax revenue. For Republicans, this might be the most painful choice — both as a policy matter and because of the amount needed to make an impact. #TaxTake

Upcoming Speaking Engagements and Events

Jorge and Marc will speak at the 49th Annual Federal Bar Association Tax Conference on March 3.

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