WASHINGTON—Republicans want to extend the Trump-era tax cuts that lapse after 2025. A big point of debate now: Should they cover any or all of the $4 trillion cost—and how?
The question pits the party’s fervent belief in the economic power of tax cuts against many GOP lawmakers’ oft-repeated concerns about federal debt and budget deficits. Many Republicans argue that tax-cut extensions are so important for strong growth that they don’t need to be fully paid for. Some are exploring ways to trim the net cost of a tax-cut extension, such as repealing electric-vehicle tax breaks or reducing federal spending.
Republican lawmakers and aides say they have made no decisions, and the ultimate call will depend on whether they have congressional majorities next year—and by how many seats. The internal party discussions are starting now, as senior Republicans plan for the possibility of holding the House and retaking the Senate and White House in November’s elections. Doing so would let Republicans control the tax cuts’ fate next year.
Extending all expiring individual and estate tax cuts, along with business-tax changes Republicans favor, would reduce projected revenue by $4 trillion over a decade, according to the congressional Joint Committee on Taxation. That would come atop $20 trillion in new deficits projected under current laws.
Next year’s tax debate will happen against a very different fiscal backdrop than existed in 2017 when the tax law was enacted. Then, the budget deficit was 3.4% of gross domestic product. Now, it is routinely above 5%, because of spending increases, the aging population, interest costs and the tax cuts. And interest rates are much higher.
Former President Donald Trump, who is running to reclaim the presidency, has said he favors extending the tax cuts he signed in 2017 but hasn’t detailed a fiscal plan. President Biden, meanwhile, says extensions should be offset with tax increases on corporations and high-income households.
“There’s a big enough bloc, I think, even on our side who will look for pay-fors,” said Rep. David Schweikert (R., Ariz.), who said changes to restrain healthcare costs and improve government technology could be on the table. “It may be our opportunity to actually do some adult policy instead of theatrics.”
Even in a unified Republican government, there is an upper limit on net tax cuts, said Rep. Blake Moore (R., Utah), a member of the tax-writing Ways and Means Committee.
“We want things to be paid for,” he said. “We want them to be responsible as much as possible, but we need strong economic growth and we’re going to have to balance it.”
The tax debate will likely consume lawmakers’ attention next year. If Congress doesn’t act by Dec. 31, 2025, marginal income-tax rates would climb and the standard deduction and child tax credit would shrink. More than 60% of households would see tax increases, though 9% would get a tax cut.
Clues on the path forward
The 2017 tax law, written solely by Republicans, is instructive in showing where Republicans might head. It wasn’t purely a tax cut, and extending it might not be a binary decision.
Many House Republicans entered 2017 determined to restructure tax law without reducing federal revenue. But when their biggest revenue-raising plank—a border-adjusted business tax system—fell flat, Republicans shifted to net tax cuts and agreed on a $1.5 trillion cost.
To hit that target, they embedded tax increases in the law, repealing a domestic manufacturing tax break for companies and ending per-person exemptions for individuals, for example.
They also used gimmicks, shaving the cost by creating delayed-start tax increases on research expenses and interest costs that many hoped a future Congress would block from happening. Those tax increases took effect.
Republicans also scheduled individual tax cuts to expire after eight years, limiting the 10-year cost and setting up next year’s fight.
All those tools—expirations, delayed tax hikes and embedded tax increases—could be used again.
There are other options. Republicans could repeal tax credits they oppose for electric-vehicle purchasers or curtail other clean-energy breaks. They could seek spending cuts. Trump has proposed higher tariffs, which would raise money and operate largely as a tax increase on consumers.
Welcome to the ‘Super Bowl of taxes’
Rep. Jason Smith (R., Mo.), chairman of the House Ways and Means Committee, recently said some GOP lawmakers were open to raising the 21% corporate tax rate.
Smith has tried to reframe the way Republicans talk about offsetting tax cuts, describing the exercise as replacing bad policy with good policy rather than offering a strict numerical rule. Describing what’s coming as “the Super Bowl of Taxes,” he created teams of Ways and Means members to analyze ideas and talk to the many House members who entered Congress since 2017 and might not fully understand the trade-offs members made then.
When they designed the 2017 tax law, Republicans tried to have individual tax changes pay for individual tax cuts, with corporate taxes and international tax-law changes in separate buckets. Since then, fights over diversity programs and other social issues have estranged many companies from traditional Republican allies. This time, there could be less resistance to using higher corporate taxes to pay for individual tax cuts.
For American corporations, this year “is all about defense because there’s not much for them to gain,” said Jon Traub, a former House GOP tax aide now at accounting firm Deloitte. “Corporations and Republicans are in the middle of, at the very least, a trial separation if not a full-on divorce.”
Democrats are dubious of Republicans’ stated concern about debt and deficits, and they are already arguing that Republicans would inevitably extend tax cuts without paying for them.
“It’s a lot of talk but not any action,” said Rep. Suzan DelBene (D., Wash.), a Ways and Means member who heads House Democrats’ campaign arm. “They come up with excuses about why their tax cuts don’t have to be paid for and then they complain about debt or deficit.”
The GOP case for tax cuts
The core Republican argument is that low taxes are essential for economic growth, generating gains so large that the additional taxes on that larger economy can exceed the cost of the tax cuts. But even many Republican-leaning economists who say such positive feedback occurs say it doesn’t necessarily mean that the 2017 tax law paid for itself.
In 2018, the Congressional Budget Office estimated that the tax law would generate enough growth to cover 20% of its own costs. Recent economic studies have shown a smaller effect, Phillip Swagel, director of the Congressional Budget Office, said this month.
Broadly, the Republican view of the 2017 law is that it was a roaring success. They credit it for the solid economic growth and wage gains that happened in 2018 and 2019 before the Covid-19 pandemic and sometimes for the stark jump in revenue that occurred in 2021 and 2022 as the stock market rose.
“I want to make sure that we extend all of the tax reform that we did in 2017 because we know that that gave us the best, basically, economy of my lifetime,” said Sen. John Barrasso (R., Wyo.). “CBO is regularly wrong and I expect that they are on this as well, because this is going to result in significant growth.”
Republicans often also note that federal revenue in recent years has been higher, in dollars, than CBO had projected even before the 2017 tax cuts. Many cite that as evidence that the tax cut raised revenue.
Given the sharp disconnect of the pandemic, it’s hard to draw straight lines connecting the 2017 tax cuts and today’s economy and revenue collections. Part of the increase in nominal revenue is inflation. Some of it was a one-time burst of capital-gains taxes before revenue declined in fiscal 2023. The conservative-leaning Tax Foundation says extending the expiring cuts would spur some growth but come more than $3 trillion short of paying for itself.
“I’m sympathetic to the argument that tax cuts can pay for themselves,” said Preston Brashers, a research fellow at the conservative Heritage Foundation. “But I think it’s a little bit tougher sell this time around than it was in 2017.”
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