The Tax Cuts and Jobs Act was the crowning legislative achievement of President Trump’s first term, but the tax-policy priorities he has laid out for his second term risk undermining one of its greatest features.
In addition to bringing down corporate and individual tax rates, the 2017 reform dramatically streamlined the tax code. Rather than working through complicated returns, roughly 90 percent of Americans now simply choose to take the standard deduction. That’s in large part because it was doubled under the law Trump signed, while many special carve-outs were capped or eliminated.
One example was that the law capped the pernicious state and local tax deduction at $10,000. Prior to the changes, wealthy individuals choosing to live in high-tax states were able to deduct an unlimited amount from their taxes. Reducing various breaks was also essential to limiting the deficit effects of such large tax cuts. Capping the SALT deduction, for instance, helped offset the effects of updating the Alternative Minimum Tax so it hit far fewer households.
With most of the individual tax cuts set to expire at the end of this year, Trump met with lawmakers and outlined his priorities for the bill to expand them. Unfortunately, Trump’s proposals would reintroduce more complexity to the tax code and make it a lot harder for the numbers to add up. According to White House Press Secretary Karoline Leavitt, Trump is seeking the following: fully renewing the 2017 tax cuts; adjusting the SALT cap; and creating new exemptions from taxation for tips, Social Security benefits, and overtime pay.
Extending the tax cuts alone would boost deficits by about $4.6 trillion, according to the Congressional Budget Office. Fully eliminating the SALT cap could add another $1.2 trillion, according to the Committee for a Responsible Federal Budget. Trump’s various campaign proposals on exempting tips, Social Security benefits, and overtime pay would reduce revenue by over $2 trillion, according to the Tax Foundation. That comes to nearly $8 trillion. In comparison, some of the offsets Trump suggested would barely make a dent in that figure (for instance, having investment funds pay taxes on carried interest as ordinary income would only raise about $12 billion over a decade).
These numbers are subject to change based on all the wheeling and dealing to come. The SALT cap could simply be raised rather than eliminated; the tips exemption could be limited to a small universe of service workers; the broader cuts could be extended for only a few years rather than made permanent; and alternate estimates could make more optimistic assumptions about how much of the revenue loss from tax cuts could be offset by increased economic growth. But the overall picture will be the same: significant cuts that are not offset by spending cuts or savings elsewhere in the tax reform will add to deficits, and inserting more carve-outs will complicate the tax code.
Trump’s special set-asides for groups he wooed during the general election (seniors, unionized workers, and Nevadans) would deliver little economic impact. Increasing allowances for SALT deductions for a relatively small number of mostly wealthy taxpayers in high-tax states would be appalling. Not only would this shift more of the burden onto residents of lower-tax states, but it would make blue states more insulated from bearing the full economic brunt of their left-wing policies. For a fraction of the costs and much greater economic benefit, Republicans could allow businesses to immediately expense capital investments.
In the coming months, there will be a lot more opportunities to debate the particulars of various tax proposals. But Republicans would be wise to keep things simple.