The House-passed version of the reconciliation bill does a few things well. It makes permanent the tax rates and the higher standard deduction signed into law by President Trump in the Tax Cuts and Jobs Act of 2017, which are currently set to expire at the end of this year. It preserves the top marginal rate at 37 percent, shunning the demands from some on the populist right to raise taxes on the rich. It rightly restores the child credit to the value it had after that act was passed.
Conservatives in the House Freedom Caucus were able to secure stronger work requirements for able-bodied Medicaid and SNAP beneficiaries starting next year, instead of in 2029 as originally proposed. Work requirements are a popular, commonsense, conservative welfare policy that make beneficiaries and the budget better off, although they raise daunting administrative issues in the context of Medicaid.
It also greatly simplifies and reduces spending on the federal student loan program. It replaces the current mess of repayment plans with just two: a standard plan and an income-based plan. It requires federal aid recipients to enroll in more class hours to stay eligible.
Now the one big beautiful bill is off to the Senate. We hope the Senate will make it better.
There’s plenty of room for improvement. The bill should seek to restore federal spending to its pre-2020 trend. Even accounting for population growth and inflation, federal expenditures last year were about $1 trillion above what they would have been if the trend that existed in 2019 had continued. The House bill still does too much budget-busting in the short term in exchange for promised savings in the long term — savings that we all know will not actually come when future Congresses inevitably find ways around the constraints.
The pre-2020 trend was already unsustainable; the current trend is lunacy. Moody’s has caught up to S&P and Fitch by stripping the U.S. of its perfect credit rating. Bond yields are reaching 20-year highs amid the realization in financial markets that many of the budget cuts in the House bill are gimmicks and the deficit spiral will mostly continue. There is no promise of significant economic growth to compensate, since the bill’s purpose is largely to keep current tax policy, not cut further, and the administration’s tariff policies are expected to cancel out the modest growth effects of the tax bill.
The further cuts that are included are politically motivated handouts that make the tax code more complicated, undoing much of the salutary simplification from the TCJA. Fortunately, these shenanigans, such as exempting cash tips from income tax, giving seniors a larger standard deduction, and offering a tax deduction for interest on car loans, are temporary.
Also temporary, unfortunately, is the return of 100 percent bonus depreciation for businesses’ capital investments, which the House bill would have expire again in 2029. The TCJA also made this temporary due to budget-scoring necessity. Businesses should be able to write off the full expense of their capital investments in the year they are made, and the Senate should strive to cut spending elsewhere to balance out the revenue losses from making bonus depreciation permanent.
It should also make structural reforms to Medicaid by reducing the federal matching rate for the Obamacare expansion population to the same rate given for traditional Medicaid enrollees in each state. This would undo the perverse incentive by which states prioritize coverage for able-bodied, working-age people instead of the poor children or disabled people Medicaid is supposed to be for. It should also completely prohibit “provider taxes,” a mechanism by which state governments launder federal money through the Medicaid program.
The bill should completely repeal the so-called Inflation Reduction Act, Joe Biden’s $1 trillion progressive Christmas list law. The House version repeals some important parts of it, such as the electric vehicle tax credit, but stops short of cashiering it entirely.
It should scrap the House’s $30,000 increase in the state and local tax (SALT) deduction cap. Ideally, it should repeal the SALT deduction entirely. High-tax Democratic states with profligate spending do not need a federal tax deduction partially shielding residents from the consequences of their own votes. Capping the SALT deduction was one of the best parts of the TCJA, both fiscally and politically, as it crystalized in many voters’ minds the difference between the blue-state and red-state models, likely helping spur some of the migration to red states in the meantime.
It should also scrap the creation of a new entitlement program, “Trump accounts,” which would create a new savings account with $1,000 in it from the federal government for babies when they are born. Encouraging savings is good; creating new spending programs is not. Adding another type of account to the already overcomplicated savings laws is the opposite of what Congress should be doing.
We understand that these are lofty goals, and political compromises are necessary to pass the bill. It is still useful to elucidate them as a measuring stick. If the Senate moves closer to these goals, it will have improved the House bill and made the country better off. If it stays put or moves further away, it will be contributing to a wasted opportunity of a unified Republican government to put federal policy on a better path.