On May 23, we applauded the House’s passage of the reconciliation bill and gave the Senate some ideas for how to improve it. The Senate has kept many of the positive aspects of the House bill and taken us up on some of our suggestions for improvement while ignoring others.
The Senate has kept the House’s provisions to make permanent the income tax brackets from the Tax Cuts and Jobs Act of 2017 (TCJA), which are set to expire at the end of this year. Calls from right-populists to raise taxes on the rich (and small businesses) were rejected yet again. The Senate also kept the doubled standard deduction and indexed it to inflation, permanently simplifying the tax code for tens of millions of filers who no longer need to itemize.
There were several substantial improvements in the Senate version. The crackdown on the Medicaid “provider tax,” which is not really a tax at all and allows states to game the federal matching formula to run up Medicaid costs, was stricter than the House’s. The provider tax should be eliminated entirely, but limiting it more severely is a good step in that direction.
Republicans should ignore hospital lobbyists’ alarmism, and Senator Hawley’s complaining, about their Medicaid reforms. Still under the Senate plan, Medicaid spending would increase by 3 percent per year for the next ten years, and the spending level will still be above the baseline for the program from 2021. That’s not a “cut” at all, let alone a dangerous one, and Medicaid spending under Biden was out of control.
Permanent full expensing for business investments, which we called for in a separate editorial, also made it into the Senate bill. This is the policy in the bill most conducive to long-run economic growth, and it removes a fundamental unfairness in the way the business tax code treats capital versus labor. As far as improving from the status quo is concerned, this is the best provision in the bill.
The Senate also held the line on the state and local tax (SALT) deduction, keeping it at $10,000 rather than raising it to $40,000 as the House wanted. Keeping this key provision from the TCJA in place keeps the SALT deduction, which should not exist at all, on the path to irrelevance as inflation eats away at the value of the deduction while also not creating several hundred billion dollars of greater deficits. President Trump began to lose patience with the handful of pro-SALT legislators in May, and he should call their bluff when the bill returns to the House.
Other improvements include reducing the impact of the gimmicky carve-outs, such as by putting an income limit on the tax exemption for tips. The Senate did not remove “Trump accounts,” a new entitlement program the House created that should still be removed.
The Senate proved its status as the upper house, but it still did a few things to make the bill worse. It scaled back the House’s elimination of many green energy subsidies, phasing them out over longer time spans or keeping some intact altogether. This is a grievous mistake. The so-called Inflation Reduction Act, whence many of these subsidies arose, should be repealed entirely, and Republicans should feel no attachment to Joe Biden’s legislative legacy.
The energy subsidies distort markets and cost enormous sums of money that would be better used in deficit reduction. The Senate should have been seeking to return spending back to its pre-Covid trend. Instead, it has let the House take the title of inching closer to that goal, while the bill still falls far, far short in either chamber.
Overall, the bill leaves the Senate better than it entered. But it still continues the irresponsible deficit spending that has characterized the federal government for years. Making the tax cuts permanent is a major priority that Republicans must deliver, and just about everyone from the president on down has supported that effort. The enthusiasm for the equally necessary spending cuts just hasn’t been there, though, and it seems Washington will do what it normally does and pretend the fiscal problem doesn’t exist.