Republican tax policy plans could grow

Congressional Republicans continue to hash out their own priorities within the major economic legislation — largely tax-related — expected to pass along party lines this year.

The House budget resolution, passed near the end of February, lumped major tax legislation with significant other policy changes, including incentives for major spending cuts. It has not advanced yet in the Senate, in part due to the government funding debate that occupied much of the Senate’s limited floor time during the week of March 10. The debate resulted in a $20.2 billion recission of the increased IRS funding provided by the 2022 Inflation Reduction Act, along with keeping the government open.

But mainly, the delay speaks to competing priorities the tight-margined Republican majorities must navigate amid a legislative process that could overhaul significant portions of economic and fiscal policy. That could grow the size of the tax policy portion of the bill — the biggest piece — if Republicans continue the “one big, beautiful bill” approach favored for political reasons by leaders in the House of Representatives.

Speaking off the cuff to reporters after a public interview at a U.S. Chamber of Commerce event on March 12, Senate Finance Committee Chair Mike Crapo, R-Idaho, a key figure in the debate, said that the size of the tax section of legislation could swell from $5 trillion to $6 trillion from the soft $4.5 trillion revenue impact cap outlined in the House budget.

“We have…just under 200 requests from Republican senators for tax policy improvements that they want to see made,” said Crapo, during the planned portion of his remarks. “There is a huge demand in both Republican House and Republican Senate conferences to reduce our deficit, and that means that we need to find not only offsets for all the price tags, but additional deficit reduction.”

Three items on the list: revivals of the more generous calculation of the 163(j) net interest deduction, Section 174 R&E expensing, and 100% bonus depreciation. Crapo estimated that the revenue cost of those provisions alone would add $500 billion to the overall budgetary impact.

The number of requests, along with the emphasis on both decreasing federal revenue and reducing government deficits, underscores how complex this year’s tax and fiscal debate will be. Due to narrow majorities, nearly each Republican senator and member of the House can leverage their vote for their own preferred outcomes. However, they also recognize that if the bill fails, none of them get what they want, and personal income and other effective business rates would go up.

For instance, while President Donald Trump and a majority of congressional Republicans would probably favor full repeal of the Inflation Reduction Act energy tax credits, 21 House Republicans wrote in favor of keeping some provisions for ongoing projects, or that may impact household energy prices, in a letter to House Ways and Means Committee Chair Jason Smith, R-Mo., on March 9.

The differences in opinion across narrow majorities are part of why Senate Republicans hope to shift budgetary scoring for continuing the portions of the Tax Cuts and Jobs Act expiring at the end of the year from current law to current policy. Those provisions, which range from the Section 199A qualified business income deduction, to personal income tax rates, to opportunity zones, come with an estimated revenue loss of approximately $4 trillion to the federal government over 10 years if measured under current law; if under current policy, that would minimize their budgetary ‘score’ and allow Republicans more maneuvering space to make everyone happy.

But not everyone supports the approach. Rep. Dave Schweikert, R-Ariz., a senior member of the Ways and Means Committee and current chair of the Joint Economic Committee, a bicameral panel for economic policy, has vocally criticized the current policy baseline proposal, calling it “intellectually vacuous.”

In a March 21 report, requested by the Arizona Republican, the Congressional Budget Office (working with the Joint Committee on Taxation) estimated that continuation of the Tax Cuts and Jobs Act provisions expiring at the end of the year would contribute to a significant increase in long-term national debt, becoming a bigger drag on economic growth caused by knock on effects of higher borrowing costs for the U.S. government. Extending the individual provisions of the TCJA in perpetuity, without accounting for offsets, would increase the U.S. debt-to-gross domestic product ratio, already on pace to hit a record high, by nearly 50 additional percentage points over the 30-year window Schweikert asked CBO and JCT to analyze.   

“Federal debt would be larger. The increase in federal borrowing would draw resources away from investment in capital goods and services, thus reducing the stock of private capital and decreasing output,” the analysis concludes. 

Decisions around offsets

Mounting concerns over debt look likely to push congressional Republicans into making politically sensitive decisions around offsets to prevent tax increases.

A trigger included in the House budget resolution that’s expected to act as the shell for the grand fiscal and tax bargain Republicans aim to pass into law this year, necessary to gain the support of several fiscal hawks and pass that chamber, requires that congressional Republicans cut spending by $2 trillion to maintain the $4.5 trillion in budgetary space they granted themselves for tax goals. Those include not only TCJA extensions, but Trump campaign tax promises and potential extensions of other major expiring provisions. For every dollar they cut beyond the $2 trillion, they can go over the $4.5 trillion target number. For every dollar below the $2 trillion threshold, they lose an equivalent amount in budget space for tax policy, with floors of $1.5 trillion in spending cuts and $4 trillion for revenue cuts.

While House Ways and Means Committee Republicans began huddling the week of March 10 to hash out their own legislative stances, and the White House, with Senate and House Republican leadership, have begun working out differences, the broad range of moving pieces — before even factoring in how tariffs affect the debate  — explains why there’s yet to be much more progress made public.

During a March 18 interview Treasury Secretary Scott Bessent was asked if the tax and fiscal legislation remains on the May timeline for passage into law laid out by House Speaker Mike Johnson, R-La., earlier this year.

“I’m taking Speaker Johnson’s lead. May is very ambitious,” replied Bessent, adding that it “would be great.” But despite the mild tempering of expectations, the Treasury secretary pointed to the less bumpy-than-expected recent House passages of the budget resolution that will serve as a vehicle for multitrillion-dollar tax and fiscal policy as well as the recent government funding resolution as proof that the Trump administration and congressional Republicans can deliver.

“Given those two wins… I think we have great momentum going into this tax bill,” said Bessent. 

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