This post consists of excerpts from and my comments on five media stories related to the IRS that appeared in November. They’re in chronological order, not how I assess their importance.
What I had assumed would occur now is official, the IRS is ending (“suspending”) the direct file program under which the government itself provides software to calculate and file your income taxes. (The Free File program by private software firms and fill-in PDF forms – no tax calculations – will continue, though.) The IRS did not announce it but sent an email to the state tax agencies according to the Federal News Network (11/5/2025). The New York Times story has more detail.
This seemed certain to happen given the views of GOP members of congress and the conclusion of the Treasury Department’s mandated report on it:
Direct File had low overall participation and relatively high costs and burdens on the federal government, compared to other free filing options. . . . Direct File’s complexity and technical demands also diverted IRS resources from other core priorities. Meanwhile, successful, longstanding programs, such as Free File (which already covers a broader eligibility population than Direct File and operates at little cost to the government), were not fully promoted or optimized during this period.
The report estimated a cost of $138 per return without taking into account indirect costs.1 Scale economics and long-term fixed costs suggest the per return cost would drop over time and as its usage increased (marginal per return cost had to be very low). Free File’s asserted broader eligibility is questionable. It likely reflects the more limited geographical reach of Direct File until more states could come on board. Direct File had much higher income eligibility than Free File ($200K v. $84k for Free File).
I have mixed feelings about this, but my take is that the software firms who provide Free File services are inherently conflicted (their business model is to sell the software, not to give it away) and I lean toward the government bearing the cost of basic preparation and filing. Software is virtually essential now, given the complexity of the code. (Thank you, Congress.) Providing free software to do the calculations is similar to providing paper forms in days of a simpler code without income phase-outs, an AMT, and similar. (People would not have been pleased if the IRS charged for tax forms, while allowing low-income people to get them free from the IRS’s printer.) It’s analogous to a sales tax credit for retailers to offset some of their costs of collecting the sales tax for state and local governments.
Giving away tax base
I have discussed before how the IRS for various reasons undercuts the revenue intended to be provided by legislation (usually offsets to fund GOP tax cuts or Dem tax cuts or spending increases). Sometimes, that is a matter of practical necessity (e.g., delay of expanded information reporting for gig workers, now repealed), fear of popular/political blowback, and in other cases is simply inexplicable (allowing pass-through entity level taxes to avoid the SALT deduction limits). Even if the concessions are contrary to the letter of the law and intent of Congress, rarely does anyone have standing to and the wherewithal to challenge them.
The NY Times published a story (How the Trump Administration Is Giving Even More Tax Breaks to the Wealthy, 11/8/2025) that mainly focuses on undercutting the new corporate alternative minimum tax or CAMT, enacted to offset the cost of Inflation Reduction Act (a/k/a Biden’s infrastructure bill).
It’s hard to tell from the article what the agency’s rationale was for the various dilutions of the CAMT and other provisions. CAMT, of course, undercuts the investment incentives in TCJA and OBBBA (see this Brookings piece, e.g.). So, undercutting it will further the administration’s and GOP Congress’s agenda. But that certainly is no justification. Moreover, as the article points out, it is done without accounting for the cost, as enacting actual legislative changes would and is sure to increase the deficit materially. The changes are permanent features, in most cases. The article quotes speculation that hundreds of billions may be involved. Hard to judge the quality of such speculation, but it seems credible.
Most troubling is that the article asserts the crypto industry is a big beneficiary of the concessions. That’s an industry that adds little social value (as far as I can tell) and is the subject of some of the most lucrative grifting by Trump and his family, along with other administration insiders (like David Sacks) in other contexts.
The Treasury Department and Internal Revenue Service, through a series of new notices and proposed regulations, are giving breaks to giant private equity firms, crypto companies, foreign real estate investors, insurance providers and a variety of multinational corporations.
The primary target: The administration is rapidly gutting a 2022 law intended to ensure that a sliver of the country’s most profitable corporations pay at least some federal income tax. The provision, the corporate alternative minimum tax, was passed by Democrats and signed into law by President Joseph R. Biden Jr. It sought to stop corporations like Microsoft, Amazon and Johnson & Johnson from being able to report big profits to shareholders yet low tax liabilities to the federal government. It was projected to raise $222 billion over a decade.
…
“Treasury has clearly been enacting unlegislated tax cuts,” said Kyle Pomerleau, a tax economist at the American Enterprise Institute, a right-leaning think tank. “Congress determines tax law. Treasury undermines this constitutional principle when it asserts more authority over the structure of the tax code than Congress provides it.”
The alternative minimum tax isn’t the administration’s only effort to roll back taxes on large businesses and wealthy individuals. Last month, the Treasury and I.R.S. granted new tax relief to foreign investors in U.S. real estate. In August, they withdrew regulations to prevent multinationals from avoiding taxes by claiming duplicate losses in multiple countries at once. And, as The New York Times previously reported, the Treasury and I.R.S. have rolled back a crackdown on an aggressive tax shelter used by big companies, including Occidental Petroleum and AT&T. That amounts to another $100 billion in cuts — and likely far more, according to tax advisers.
…
The Treasury’s actions are probably contributing hundreds of billions of dollars to the federal deficit, tax experts said. That is on top of the trillions that the legislation signed by Mr. Trump in July is already adding to the deficit. Yet unlike laws passed by Congress, Treasury is under no obligation to publicly account for revenue lost by its actions — such as cutting spending to offset the money no longer being collected.
Opting crypto out of the CAMT:
The [CAMT] could have swept in two of the biggest crypto firms, Coinbase and Strategy. In response, they sought rule changes for calculating the minimum tax. Three high-powered legal advisers — Michael Desmond, who served as the I.R.S. chief counsel in the first Trump administration; Andrew Strelka, formerly senior tax counsel in the Biden administration; and Eugene Scalia, the labor secretary in the first Trump administration — pushed to exempt “mark to market” gains reported to investors. Those gains reflect the increase in value of the investments held by companies that haven’t been sold yet.
On Sept. 30, the I.R.S. granted their request, explicitly citing “digital assets.” Big crypto companies “have been granted a reprieve,” lawyers at Vedder Price wrote.
Monte Jackal as characterizing the changes as an effective repeal of the CAMT. (Seems a bit over the top to me.)
Conflicts at the top
The IRS commissioner position has been a revolving door under the Trump administration. We’re on the seventh commissioner or acting commissioner, when you include Danny Werfel, Biden’s commissioner who left shortly after Trump was inaugurated. Scott Bessent, the Treasury Secretary, is now acting commissioner.
Before becoming Treasury Secretary, Bessent was a hedge fund guy. He was a principal at Key Square Group. The NY Times published a story that revealed his old hedge fund has taken the position that limited partners who are actively involved in working for or managing the partnership (as Bessent was) do not need to pay Social Security and Medicare (SECA) taxes on their non-guaranteed partnership distributions. The I.R.S. Tried to Stop This Tax Dodge. Scott Bessent Used It Anyway (11/12/2025).
The IRS (the agency Bessent now directly heads) takes the position that these limited partners are not limited partners (i.e., passive investors) who are exempt from the SECA taxes on their nonguaranteed payments.2 In its view, these limited partners are garden-variety partners who must pay SECA taxes on their non-guaranteed payments. (The statute explicitly exempts the guaranteed payments.) The IRS won a Tax Court case on this issue in 2023, which is on appeal.
This tax minimization strategy is analogous to the more publicized use of S corporations to shield pass through entity income from full SECA taxation. Multiple high-profile politicians have used this gambit – John Edwards, Newt Gingrich, Joe Biden, and many more. Broadly closing off these strategies would raise a lot of revenue and is one option (indirectly through subjecting them to the NIIT) I suggested to fund the Dems’ proposal to continue the more generous ACA credits.
The story reveals that Bessent did not appear troubled by the fact that he has and is taking a tax position contrary to the agency he now manages. According to the Times story:
Mr. Bessent has stood by the tax maneuver. During his confirmation process to lead the Treasury Department, which oversees the I.R.S., Mr. Bessent said he would not follow the I.R.S. position that limited partners like him owed those self-employment taxes.
Instead, he said he wanted to see how ongoing legal challenges would pan out. He pledged to create “a reserve fund to address any contingency related to this issue” and said the amount in question was smaller than the $910,000 described by Democrats. He also committed to winding down his hedge fund.
Tax experts quoted by Times do not agree. (I can attest to Professor Burke’s bona fides. She was formerly a U of M law professor, and I took a week-long partnership course from her. She is a national expert in partnership taxation.)
“There’s zero question that this is abusive,” Walter D. Schwidetzky, a law professor at the University of Baltimore who focuses on partnership taxes, said of the ability for business owners to avoid self-employment taxes through limited partnerships. “No one of good faith would argue otherwise.”
…
“What surprises me is that there’s a precedential Tax Court opinion that Scott Bessent seems to say, ‘That’s not good enough for me,’” said Karen Burke, a tax law professor at the University of Florida who has written about the limited partnership exemption.
The Biden Administration had a regulation project to explicitly foreclose claiming the exemption, but the Trump Administration appears to have dropped it. The article notes that the staff turmoil at the agency and DOJ (in addition to Bessent’s public statement, I suppose) may undercut the government’s litigating position on appeal:
The U.S. government continues to defend the I.R.S. position in court, but it is now doing so with a weaker hand, tax experts said. The Trump administration has moved to disband the Tax Division at the Justice Department, which represents the I.R.S. in appellate court, and many tax lawyers in the department left amid the turmoil there, former officials said. One of the lawyers who represented the I.R.S. in the Fifth Circuit case involving the limited partner question, for example, withdrew from the case and left the government this year.
“The proposed restructuring of the Tax Division will not impact the ability of its civil litigators and criminal prosecutors from advancing its mission to fairly and consistently enforce the nation’s tax laws,” a spokeswoman for the Justice Department said.
The I.R.S. has lost not only much of its overall staff, but much of its leadership, too. Several of the agency’s top officials focused on tax enforcement have been pushed out, put on leave or quit.
This is just another (comparative mild) example of questionable ethical behavior by administration officials and a seeming lack of concern about defending the tax base.
MAGA mugging
Trump nominated Donald Korb to be IRS chief counsel. I thought this to be a modestly bright spot in an otherwise dark picture for the agency. Korb served in George W. Bush’s IRS as chief counsel, as well as a few other IRS roles before that. He is a respected tax lawyer with a long career, a typical conservative normie Republican. The Senate Finance Committee had recommended his confirmation.
Well, it was not to be. He’s out. Per Politico (11/14/2025):
President Donald Trump abruptly withdrew Donald Korb’s nomination for IRS chief counsel on Friday.
While Trump didn’t explain his decision, right-wing political activist Laura Loomer reposted Trump’s announcement on her X account, along with the hashtag “#LOOMERED.” Loomer, who’s sidelined several administration officials, chastised Korb on Wednesday for praising Democrats and donating to them.
I regard that as unfortunate depending upon who his replacement is. The leak by Senator Wyden regarding Korb’s questionable comments in a private meeting with Finance Committee staff and his public comments on the data sharing agreement, as reported by Tax Notes (no paywall), suggested to me that Korb might be in trouble with the MAGA types and was trying to pander to them. Loomer is a whacko, whose targets are impossible to predict (much less whether Trump acts on them). Who knows why a typically below the radar appointment like IRS chief counsel would attract her attention? This is not good, anyway you view it.
ICE data sharing case decided
The federal district court for DC has decided the IRS data sharing case that I previously blogged about here, granting a stay and a preliminary injunction of the data sharing policy. Links: to court’s memorandum and WaPo story (11/21/2025).3
The court accepted the plaintiffs’ arguments on the address issue and the rejected the government’s position that one or a few ICE employees could be “personally and directly engaged” in criminal investigations of thousands of individuals for which data was requested. The court likely thought that was simply not possible for one or two people to do that, because being personally engaged requires more than a cursory paper check as the government asserted.
The court’s memorandum, in deciding the agency had taken final, reviewable action describes how extensive IRS’s actions were:
Plaintiffs’ factually uncontested allegations show that the IRS spent an unknown amount of money developing the capability to conduct mass transfers of taxpayer information; entered into an agreement with ICE to conduct mass transfers of confidential taxpayer address information; and then completed a mass transfer of confidential taxpayer address information to ICE pursuant to this agreement, all while removing high-level individuals who disagreed about the disclosure process. This marks the consummation of the IRS’s decision-making process. page 40.
The IRS, according to the court’s memorandum, committed multiple violations of the statute in one instance in which it provided ICE with information for 47,000 individuals:
In sum, Plaintiffs have shown that the IRS committed multiple violations of Internal Revenue Code Section 6103(i)(2) when it disclosed confidential taxpayer address information to ICE on August 7, 2025. The IRS’s disclosure of address information for 47,000 taxpayers to a single individual at ICE violated the requirement in Section 6103(i)(2)(A) that the IRS disclose taxpayer information only “to officers and employees of [a requesting] agency who are personally and directly engaged in” a criminal proceeding or investigation. Furthermore, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(i) because the IRS disclosed thousands of taxpayers addresses to ICE without first confirming that ICE provided the “address of the taxpayer with respect to whom the requested return information relate[d].” In addition, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(iv) because the IRS disclosed taxpayer information to ICE even though ICE’s request for disclosure did not adequately set forth the “specific reason or reasons” why taxpayer address information was relevant to a criminal proceeding or criminal investigation under 8 U.S.C. § 1253(a)(1). Finally, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(ii) because ICE’s June 27 request failed to provide “the taxable period or periods” to which its requested taxpayer information related. pages 62-63 (citations omitted).
Regarding the substance of the apparent new address sharing policy:
In sum, Plaintiffs have shown a substantial likelihood that the IRS’s implementation of the Address-Sharing Policy was both arbitrary and capricious and contrary to law. The IRS failed to acknowledge its change in policy and failed to provide a reasoned explanation for its implementation of the Address-Sharing Policy. Furthermore, in implementing the Address Sharing Policy, the IRS failed to consider significant reliance interests that were endangered by its prior policy. Finally, Plaintiffs have shown a substantial likelihood that the Address-Sharing Policy is contrary to the requirements of the Internal Revenue Code. Plaintiffs have therefore made an adequate showing of likelihood of success on the merits as to the Address-Sharing Policy to support a preliminary injunction.
If this is the face of the new IRS, it’s ugly.
The WaPo story says no decision has been made on appeal, but I’m certain it will be, given the administration’s history and the importance it assigns to generating high deportation numbers. Whether this small victory for taxpayer privacy holds is anyone’s guess.
Notes
The New Jersey Department of Revenue, by contrast, estimated that taxpayers who used the system saved $153 per return, as reported by CNET. Not materially different, given New Jersey is a comparatively high-cost state. ↩︎
The story reveals Bessent paid the full Social Security tax, which has a modest income cap, currently $176,100. Obviously, his guaranteed payments exceeded that threshold for each of the years. ↩︎
The memorandum is quite a read WRT the background of the changes in IRS data sharing practices. ↩︎
One would think that you could give away money without worrying about branding. Apparently not.
OBBBA’s provides for Trump accounts – a $1,000 free gift for every baby born in 2025, 2025, 2027, or 2028.1 This from Axios:
Companies, lawyers and policy types are starting to call “Trump accounts” a new name: 530A accounts.
Why it matters: It’s a way to avoid politicizing the accounts — investment vehicles for kids that proponents hope will be widely used by families, companies and philanthropies on both sides of the aisle.
530A is the name of the section of the One Big Beautiful Bill Act that established the accounts. [Wrong: It’s the section of the Internal Revenue Code.]
…
“We are working with Democrats to reassure people that this isn’t a transactional political thing,” says Matt Lira, a veteran Republican operative who led a nonpartisan lobbying effort for those accounts.
….
“For the durability of this program, there’s reason to remove politics, and think of it as something that will exist beyond this administration and to encourage folks to participate.”
There’s a rational explanation, of course. The law permits additional contributions to be made to the accounts beyond the government’s $1k gift. Parents, their employers, and others can contribute up to $5,000/year to the accounts. Financial institutions can’t earn much in the way of fees or profits on a piddly $1,000 accounts. So, they obviously want to encourage those additional contributions. The Trump name is likely to repel a large portion of the population. So, coming up with a neutral name seems like a sensible business strategy.
This can’t be popular with the big guy who slaps his name on everything from hotels, golf courses, steaks, airlines, and bottled water. A couple immediate reactions: I wonder if the Trump IRS can require use of the legal name or simply sprinkle it so thoroughly on forms and similar to make it unavoidably obvious? If I were Lira, I’d watch my back and would not be heading to the White House on behalf of lobbying clients.
Note
There are strings. The money must be deposited in a qualifying account and cannot be accessed until the child turns 18. Earnings are only tax free if they are used for qualifying purposes like education or starting a business. But it’s free money if you’re the patient type. ↩︎
Conventional political wisdom says tax cuts are popular. People don’t like paying taxes and do like when politicians cut them.
TCJA was an exception. For example, a 2018 Pew Poll showed 37% approved and 46% disapproved of its overall long-term effect on the country (without the long-term qualifier the gap was slightly smaller).
Unlike TCJA, OBBBA was not just a tax cut, but a budget bill that cut spending (albeit off in the future) to partially offset the lost revenue from the tax cut. That makes it more challenging politically. Not surprisingly, polling typically finds an approval rate lower than TCJA’s. Pew found 33% approval and 46% disapproval, a 3-percentage point larger gap than for Pew’s 2018 TCJA poll. Small difference and, of course, both are strongly correlated with partisan affiliation.
Refunds to the rescue?
This has the GOP worried.1 So, their natural reaction is revise how they are marketing it. Everything is a marketing problem. First step is rebranding (i.e., to change the weird name that the Marketeer in Chief gave to it). The NYTimes reports they have settled on Working Families Tax Cut.2
The second step is to stick your head in the sand: “Let’s assume it’s not really a problem because tax cuts are popular.” In a version of this, the Times story says that Republicans are thinking OBBBA’s big refunds will be their political salvation, since the IRS has not put out new withholding tables. According to the Times:
Republicans are also banking on the simple power of direct payments to ultimately buoy the law’s popularity and, in turn, the party’s prospects in midterm elections next year. Under their design, the law will first deliver many of its benefits to American in their tax refunds next year, a lump-sum payment that may make the tax cut particularly visible to voters.
Most of the “cut” is not new, but just an extension of what people already are used to, i.e., the provisions of TCJA that otherwise would have expired. Put another way, TCJA is obviously reflected in current withholding, and its extension won’t generate refunds. Yes, OBBBA layered on new cuts, but they were relatively modest and targeted to narrow constituencies, as the Times story points out:
Republicans did layer some additional tax cuts on top of the extension. While the legislation overall is unpopular, several of these specific ideas, like tax breaks for overtime pay or tipped income, poll well with both parties. But those cuts will be valuable to only a relatively small subset of Americans, not the population overall, potentially limiting their political resonance.
About 3 percent of American workers regularly earn tips, for example, though even some of those workers may not gain anything from the change. Only Americans who owe a lot in state and local taxes will benefit from an expansion of the state and local tax deduction. And only those who buy a new car made in the United States will be able to deduct their auto loan interest.
Favored groups may notice
I thought I would dig a little deeper. The Yale Budget Lab calculated the differential impact of the new provisions versus the TCJA extension. It reports (emphasis in original):3
Many taxpayers will see little-to-no additional tax relief. For tax year 2026, we estimate that about one-third of households will see no additional benefit on top of TCJA extension. Almost half will see a tax cut of less than $100 for the year, and two thirds will see a cut of less than $500.
…
Notable tax cuts are most common in the upper-middle income range. More than half of taxpayers in the fourth income quintile (about $75,000 to $130,000) would see a tax cut of at least $500, and half of top-quintile taxpayers will see a tax cut of at least $1,000. These groups are generally more likely to benefit from the “no tax on…” provisions (including the new senior deduction) and the higher SALT cap.
Tax cuts of $100 will be hardly noticeable. The exact amount of income tax one pays or their typical refund are not very salient, unlike the price of gas which is on big signs everywhere. I would guess most folks only have a general idea of the size of their refund and $75 to $125 more will not particularly stand out. However, a tax cut of $500, which YBL estimates one-third will receive, should be noticed. But I doubt that will matter much politically because of the distribution issue described below.
Because the Joint Tax Committee (JCT) staff prepared estimates under the usual method (present law baseline) and under the Senate’s reconciliation work around (current policy baseline), it easy to filter out the estimated differences in the revenue loss for the TCJA extension versus the new tax cuts.
The new tax cuts for individuals look small compared with the total revenue loss from both the extension and the new cuts. To crudely focus on the tax year 2025 effect, I compared the FY 2025 and FY 2026 numbers.4 The total estimated revenue loss was just under $600 billion. By contrast, the new income tax cut for individuals, excluding the business provisions, was about $170 billion, less than a third of the cost.
Probably the bigger problem for the GOP banking on the political benefits of refunds is the concentration of the benefits of OBBBA’s new tax cuts.
The table below lists the provisions, ranked by JCT’s estimates of the revenue loss (a proxy for the tax cut amount). The dollar amounts are for federal fiscal years 2025 and 2026 – i.e., for all of calendar year 2025 and the first three quarters of calendar year 2026. This will capture some of the tax year 2026 effects, since the JCT estimates reflect that people will adjust their estimated payments and withholding during January through September of 2026.
Provision
$ amount
% of total
Expand SALT deduction
(39,247)
22.8%
No tax on overtime
(32,806)
19.1%
Senior deduction
(32,314)
18.8%
Increased std deduct
(26,503)
15.4%
No tax on tips
(10,121)
5.9%
Enhancement of child credit
(10,014)
5.8%
Car loan interest deduction
(7,332)
4.3%
Trump accounts
(7,177)
4.2%
Enhanced rates
(4,948)
2.9%
Enhanced adoption credit
(608)
0.4%
Enhanced child and dependent tax credit
(409)
0.2%
Enhanced dependent care assist
(365)
0.2%
Enhanced employer-provided child credit
(45)
0.0%
Total
(171,889)
GOP political payoff?
The provisions with the largest costs confer benefits on narrow categories of taxpayers. The standard deduction and rate changes apply broadly but are less than 20% of the cut. The senior deduction (another 19%) applies somewhat broadly (TPC estimates about 13% of tax units and half of those over 65). The rest of the cuts – over 60% – are narrowly targeted. Proportionately few households earn material overtime, receive tip income (and have tax), take out a car loan, or had a baby during the year (to get a $1k Trump account).5
Expanded SALT deduction
The largest benefit, the increase in the SALT deduction limit to $40k, will narrowly benefit mainly upper middle-income households and often in blue states. Here’s the Yale Budget Lab graph.
Tips and Overtime
The politics are probably going to come down to the refunds generated by the exemptions for tip and overtime pay income, two of Trump’s big headline political points during the campaign.
A preliminary TPC estimate is that the exemption for tip income will benefit 3% of tax units and for overtime pay about 9%.6 See the TPC graph below for the distribution of the benefit by income:
This TPC graph shows the distribution of tip income workers by state.
Overtime pay provides a bigger buck exemption and is likely to generate bigger refunds but is also harder to get a handle using government data on who will benefit. The Yale Budget Lab estimates that about 60% of employees qualify for overtime under the Fair Labor Standards Act, but only 8% of hourly employees and 4% of salaried employees regularly collect it.
Midterm benefits?
The political question is whether biggish refunds from expanded SALT deductibility, tips, and overtime pay will help overcome the general antipathy to OBBBA. The crucial focus must be on persuadable or swing voters in the polarized political world we now live in. The vast majority (maybe 90%) of voters are going to vote based on the candidate’s party in almost all cases. That’s even more likely in low-turnout midterm elections. Moreover, these illusive swing voters only matter in the handful of swing districts for House races and states with Senate seats that are actually in play.
Some relevant factors that occur to me:
The benefits (refunds?) from the expanded SALT deduction will be concentrated at the top. Those are not the voters that the Republicans have been gaining ground with; instead, they have been migrating to the Dems. What’s worse for the GOP, the beneficiaries will be disproportionately in blue and purple states. That might help them in arguable competitive Senate races in blue or purple states (Maine, Minnesota, New Hampshire, and North Carolina).
Per the TPC graph, tipped workers are concentrated in red states with Nevada and Wisconsin, two purple states, being the obvious exceptions. (Hawaii is a deep blue state that also has a lot of tipped workers. It’s irrelevant to the political calculations.) That is obviously not a good thing politically for the GOP if they’re looking for an advantage in the midterms. No Senate seat is up in either Nevada or Wisconsin.
Tipped workers are heavily female. According to TPC, over 70% of tipped workers are female. Of course, the Dems do much better with female voters and especially women of color (over 29% of tipped workers according to TPC), the most reliable of the Dems’ base voters. Will the exemption cause a material number of them to instead vote for Republicans? I doubt it. That is probably not good news for the GOP.
Gaming out the effect of the overtime pay exemption is more difficult because of the lack of data. My perception is that unionized workers in the private sector, particularly in manufacturing, and public safety employees (cops and firefighters) are the prime recipients of regular and larger amounts of overtime pay. The GOP already does well with both groups. Cops and firefighters are the outliers among public employees – their partisan allegiance tends Republican. It doesn’t seem like a fertile hunting ground to look for voters to swing from the Dems to the GOP.
More fundamentally, I’m dubious about the political benefits of modest increases in income tax refunds. I suspect that most voters look to the future, rather than rewarding politicians for what they have already done. The tips and overtime pay were modestly big issues in 2024 campaign, Trump won, and the expectations are already baked in. I don’t think the Dems got much mileage in the 2022 midterms out of their generous increase in the child tax credit in the 2021 American Rescue Plan. That expansion had a much broader and more dramatic effect. Its benefits ($85 billion/year) exceeded in dollar terms the sum of the exemptions for seniors, tips, and overtime pay.
Bottom line: I don’t think refunds will bail out GOP from adverse public perceptions of OBBBA. That does not mean opposing OBBBA will be a winning midterm campaign issue for Dems, though. That will depend upon political messaging, media coverage, campaigning, and (potentially) random events (recall how 9/11 threw the 2002 midterms to the GOP).
I know little about effective political messaging, but I’m highly skeptical of what appears to be the Angie Craig approach (see note 1) that muddies what should be unambiguous Dem opposition to OBBBA. Key points in my amateur attempt:
Unaffordable: We can’t afford to borrow money to hand out more tax cuts. That’s what OBBBA does. Federal debt is at unsustainable levels. To the extent they’re paying with tariffs (plenty Trump quotes to cite), that’s anti-growth and a tax that falls heavily on low- and middle-income people.
Unfair: OBBBA is both tilted to the top and picks favorites (tips, overtime pay, car loans, etc.). Sure, tipped employees are deserving and often underpaid, but why should they pay less tax than a factory or warehouse worker with the exact same income? Unless you believe in the fiscal fairy, exempting some means everybody else pays more or gets less.
Cuts crucial services: Cuts to health care (Medicaid and failure to extend ACA tax credits) and food aid (SNAP) hurt many people across all parts of the country, rural and urban, Republican and Democratic.
In short, don’t do anything to imply OBBBA may be okay/good, if only they had modestly changed its emphasis.
Silver Lining
One glimmer of light is that the administration’s political concerns about making sure that OBBBA is administered (i.e., the 2025 tax filing system works smoothly and the refunds get paid) likely means that the IRS will be saved from shutdown revenge reeked on “Democrat agencies.”
That appears to be the case so far. See this table from the NY Times that shows only 2% of Treasury employees have been furloughed:
Agency
Total employees
Planned furloughs
Share
Environmental Protection Agency
15,166
13,432
89%
Education
2,447
2,117
87
Commerce
42,984
34,711
81
Labor
12,916
9,792
76
Housing and Urban Development
6,105
4,359
71
State
26,995
16,651
62
Energy
13,812
8,105
59
Interior
58,619
30,996
53
Agriculture
85,907
42,256
49
Defense (civilian work force)
741,477
334,904
45
Health and Human Services
79,717
32,460
41
Small Business Administration
6,201
1,456
23
Transportation
53,717
12,213
23
Social Security Administration
51,825
6,197
12
Justice
115,131
12,840
11
Office of Personnel Management
2,007
210
10
Homeland Security
271,927
14,184
5
Veterans Affairs
461,499
14,874
3
Treasury
81,165
1,736
2
Sources: Official government agency websites; numbers for the Treasury are partial and exclude two small subagencies that have not yet released plans.
This Bloomberg article says that if the shutdown persists, IRS plans to lay off 35,000 employees but not those “working on filing season activities, implementing legislation, and IT modernization.” Getting refunds out and implementing their new law is “essential” collecting tax (auditing and exam) is not. Got it.
Notes
Perversely, some Dems, including Angie Craig, are worried (WSJ) but for the opposite reason – parts of OBBBA poll well (e.g., exempting tips and breaks for seniors). The response is to expand them. Yikes. Bad policy idea and it endorses a fundamental flaw in the OBBBA’s strategy, government borrowing to hand out tax cut goodies to favored constituencies. It’s bad both because we can’t afford them and they’re unfair, treating people with the same incomes unequally. All this reflects the uncertainty of political winds and why politicians that try to sail with them, rather than expressing their core convictions (e.g., like AOC and Bernie on the left or Liz Cheney on the right do), look like Caspar Milquetoast. Not what inspires confidence in a leader IMO. ↩︎
I’m sure that the Dems will be in the rebranding business too, claiming OBBBA really stands for One Big Billionaires’ Bailout (or Benefit) Act or something catchier. ↩︎
Because these estimates are for next year (2026), they are likely slightly higher than the 2025 refund effect, but close enough for our purposes. ↩︎
That captures a fair amount of the tax year 2026 effect as well, unfortunately. ↩︎
That assumes they know enough to apply for a Trump account for their baby. Will applications be included in hospital packages for new parents? I would not be surprised if the administration provides a presidential letter claiming responsibility – similar to Trump’s rebate letters during COVID. ↩︎
Of course, it would be no surprise if a lot more tip income miraculously appears (compared to the estimates), once it is exempt. Congress left many issues to the IRS and there is a fair amount of grey area for the aggressive to game, legally or illegally. ↩︎
Words and language matter. Especially in politics. Language, the ability to communicate complexity, distinguishes us from other fauna, and is responsible for our species’ success.
Whatever you think of Trump, his person or politics, he is a master of political communication.1 But to even the mildly sophisticated, his communications often seem comical, if not ridiculous.2 His name for the big tax and budget bill: OBBBA, the One Big Beautiful Bill, is a case in point. Even if far from the funniest, most ridiculous, or absurd.
I like to read John McWhorter’s NY Times column because of his skill at documenting and providing insights into the hidden meaning and nuances of language, including Trump’s. One paragraph from his most recent column struck such a chord that I felt I had to archive it. (The whole column is worth reading.) His column focuses on Trump renaming DOD as the Department of War and how it reflects his consistent pattern of being active, rather than reactive, always on attack. But the quote relates to OBBBA:
Even Trump’s most positive-sounding coinages are acts of a certain kind of verbal aggression. I sometimes stop to marvel that the House passed something with the actual official title the One Big, Beautiful Bill Act. That goofy bark of a name is a boisterous clap back against opposing views, an attempt to drown out inconvenient facts with braggadocio. It is a linguistic snap of the locker room towel. Every Democrat in Congress, a few Republicans and hordes of people across the land thought the bill was a tragedy. For Trump to nevertheless call it big and beautiful, as if it were one of his buildings or a hairdo, was a jeering “Ha ha!” from Nelson Muntz of “The Simpsons.” This includes the informality of the phrasing. “Big Beautiful Bill”? Imagine the 13th Amendment, abolishing slavery, titled Eat It, Secessionists!
Notes
His failures as a basic businessman, casino owner, developer and so on are well documented, but his years as a marketeer, salesperson, TV personality, and general shill honed his native communication skills. ↩︎
Many must work politically or at least are not political liabilities. ↩︎
I blog about taxes and have no expertise in Medicaid, but I can’t let a logical inconsistency in political rhetoric in such a key provision of the bill pass without commenting.
According to the CBO score, the bill will reduce federal spending on Medicaid by almost $1 trillion over ten years (see here, numbers are in Subtitle B, chapter 1 of the Title VII page of the downloadable spreadsheet). If these estimates are remotely close to accurate, this is a very large reduction in the social safety net (by some accounts the largest ever); it will fall heavily on many Trump voters and red states; and Trump campaigned on not cutting Medicaid.2
This situation has led to hand wringing by a few populist type Republicans, presumably because it hurts their base voters and communities.3 By contrast, while Dems are appalled by the potential real-world effects of the cuts, it has them licking their political chops as they plan to make the Medicaid cuts a campaign issue in the midterm and 2028 presidential elections. Whether that will work as a campaign strategy is debatable (see here and here for why it probably won’t), but I’ll do a little amateur analysis of the defenders of the cuts’ rhetorical claims and what I think they reveal about the reality as I see it.
The two main claims that bother me are that the estimated effects of the cuts are wildly overestimated or that because the cuts occur off in the future, they will likely be softened or repealed before they go into effect. If either or some combination of those assertions is correct, then the deficit/debt effects of OBBBA will be even higher. Disassembling about the quality of the estimates and planning future fixes, which you have no plan to pay for, does not change that reality; you can’t have your cake and eat it too.
Nature of the Cuts
Four observations about the Medicaid cuts (again, caveat that this is based on my limited, very high-level understanding of them and Medicaid itself):
First, the cuts largely result from imposing work requirements on able-bodied adults and by capping states’ ability to impose provider taxes that effectively increase the share of program costs paid by the feds. As a very crude explanation of the latter, states “tax” providers while increasing their reimbursements sufficiently to offset the tax. The higher reimbursement holds the provider harmless. Because the feds pay a percentage of the reimbursed tax, this arrangement (“tax”) imposes no cost on the state.4 This is widely recognized as gaming the system but has become engrained as part of the system’s overall mosaic – essentially de facto increasing the federal reimbursement rate. It is also subject to complicated federal regulations that restrict states’ ability to do too much of it (e.g., imposing very high tax rates). OBBBA changes those rules by reducing the allowed tax rate in steps over several years. Somehow, this reduced de facto federal reimbursement rate will need to be made up by states paying more or benefit/eligibility cuts or both.
Second, that structure enables proponents of the cuts to say the changes do not reduce individuals’ benefits. Able-bodied adults, if they aren’t already, can go to work to maintain their benefits. States can stop gaming the system by imposing bogus taxes and pay for the share of the benefits that the statutes nominally say they are responsible for. So, it’s just a choice by beneficiaries and/or state governments, not Congress and the feds. The structure of these changes also makes CBO’s estimating task very difficult, because the change in federal budgetary costs depend upon individual and political behavior that is inherently difficult to predict.
Third, the effective dates of OBBBA’s changes are delayed until after 2026 for the work requirement and after 10/2028 for phasing down the provider tax cap. That is necessary as a practical matter for the work requirement, less so for the tax cap, which could be applied in 2027 as well. That means Congress and/or the administration (by granting waivers or delaying implementation, like the TikTok strategy which ignores a technically binding law SCOTUS has upheld) have time to change their minds about imposing or can mitigate the rules’ effects.
Finally, CBO’s estimated savings from the Medicaid changes are crucial to reducing the bill’s effect on debt – both as a political matter (House passage was mildly in doubt because of objections it increased the debt too much) and as an objective fiscal matter (even nonfiscal hawks are concerned that OBBBA may go too far down a seeming ever-increasing debt path, which is already at a historical high-water mark).
Rhetorical Responses
The primary argument I saw made by the proponents of the Medicaid changes (e.g., Speaker Johnson) argues that they protect the program by ensuring that it only covers what everyone thought it was supposed to cover: i.e., those working or unable to (children, disabled, or elderly) and that states pay their expected (nominal statutory) shares of the program costs. That’s not true other than in their re-formulation of the program’s objectives; it’s what they think, not what the law said. A rough translation: we’re cutting it now, so you don’t have to worry about us cutting it in the future, I guess? It’s a way of saying that is what the program’s parameters should be in their view. Fair enough, but it’s not saying benefits won’t be cut. They will be or CBO’s estimates are wildly wrong. What one thinks about the changes depends upon your policy and political preferences and isn’t of much interest to me (it’s not illogical, just an obtuse way of saying it).
I’m more interested in the arguments made by Republican and conservative types who are concerned (politically or policy-wise) about the changes and argue that they really won’t be that bad. I see basically two flavors of these arguments.
But the coverage loss from the bill is likely to be a lot smaller than the predictions.
We should keep in mind, first, that the CBO has a poor track record in modeling the effects of health care legislation. * * *
Medicaid estimates, specifically, have been way off. In 2012, after Obamacare had passed and been modified by a Supreme Court ruling, the CBO thought that in 10 years, Medicaid, along with the Children’s Health Insurance Program, would enroll 43 million people. The actual number was more than 87 million, and it had already reached 70 million before the pandemic sent enrollment shooting up.
* * *
The effects of the work requirement are likely to be blunted by state implementation. A CBO assessment last month found that a version of the work requirements would cause a 4.8 million decline in enrollment. Much of the evidence CBO uses, though, comes from a short-lived experiment in Arkansas, a red state that expanded Medicaid reluctantly. Larry Levitt of the health-policy group KFF, drawing on that example, notes that states “could require Medicaid enrollees to report work or exemptions as often as every month.” They could — but will California or New York really be so stringent? Especially when it would lower their federal funding?
My take
Making these estimates is extraordinarily difficult and I am confident that CBO does a competent and neutral job. The obvious difficulties are the complexities of human behavior and specifically political behavior (i.e., what will legislatures and governors do) for which there is little data to provide guidance. Two states, Arkansas and Georgia, have limited and brief experiences with work requirements.6 A large cut in state provider taxes has never been done to my knowledge.7 That means that there is a large confidence interval around these point estimates.
That says nothing about a bias in one or another direction (i.e., over or underestimating the size of the reductions). An underestimate, which is certainly plausible, would make matters worse from the perspective of reducing benefits. Why should we assume, if CBO is bad at making health care program estimates, that they always will be wrong in one direction? If they had consistently erred in one direction, one would expect the analysts to assess why and modify their methods. Ponnuru must not think so. He must think they have a persistent bias in one direction.8
Should we assume that CBO analysts have some sort of inherent bias to overestimating? I can conjure up two reasons why that might be so (likely subconsciously by the relevant analysts):
Estimating larger cuts will make their Republican employers happy. Although they’re nonpartisans, Congress is controlled by Republicans and so has more control over CBO. Larger estimated cuts will make the deficit effects of the tax cut smaller and will reduce the need to make more reductions, which would be even less politically palatable. Both things will help Republican leadership put a passable bill together, a good thing for them.
If (as the Right always suspects) the analysts involved have policy priors that do not favor the cuts, estimating that they have larger effects will serve those priors. It will allow the program to escape deeper cuts but at the expense of a larger deficit. I’m sure they try hard to avoid explicitly putting their thumb on the scale in that manner, but one’s perception of the world/reality may matter in deciding how much weight to give assumptions for which there is so little data to inform those decisions.
Both factors point toward overestimating the magnitude of the cuts. They are wildly speculative. I’d assign a very low probability to them having meaningful influence on the estimates, but it’s possible.
The key point to keep in mind, which Ponnuru makes to his credit, is that if CBO seriously overestimated the amount of cuts, then the deficit effects of the bill will be much larger. The ship missed the rock but ran into the hard place. Second, the estimates are very large ($988 B), so they need to be off by a lot to matter much in terms of the hardship imposed on recipients and providers. Let’s say they’re too high by 25%, then the cut is ONLY three-quarters of a trillion dollars. Small comfort. In my mind quibbling about estimation accuracy is silly, a false hope, or worse – at least in the way that Ponnuru does it.
We can fix them
As noted above, the Medicaid cuts do not go into effect immediately. That means Congress or the administration can lessen their effects or eliminate some of them altogether. Senator Josh Hawley, one of the GOP populists who opposed the cuts, and Senator Ron Johnson who also opposed them have made this point as a basis voting for OBBBA. Here’s Politico, Ron Johnson believes he will get ‘second bite of the apple’ on Medicaid cuts:
Sen. Ron Johnson (R-Wis.) believes he has a commitment from the White House and Senate GOP leadership to get another chance to repeal an expansion of Medicaid offerings — a controversial proposal that failed to make it the final version of President Donald Trump’s sweeping domestic policy package.
“I think I pretty well have a commitment. They’re going to do that,” Johnson told reporters of the prospects that Republicans will reconsider a provision that would end the federal government’s 90 percent cost share of funding for new enrollees in states that expanded Medicaid under the Democrats’ 2010 health care law.
And when asked about the steep Medicaid cuts in the bill, Hawley continued to criticize them. Hawley said his “goal” is to ensure the provider tax changes, which will limit state reimbursement for Medicaid, don’t go into effect in Missouri in 2030 — even as he helped to pass a piece of legislation that will do just that.
My take
There is plenty of time, especially for the provider tax reductions, to modify or mitigate the cuts. As the administrative challenges of implementing them (work requirements) and their social, health, and economic effects become more apparent, changes seem probable. But:
Their gargantuan size means making meaningful changes will be extremely expensive and difficult to achieve without materially increasing the debt.
Voting for something that you firmly oppose and pledge and/or hope to change (e.g., Hawley, Johnson, and Murkowski) is an odd political strategy, since it gives up your strongest leverage in the legislative process. It must mean that you value some combination of tax cuts and deficit concerns and appeasing Trump and MAGA world more highly than your concerns about the Medicaid cuts.
The pattern of structuring payfors (here, Medicaid cuts) in the future and financing the politically desired policy (here, tax cuts) immediately is a time-honored bipartisan tradition. It was done by the Dems with the ACA, delaying implementing some of the tax increases to fund it. That almost inevitably results in unraveling the deficit-mitigating payfors. Republicans and a few Dems joined to repeal key ACA payfors. The medical device tax did go into effect, but was repealed, the Cadillac health coverage tax was repealed before it could be imposed. Some version of that seems likely to happen here unless events intervene (e.g., debt hysteria or crisis). However, there is also a good chance any mitigating factors will be partial or skewed to the politically favored. For example, the rural hospital fund is skewed to red constituencies, as contrast with a more neutral set of criteria that would help any hospital heavily dependent on Medicaid funding or with a high percentage of Medicaid-covered patients, even if it were located in an urban area.
The likely bottom line is that the deficit effects of OBBBA are worse than the estimates say, if past political behavior is any guide.
If you doubt that Hawley and others of similar ideological ilk have little have little to no concern about deficits or fiscal responsibility more generally, check out his proposal to rebate tariff revenues.
Littering the tax landscape
OBBBA’s erosion of vertical and horizontal equity is the biggest policy flaw of its tax changes. The distribution of the income tax will be more regressive (although still progressive) and there will be a wider dispersion of tax burdens for households with equal incomes. Both bad and I’m not sure which is worse.
But the more time I spend going through the details, I’m more depressed by how bad the changes are at a granular level, which likely reflects the several decisional dynamics – the hurry with which it was put together, the lack of public scrutiny, and the impetus to throw every Republican member’s (and his or her staffers’) pet ideas into the bill to get their support, grease the skids, etc. The result is an absolute mishmash, a littering of the tax code with provisions with little to no or contradictory policy rationales.
This has serious consequences for the ability of the IRS to administer and enforce the tax law, as well for taxpayers to comply with it. Janet Holtzblatt at TPC points out that OBBBA requires the IRS to issue about a couple dozen new regulations explaining and filling in the gaps at the same time its enforcement budget is being cut. Something has to give with a system that already had higher demands for guidance than resource to provide.
As Holtzblatt points out, the financing dynamics (e.g., paying for private letter rulings and the interests of those suggesting topics for public guidance) already skew the guidance to those with resources or to issues affecting higher-income filers. This does not bode well in terms of clarification of the multiplicity of provisions affecting the masses (beyond the big-ticket items Trump proposed that have already produced a press release from the Service).
To make matters worse, many of these provisions never had hearings or public scrutiny (hello, Trump accounts) and will affect millions. This is a recipe for confusion and unintentional mistakes and noncompliance. Bad.
The Tax Law Center has a new project focused on improving tax administration with a blue-chip set of advisors and contributors. I’m sure they will come up with many sensible ideas with likely little more effect than yelling for the wind and rain to stop.
Two niche provisions
A sprawling bill like OBBBA inevitably contains odd, narrow provisions. Two that I ignored as OBBBA was winding its way through Congress was the effective repeal of the National Firearms Tax and a new limit on deducting gambling losses. Both strike me as peculiar in different ways.
National Firearms Tax
The NFA was enacted in 1934 (allegedly) in response to the St. Valentine’s Day Massacre and the assassination attempt on FDR. It was more regulation (prohibition) than tax in the days when the Lochner Court imposed serious limits on congressional power under the Commerce Clause.9 Imposing a prohibitively high tax was a way to avoid potential limits on regulatory powers. (Second Amendment concerns weren’t much of a consideration in those days.) The tax was/is a flat $200 per item ($4,800 in 2025$) and applies to machine guns, short barrel shotguns (the proverbial sawed-off shotgun, I assume) and rifles, silencers, and similar – weapons and accoutrements Congress wanted to keep off the streets and considered to be criminal tools, rather than legitimate firearms for hunting and protection.
OBBBA’s provision started in the House as an exemption for silencers. The Senate thought that was a good thing and expanded it to exempt everything except machine guns (a bridge too far, I guess). That increased the cost from $1.5 billion in the House bill to $1.7 billion in the Senate bill. Obviously, the tax is mainly being collected on the production of silencers or suppressors. The changes are effective 1/1/2026.
The rationale for repealing this longstanding “tax” is unclear to me. An older CRS report describes proposals to modify the tax on silencers. A case can be made that the tax is unconstitutional now, even though it was upheld back in the 1930s. The Second Amendment doesn’t mean now what it meant then. Congress rarely repeals laws out of a preemptive concern that they may be unconstitutional, especially at a cost of nearly $2 billion, so some sort of pro-gun rationale seems more likely.
This is all new to me. What’s surprised me was how many silencers/suppressors are apparently being sold based on JCT’s revenue estimate. Since the tax is a flat $200/item, the $1.5 billion estimate implies something on the order of 750k silencers will be sold per year. (I would assume a $200 drop in price will stimulate sales FWIW but that is not reflected in estimate of foregone revenue from a repeal I assume.) That’s for items that Congress considered of so little social value (i.e., it was primarily a tool of criminals) in the 1930s that they de facto prohibited their sales. It’s amazing how attitudes have changed in 90 years.
Income from wagering
OBBBA’s changes in how the income tax applies to gambling are even odder. These changes have attracted a modest amount of attention, including claims by some members who voted for the bill that they were unaware of the changes and by even more members who now want to repeal them.
Deducting gambling losses traditionally have been allowed to offset winnings as a miscellaneous itemized deduction, which (obviously) required itemizing.10 TCJA temporarily eliminated the miscellaneous itemized deduction for casualty losses, but not gambling losses. They continued to be allowed to offset winnings.
OBBBA made TCJA’s disallowance of miscellaneous itemized deductions permanent but added a twist to wagering loss deductibility. It only allows 90% of losses to be deducted. This creates phantom income for someone with net winnings or modest net losses (10% or less). It raises a material amount of tax revenue – $1.1 billion per the JCT estimates for the budget window.
This provision has some very odd and uneven effects. Here are a few:
It has no effect on gamblers whose net losses exceed 10% of winnings.
A losing gambler with small losses (less than 10% of the amount bet) will have income tax liability, even though she has no income from wagering.
For a gambler with winnings, the tax rate effect is higher the lower the return on the amount bet. Put another way, the effective tax rate gets smaller as the return on the amount bet rises. To take an extreme example, it’s meaningless for a lottery winner who pays $5 for a ticket that yields $100,000. By contrast, a high-volume sports bettor who relies on finding bets in which the odds makers are slightly off (essentially playing a narrow margin probability game) will likely be put out of business by the tax. The odds have to be off by a larger amount for her bet to have a positive ROI.
The effect also varies depending upon the other taxable income of the gambler. Someone in the top tax bracket pays a bigger tax price obviously than a low-income person. The phantom income is added to and taxed at their marginal rates. As a matter of algebra, the new rule raises the tax cost of making a bet by 0.1% * the taxpayer’s marginal income tax rate.
I can’t come up with a reasonable rationale for such a tax. It makes no sense as a way to impose a sin tax to deter gambling or as a way to impose a tax on the gaming industry to recover some of the social costs of problem gambling. More accurately, many better structures could easily be devised to accomplish policy goals like those. It’s just one of those head scratcher provisions.
I cannot imagine that it will last long, if it ever actually is allowed to go into effect. According to the NBC story linked above, both chairs of the tax writing committees support repeal. (Q: how the heck did this get into the bill, then? Its inclusion is a massive indictment of the process the two chairs used IMO.)
Matt Levine in his interesting and always entertaining daily newsletter, Money Stuff (if you’re interested in corporate finance and don’t scan it everyday, you’re missing out; it’s free), points out that some commodity markets now sell contracts based on the outcomes of sports contests. The CFTC has approved this, surprisingly. Returns on these contracts, functionally indistinguishable from betting on the games, are taxed as capital gains with no restrictions the deductibility of losses from any other capital gains (and $3k/year to reduce ordinary income). This is a big tax advantage, even absent the silly OBBBA provision.
Charitable contributions
OBBBA makes a host of changes in the charitable contribution tax rules. Some of these were likely intended to raise revenues to offset the tax cuts, while others further the GOP policy agenda (credit for contributions to scholarship granting organizations or SGOs) or to mollify interest groups (charities have been lobbying for a nonitemizer deduction for years, more intensely after TCJA’s standard deduction increase). The changes certainly do not simplify or make the incentives easier to understand.
The table below lists the changes for which the JCT published an estimate (negative numbers are tax cuts and positive one’s tax increases). The amounts are for fiscal years 2025-34.
The overall net effect is a tax reduction of about $20 billion. If one ignores the credit for contributions to scholarship granting organizations (not really a charitable giving incentive since it’s a full offset for amounts given), the net effect is to raise revenues slightly (by about $6 billion).
Not reported in the table is the effect of the increase in the SALT deduction maximum from $10,000 to $40,000. That change will increase the number of itemizers (by about 2 to 4 percentage points according to TPC) who, as a result, will qualify to claim itemized deductions for their charitable contributions. Thus, one of the revenue effects of the higher SALT deduction limit will be more itemizers claiming deductions for their charitable contributions.
Non-itemizer deduction
One of the main criticisms of TCJA’s changes was that its higher standard deductions dramatically limited charitable contribution incentives to a smaller and higher income group of individuals. (TPC has a short piece that describes these effects.) COVID relief legislation allowed a one-year (tax year 2021) deduction for cash contributions by nonitemizers. OBBBA reinstates that deduction and makes it permanent at a higher dollar maximum ($1,000 single/$2,000 married joint versus $300/$600 under the expired provision).
Because of the maximum dollar limit, this is a flawed incentive – it won’t apply to marginal gifts by larger contributors. For larger contributors, it is little more than a modest bonus, a little extra income. But it has a big revenue loss, more than $73 billion.
0.5% AGI floor for individuals
While extending a new benefit to those claiming the standard deduction, OBBBA reduces the benefit for existing itemizers. It does that by disallowing deduction of contributions equal to 0.5% of AGI. This floor will also apply to the new deduction for nonitemizers but will not apply to qualified charitable distributions from traditional IRAs – direct payments made to charities for individuals aged 70.5 years old or older from their IRAs. (At least, that is how I read the law’s language.) This small change increases revenues by over $63 billion, almost totally offsetting the loss attributable to the new deduction for standard deduction filers.
This change has a good policy basis; it makes the incentive more cost effective. Disallowing contributions (scaled to income level) that nearly all contributors would make (w/ or w/o a deduction) minimizes the tax benefits conferred on people for doing what they would do anyway. It focuses the incentive at the critical margin. I have two criticisms, though: (1) the floor should have been set higher (e.g., at 1% or 2%), which would double or triple the savings with little negative incentive effect; (2) the floor should also be applied to qualified charitable distributions from IRAs. The same logic applies in that context and uniform rules are better.11
1% floor for corporations
OBBBA also imposes a 1% taxable income floor on corporate gifts. This raises over $16 billion in revenue.
The logic of this change is similar to the floor for individuals. However, it is worth noting that contributions and advertising/PR spending by businesses are close substitutes. Think of the local retailer sponsoring youth sports or making contributions to get their names listed in arts programs and similar. Those contributions may be motivated by the owners’ charitable impulses or to promote their businesses or more likely a combination of both. The floor will encourage characterizing contributions as ordinary and necessary business expenses. We can expect more “contributions” to be deducted as advertising or promotional expenses. I expect the estimates attempted to take this into account.
Contributions to subsistence whaling
This is one of a suite of minor provisions added at the last minute to secure Senator Murkowski’s decisive vote for the bill.12
SGO tax credit
This is a longstanding GOP desidera, not a charitable contribution incentive but de facto government funding of K-12 private schools since the credit equals 100% of the amount contributed.13 This is, of course, occurred at the same time that direct federal funding of public schools was being withheld and might be cut.
The interesting issue is that states must opt in for contributors to qualify for the credit. How this plays out in blue and purple states (including Minnesota) will be a potentially hot political issue. (A STRIB op-ed has already been published opposing Minnesota opting in.) It essentially pits the lure of “free” federal money for in-state private schools versus a concern that doing so will undercut the viability of public schools.14 It’s roughly mirrors the dilemma red states faced in deciding whether to opt in to the ACA’s expanded Medicaid eligibility rules. That, however, bore no risk of undercutting the existing health care delivery system, so it was more a matter of ideology and perceptions about the risks of future cuts in federal ACA funding, which now are, in fact, looming.
Missed opportunity
Overall, the charitable contribution changes seem positive to me (ignoring the SBO credit). They modestly expand who qualifies for tax incentives, while making the existing incentive slightly more cost effective (thanks to the income floors), with little net change in revenues. But it was a missed opportunity to adopt a universal incentive for all contributors, while cutting back on the overly generous incentives for gifts of appreciated property. The right set of changes could have made the incentives more effective at a lower cost. But in a bill and process of this nature, making hard choices to improve tax policy is expecting too much. The process was too hurried and too partisan to expect much.
Not GILTI
OBBBA revises the international tax rules, including significantly modifying calculation of GILTI. Under prior law, GILTI excluded the normal return (i.e., 10%) from tangible assets, like foreign manufacturing facilities. Very simplistically, 50% of the return above that threshold and 50% of any return from intangible assets were taxable at the regular corporate rate. The 50% deduction was scheduled to drop to 37.5% beginning with tax year 2026, raising the effective federal tax rate on GILTI.
OBBBA eliminates the 10%-exclusion for the return on tangible assets and sets the general exclusion at 40% (rather than allowing it to drop to 37.5%). That means saying goodbye to one of my favorite tax acronyms, GILTI, which I assumed was intentionally concocted to be revealing. The acronym (GILTI = Global Low Taxed Intangible Income) reflected the theory that its inclusion focused on income that was either from intangibles or constituted super-returns on tangible investments (well, 10% might just be above average rather than super), so it roughly reflected income that was artificially shifted to a low-tax foreign country to avoid US tax. Now, 60% of most CFC income will be subject to inclusion. As a result, the reference to “low-taxed income” is gone. The law now refers to it as just net CFC tested income. I don’t know what the consensus acronym will end up being (NCFCTI?).
This will present some interesting issues as to how Minnesota should conform to OBBBA’s changes.15 My instinct is that straightforward conformity (i.e., just updating to the federal changes) would raise revenue, because the effect of increasing 37.5% to 40% will be more than offset by eliminating the 10% threshold for the income from tangibles. However, the JCT spreadsheet does not have the needed detail to see whether that is so. I have a suspicion that fairly significant amounts of new revenue could be involved but have no basis for knowing that. It also depends upon the mix of income of MNCs taxable in Minnesota and their apportionment factors, making a Minnesota estimate slightly more complicated than just allocating the detail from the JCT estimates that JCT typically provides to DOR.
If it is the case that simple conformity would raise material revenues, this should cause the administration and legislators to rethink Minnesota’s very aggressive GILTI tax regime, in my opinion. A few reasons why I think that would be prudent:
First, ITEP has estimates of how much revenue would be raised by mandatory worldwide combined reporting (WWCR). The estimates show that Minnesota’s GILTI regime raises $240 million annually more than WWCR would. WWCR is the basic benchmark for how much a neutral tax apportionment tax regime should raise. (The credible arguments against adopting WWCR are based on administrative, compliance, enforcement, and foreign relations considerations, not theoretical policy.) I have no idea whether the ITEP estimates are accurate (they make quibbles about the possibility they overestimate revenues for GILTI inclusion) but if they are even close, they strongly suggest Minnesota is overtaxing CFC income with its GILTI tax. Conformity to OBBBA would likely make that situation even worse. That combination gives someone like me pause and argues for moderating the tax – i.e., using conformity revenues to somehow cut the tax, not to fund other tax reductions or spending.
Second, there are sure to be constitutional challenges to Minnesota’s GILTI tax. I have tended to discount the probability of their success, but it is certainly not zero or even minimal. The ITEP estimates lend some credibility to opponents’ case.16 (SCOTUS has simply refused to consider the general issue when petitions for cert are filed, as in the Caterpillar case.) Changes in SCOTUS personnel makes assessing the probability more uncertain. Losing a case could be catastrophic fiscally, similar to Cambridge Bank – with the state obligated to pay refunds, plus interest, for many years and for many taxpayers. That is so, because litigation of this type takes forever and many corporations have open audits (tolling the SOLs) or will file for protective refunds.
Third, it’s a certainty that a fair number of corporations will make cases for administrative relief (even more so if simple OBBBA conformity is adopted) because the treatment of GILTI mismeasures the amount of their Minnesota share income. If a MNC would consistently pay less under WWCR, I would think DOR would have difficulty denying relief if only to head off undesirable facts in a constitutional challenge.
One fix would be to add an option for corporations to elect WWCR for an extended period (e.g., 5 or 10 years, so they can’t toggle back and forth based on bad or good years). That would provide a default alternative to 290.20 relief and could be made the rule that would prevail, if the taxation of GILTI is invalidated (deterring constitutional challenges – not sure that passes due process muster?). Of course, if the ITEP estimate is close to accurate, elective WWCR would likely be scored as prohibitively expensive. Reducing the inclusion percentage would be another obvious strategy for mitigating the tax.
NOTES
That is no longer the official popular name of the bill thanks to a successful Democratic point of order. I assume people will ignore that and continue to refer to it as OBBBA. ↩︎
It is worth noting that reducing Medicaid by a trillion dollars (or whatever the real number is) will not reduce health expenditures and consumption by that amount. The consensus based on quality research by health care economists is that the amorphous health care system (hospitals and other providers) still provides services to the uninsured. That occurs, in part, because federal law requires it of hospitals, emergency care providers, etc. It’s just provided at a lesser level of maybe 75% or so of the insured. So, cutting Medicaid dramatically shifts much of the cost elsewhere. This should be viewed as an implicit social tax of uncertain incidence. ↩︎
This characterization by Ross Douthat, a conservative Republican, captures it succinctly: “And it is coalition-shrinking folly for the G.O.P. to persistently cut programs that benefit its own voters while always lightening burdens on wealthier voters who are trending toward the Democrats.” His general point is that the Republicans are policy prisoners of their anti-tax litmus test. Trump ignores the inconsistency with his promise and the reality by falsely denying he’s cutting Medicaid. Simple but not true. ↩︎
A stylized example will illustrate how this works for those who are not familiar with it. Assume a 50% federal match rate. State imposes and collects $2 tax from Hospital for a procedure. State bills the feds for the $2 tax and gets federal reimbursement of $1. State now has $3 = $2 tax + $1 federal reimbursement (it was reimbursed for the procedure’s cost + tax) – and can pay the hospital its previous rate for the procedure + $3 at no cost to the state budget. Hospital is $1 to the good. ↩︎
The media focus tends to be on the number of people losing insurance. It’s also possible that states will cut benefits by reducing reimbursement rates, procedures covered, and similar to offset the dropping cap on provider taxes. ↩︎
The one ACA estimate that CBO muffed by a lot involved the effect of repealing the mandate to purchase insurance in TCJA. In their defense, unlike the work requirement, there was no experience with that to go on: i.e., a policy allowing annual purchase of heavily subsidized individual health insurance without a mandate. They had to rely on a few state examples that involved community-rated individual policies that were not subsidized and with no annual enrollment period. Here, there are the Arkansas and Georgia examples that are very analogous. I think Ponnuru is profoundly unfair to the CBO analysts. Typical for right-wing commentators like him. ↩︎
It’s worth noting that the type of state action matters. For example, if the state offsets $1 of reduced provider taxes with its own source revenue, the feds realize 50 cents of savings and beneficiaries and providers are held harmless. But the state is out the full $1. If the state wants to hold its budget harmless by cutting benefits – either by reducing benefits or by cutting eligibility – it must do so by cutting benefits by at least twice as much because of the federal match (50% is the lowest federal match). The cuts must be bigger for states or beneficiaries (i.e., beneficiaries who were added by the ACA) with higher match rates. For the 90% match rate, that almost surely requires dramatically reducing eligibility. It’s the reverse leverage effect of imposing a provider tax. ↩︎
The two examples Ponnuru uses in his column go in opposite directions, I’d observe. ↩︎
To clear, there’s not much of a tax policy rationale for the tax. Support for it must lie in regulatory considerations and there certainly must be better ways to accomplish such goals than just raising the price by imposing a special tax. But it raises a material amount of revenue when there is a professed concerns about deficits, and spending is being cut to that end with little analysis or thought about benefits relative to costs. ↩︎
Otherwise, allowing losses to reduce unrelated income would subsidize a hobby, personal consumption. If you can truly prove that gambling is your trade or business, losses can be treated as ordinary and necessary business expenses rather than an itemized deduction. This is very difficult to do. For a period, gambling losses could trigger AMT because the miscellaneous itemized deduction was treated as a preference. That was fixed a while back. Its more modest effects caused a lot of gnashing of teeth. ↩︎
Providing special charitable incentives for old people with traditional IRAs makes no policy sense IMO. Disclosure: that is the way I make my cash contributions, since it yields the largest tax savings. ↩︎
It increases an existing limit of $10K to $50k – essentially treating business expenses as a charitable contribution. In certain circumstances, that provides a tax benefit. ↩︎
It’s easy to speculate about why the GOP favors this – antipathy for teachers unions, a core base of the Dems, and/or favoring parochial schools to which more of their supporters send their children. ↩︎
Political fights have erupted in red states, like Texas and Oklahoma, among Republicans over state voucher laws for private schools. ↩︎
Full disclosure: one of the big benefits of retiring was no longer needing to decipher the federal international tax rules and to try and figure out how they affect Minnesota tax and how to recommend conforming Minnesota law to them. The federal rules are technically very complex and the federal and states systems – apportionment versus separate accounting – simply do not lend themselves to meshing nicely. My comments in the text are high level, rank speculation. ↩︎
The conceptual argument for the constitutionality of a state taxing GILTI is that it reflects Congress’s definition (albeit very rough) of CFCs’ income that is really from domestic sources but that MNCs are artificially shifting to their CFCs to minimize federal tax. That federal characterization, then, allows a state to treat it as domestic income (after a dividend haircut) and apply normal domestic apportionment factors. That argument will be harder to sell when a blanket 60% of CFC income is captured, I would think. ↩︎
This post is a partial compendium of the tax provisions that I don’t like about the One Big Beautiful Bill Act or OBBBA.1 Yes, that’s the official name selected for it.2 That the popular naming practice used by Congress keeps getting sillier and sillier (to the point that one imagines Kim Jong Un ghostwrote this one) is a harbinger of the bill’s contents and an answer to the rhetorical question in the title: a lot.
The nation and its tax system would be better off if this bill failed but it won’t because of the political imperatives. The bill comprises the sum of the Trump administration’s and the Republican Congress’s legislative agenda rolled into one big bill as the title says. So, “Failure is not an option.” This too will pass.
I’m posting this as the House is about to pass the Senate version and send it to the President (I assume) on July 3rd. The post is over 8,000 words long and not meant so much to be read as to record/formulate/refine my reactions to the bill, along with links to some of the sources I relied on. That is why I have not emailed it to my subscribers. I added a table of contents, if someone actually wants to read what my thoughts were on a provision or issue.
It’s hard to pick the worse thing about OBBBA, but I settled on its effect on the deficit and debt. It’s impossible to reliably predict but this may be the straw the ultimately proves too much for the camel’s back – probably will take a good length of time to find out, providing time to step back.
An unsustainable increase in debt
There are a host of dueling estimates of how much OBBBA will increase the debt. The mainstream consensus on the version passed by House (per the official score keepers and other credible, nonpartisan sources) is about $2.4 trillion or $3 trillion when you include the increased borrowing costs. If you assume that the temporary tax cuts will ultimately be made permanent – and that is what OBBBA is doing with TCJA (damn the deficit full speed ahead), the cost rises to $5 trillion. See CRFB’s overview of the long-run effects. The Senate’s version is even worse, increasing the debt by close to $1 trillion more. The Senate’s version is what will be enacted (almost certainly), so $4 trillion is the operative number and more if the temporary tax provisions become permanent ($5 trillion) or if Congress relents from implementing future spending cuts – both probable.
This is unsustainable, anyway you cut it. If TCJA expired, the debt was growing faster than reasonable forecasts of GDP growth. That gap will be materially larger after OBBBA is enacted. For example, the Penn Wharton Budget Model projects that the House bill will increase GDP by 0.4% and debt held by public by 7.2%.3 The ultimate day of reckoning will be much sooner or the point at which inflating the dollar (de facto default by implicitly writing down the debt) or other outs (e.g., Mar Lago accord type rewriting of treasury bonds to 100-year terms) become the only politically realistic course.
Bankrupting the legislative fiscal process
What may as bad as or worse than those numbers, using a “current policy baseline” (as opposed to the longstanding current law baseline) adopts a “deficits don’t matter” rubric for extension of temporary tax cuts. This has been rightly ridiculed by outside commentators on the left and right. The only explanation for it is the Republican political reality of constantly pushing tax cuts while being unwilling to cut spending sufficiently to offset the revenue losses. This leads to the magical thinking of asserting economic growth will fix it. Magical thinking that has proven wrong repeatedly over the last 40+ years. George H.W. Bush correctly called it voodoo economics. So far, the country has not been in a situation where tax cuts pay for themselves.4
The reconciliation process, which was intended as a budget accountability and limiting measure, has turned into a borrowing fest by both parties. It probably is time to rethink or repeal it altogether (see Howard Gleckman’s take on that).
Doubling down: using temporary provisions to mask the fiscal effects
What makes this even more problematic is that OBBBA contains big temporary tax cuts, which will be up for a “free” extension in a future Congress under the current policy baseline. These include the Trump tax cuts for tips, overtime pay, car loan interest deduction, and higher SALT cap. If one assumes these temporary provisions become permanent, OBBBA’s increase in the debt rises to about $5 trillion. Given what Congress is doing now, that’s probably the number that should be focused on.
It is worth noting that TCJA’s extension cost is higher than its original cost. That partially due to inflation and real economic growth. But another part of the story was that TCJA used temporary payfors (most importantly, the one-time repatriation tax) to offset TCJA’s revenue loss. That money cannot be tapped again (the income has been repatriated and the tax paid or almost under the installment plan TCJA allowed). Of course, the current Congress is up to similar sleights of hand. For example, they’re selling federal land as an offset (and the Post Office’s EV delivery trucks, but that’s more an ideological, anti-green deal than a real offset, since they’re worth a pittance as one would expect for reselling niche, special use vehicles). Some of those ideas have fortunately been washed out of the bill by the Byrd Bath (see this handy NYTimes tracker for a list of all the provisions that have suffered that fate at the hands of the Senate parliamentarian).
Wasting spending cuts
This bill is the first big Republican tax cut that has real and material spending cuts – mainly in Medicaid and SNAP. These will cause real pain (see below for data on distributional effects), including on many red states and Republican voters. This is causing political handwringing by some Republicans. See, e.g., here (NY Times paywall), here and here (Politico).
My view is that better spending cuts could be found. But if the country is going through the pain of spending cuts5 they should be used to finance deficit reduction not more tax cuts. Especially, not a poorly designed tax cut like this one that makes the tax system worse, is tilted to the upper end of the income distribution and does little to encourage growth (compared with alternatives). In short, these are wasted spending cuts that will be largely visited on those who can least afford them.
Can tariff revenues fix it?
During the campaign, tariffs were Trump’s all-purpose answer to any policy problem, including the deficit and how to pay for his tax cuts. CBO has produced an estimate of revenue from the current configuration of the tariffs – a reduction of $2.5 trillion in the primary deficit over 10 years. Remarkably, that almost exactly equals the projected revenue loss of the version of OBBBA that passed the House, ignoring timing issues.6 Problem solved, right? In a word, no. There are several reasons for that. The tariffs are not in the bill (other than repeal of the $800 de minimis exemption); they are imposed under executive authority. Anyone who follows the news knows that they regularly change, based on whims, negotiations, political pressure, and likely other factors. If there’s one thing you can be certain about, it is how uncertain their revenues are, because the tariffs constantly change.7
As new trade deals are negotiated or as affected domestic businesses lobby for exemptions, adverse economic effects grow, buyers substitute other goods, etc., the revenues will diminish.8 They are not a reliable offset. Ignoring the legal risk that SCOTUS will invalidate some/many of them (I tend to discount that following Jack Goldsmith’s analysis), tariffs are such a flawed instrument for raising revenues for a developed nation that they will be dramatically reduced or abandoned altogether as that reality becomes obvious IMO.9 For more details see NYTimes, Trump’s tariffs could pay for his tax cuts — but it likely wouldn’t be much of a bargain (6/7/23025) (gift link); CRFB’s analysis; Adam Posen’s Senate testimony. Maybe I’m a Pollyanna, but I cannot believe such a flawed instrument to raise revenues can be maintained for long.
The fundamental problem
The core problem is political cowardice, an unwillingness to tell the public the basic fiscal truth. Santa Claus (Congress) can no longer come to town. His sack is empty and the credit line to refill it is close to being tapped out. Fiscal probity requires swearing off tax cuts and raising taxes, while cutting spending.10 This is a problem of both parties, but more so of the Republicans because of their categorical refusal to consider tax increases (other than to offset tax cuts and then, only partially).
Gene Steuerle in his Substack describes the core political problem better than I could, essentially as a prisoners’ dilemma that the two parties are locked into:
Neither party can acknowledge that both have put promises into the law that they cannot fulfill, as that would mean informing large segments of the population that today’s combination of low taxes and high automatic spending growth is unsustainable. Targeting only specific groups, whether the wealthy by Democrats or Medicaid recipients by Republicans, won’t resolve the issue. When only one party admits the full scope of the problem while the other does not, the honest party appears less generous to taxpayers and fears losing elections. It’s a classic prisoner’s dilemma. In simple terms, “if you lead, you lose.”
However, the cost to the public increases by more than just the extra interest charges on the debt. Those who have fallen behind, particularly the working class and youth—especially those who are not college-bound—will continue to be left behind.
In other words, at its core, legislators today have the budgetary responsibility to break past promises in a way that makes spending and tax policy more efficient, fair, and sustainable. Yet Every dollar of revenue today and in the foreseeable future has already been allocated or promised to the public before Congress appropriates even a dime or extends past tax cuts. Congress has no room to allocate resources to any new and major agenda as long as it sustains current law.
You need to understand that this is not just a Trump-led phenomenon, and it won’t end merely when he completes his current term of office, any more than it ended when Biden defeated Trump in 2020. This situation has persisted for decades. Unsustainable, built-in spending growth was institutionalized in legislation dating back to the 1960s and 1970s and has been compounding on an ever-larger base while also receiving further legislative boosts. While Democrats largely claim credit for the spending growth, the Republican Party was not to be outdone. Every Republican president who regained the White House since 1980 immediately advocated for a large tax cut, emphasizing lower rates for capital income. They almost always claimed that the tax cuts would pay for themselves, which, of course, has not occurred.
Politicians like to distribute funds, increase spending, and cut taxes. They win elections by telling us what they do for us, frequently concealing the costs that future generations will bear and that upcoming Congresses must address.
My other take on the fundamental problem: fiscal purgatory results when you must rely on the pro-government party (i.e., the one whose agenda generally favors expanding government programs, the Dems) as the primary enforcer of fiscal discipline. In the natural order of things, conservatives who are skeptical about expansive government should be the primary defense. Arguments to put the fiscal brakes on proposals to expand government (i.e., when the Dems are in control such as during the passage of the ACA or IRA) are core to their ideology. But when they are in control, anti-tax ideology and magical thinking (tax cuts pay for themselves) take over, sinking the country ever farther into debt. After that, the Dems naturally gave up on their (perhaps, flawed but still reasonable) effort to pay for the ACA for much more debt financing of the IRA. The result is an ever-downward debt spiral.
Upside down equity
Tax principles use two equity standards to evaluate taxes – horizontal equity (equal treatment of equals) and vertical equity (progressivity/regressivity considerations). Most public attention, not surprisingly, is on the latter. Simple political considerations dictate that: e.g., it’s easy to relate to “it’s a giveaway to the rich” and similar slogans. But when you talk with people about specifics, horizontal equity often has greater intuitive appeal. Taxing people with the same income differently strikes most people as fundamentally unfair, unless other characteristics justify it (e.g., very high medical expenses cramping ability to pay).
OBBBA violates both principles big time. If the debt considerations were not such an existential fiscal threat IMO, its basic unfairness would be my biggest objection.
Vertical equity (regressivity)
People have different tastes or preferences when it comes to vertical equity. There is no objective or right choice. Conservatives typically prefer less progressive or proportional taxes (i.e., where everyone pays about the same share of their income in tax). And there are principled bases for such a preference – Okun’s leaky bucket, Nozick style moral objections (see chapter 7 of Anarchy, State, and Utopia), potential negative growth effects, etc. Progressives typically favor more progressivity (duh, that’s why they call themselves progressives), some outright redistribution. But whatever your preference, OBBBA’s distribution is unbalanced. Here’s the CBO graph of the income distribution of the combination of the spending and tax cuts for the House version. It’s breathtaking in taking from those with lower incomes and giving to those much more well off.
Average Annual Change in Household Resources as a Percentage of Current Law Income After Transfers and Taxes, 2026 to 2034
If one assumes that tariffs are used to offset more of the revenue loss, matters get worse, much worse. CBO does not graph that but see here for the Yale Budget Lab’s (figure 1). I’m not copying it because as I noted above, I think it’s highly implausible that tariff revenues will actually offset much of OBBBA’s revenue loss.
Horizontal equity (equal treatment of equals)
TCJA had a good number of provisions that violated horizontal equity principles. Most prominently, its qualified business income provisions or QBI, the 20% deduction for pass through businesses, was a very big ticket item. OBBBA extends most of those provisions and layers on more. Five high profile examples (the cited numbers are for the House bill from the May 25th JCT estimate):
QBI: why should income from pass through businesses (often very large firms) pay one-fifth less tax than a wager earner or pension recipient with the same income? The vast majority of the benefit goes to the top income folks. (Revenue loss: $820 billion over 10 years)
Tips: why should a tipped employee pay less than somebody with the same income but who receives only wages? The NY Times has a story, An Illustrated Guide to Who Really Benefits From ‘No Tax on Tips’ (6/4/2025) (gift link), with examples that illustrate the potential difference in tax for individuals with otherwise identical incomes. Reading this should be eye opening for anyone who thinks this does not have serious fairness issues. (Revenue loss: $40 billion over 3 years)
Overtime pay: why should one employee who derives significant earnings from overtime pay less than tax than another guy who works the same number of hours and receives the same pay but works two separate jobs (collecting no overtime pay)? (Revenue loss: $124 billion over 3 years)
Senior deductions: the House wisely choose not to exempt more social security benefits from income. Instead, it allowed seniors an extra $4,000 deduction that phases out at higher income levels. (The Senate version ups the ante to $6,000, going from bad to worse, which is what will be enacted.) Why should living to be aged 65 mean you pay less tax than a younger person with the same income? That’s always been a headscratcher for me (as a beneficiary in the past, FWIW). Its only saving grace: it’s not as bad as Trump suggested, exempting social security benefits. That would have been more costly and undercut social security’s finances (OBBBA does that slightly already). (Revenue loss: $72 billion over 3 years)
Car loan interest payments: The House bill allows $10,000 of interest on loans to purchase a car to be deducted. Why should two taxpayers with identical incomes, one of whom saved and paid cash, while the other borrowed to purchase a car pay different tax? How does the guy taking the bus feel about this? (Revenue loss: $58 billion over 3 years)
There are many lesser examples, but these five provisions account for over $1 trillion of the House bill’s revenue loss. The Senate thankfully cut back a bit on each of these and its total, which will be enacted, comes in at $982 billion over 10 years. Except QBI which is permanent, all expire. So, their real cost is likely much higher. Once the recipients start receiving the benefits, taking it away is immensely difficult politically (a nasty tax increase). Congress will likely extend them at some point.
It’s worth noting that many of these provisions help explain why the bill is so regressive overall. The provisions are deductions or exemptions that are more valuable (reduce taxes by more) for individuals with higher incomes who are in higher tax brackets. For example, a waiter with a six-figure income (more common than many think) in a 4-star restaurant whose tips are now tax-free will benefit proportionately more than the waitress in the greasy spoon barely making much over minimum wage (she’s probably pays little or no income tax now). All the provisions do have income limits, but they’re very generous ($150k for tips, e.g.) and those limits add to their complexity. QBI goes heavily to the top.
In short, we cannot afford these special beaks for types of income or expenditures, they’re unfair, and they validate the too popular perception that the income tax is riddled with carveouts for the politically favored.
Giveaways over growth
Proponents of the bill argue that deficit concerns are misplaced and the cuts will stimulate growth sufficiently to offset its static cost. See this WH press release for an example. This follows a longstanding pattern of claims about Republican tax cuts, none of which have proven to be the case. Neutral, independent economists recognize those claims for what they are: hooey.
A well-designed tax can stimulate growth – rarely enough to offset its cost, but enough so that the economy is larger and total income is higher than if the tax had not been enacted. However, from a growth-stimulus perspective, this tax cut is not well designed. If growth were the or a prime goal, the cuts should be focused on:
Providing incentives for making investments that increase output and productivity, like bonus depreciation, expanding section 179 expensing of capital investments, and expensing R&D expenses. These are a small part of the bill, and they are temporary in the House version. The Senate bill makes them permanent, so it is modestly better.
Cutting marginal rates. This is a second-best alternative. Because it applies to business income, it rewards pre-existing as well as new investments. Spending resources to stimulate what has already occurred is unnecessary (wasted).11 But rate cuts do reduce the drag that tax rates create on investment and work effort. Thus, rate cuts are better than providing deductions and exemptions unrelated to generating income, which the bill does a lot of. To state the obvious: these giveaways instead could have been used for rate cuts or making the investment incentives permanent. But that would not be as popular politically.
Thus, the bill’s basic design is flawed from a growth-stimulus perspective. Traditional Republican tax cutters recognize that. See, e.g., this WaPO story (“Conservative experts who backed Trump’s 2017 tax law say pro-growth provisions are now being jettisoned in favor of giving households cash”). This reflects the populist credo of this administration, and the reality of the provisions described above that provide special breaks for various favored groups.
Some sophisticated analyses of the bill still suggest that it is growth positive, but credible ones (notably CBO) do not. In CBO’s view, enactment of the bill will slow overall economic growth; its static estimate of the revenue loss is higher than its dynamic estimate. The stimulus of the investment incentives and rate cuts are offset by the higher interest rate and crowding out caused by the resulting increase in the debt in CBO’s telling.
CFRB has a nice graph that summarizes the various growth estimates for the House’s bill published by various organization (PWBM refers to Penn Wharton Budget Model). There’s a strong ideological correlation between the priors of the organization (more growth for the righty Tax Foundation and less for the lefty Yale Budget Lab). The methodologies used are not the same and so the results are not comparable. But the graph gives an impression of the range and how dicey any growth assumption is. (Ignore the far-right bar, which represent the “current policy baseline” nonsense the Senate used). PWBM also has a dynamic estimate out on the Senate bill. It shows virtually the same effect (i.e., the dynamic estimate of revenues taking into macro growth effect is also $400 million lower than the static estimate). Making the investment incentives permanent got swamped by other stuff (bigger deficits and higher interest rates is my amateur guess) in their model.
It is also important to note that if tariff revenues are used to offset (partially or wholly) the income tax cuts, that will likely negate any potential modest growth effects of the income cuts. Example: the Tax Foundation estimates Trump’s tariffs would reduce output by 0.8 percent (under the unlikely assumption that he won’t change them), entirely offsetting its estimate of OBBBA’s positive impact on growth that appears in the CFRB graph above. See here (Table 1 sum of both tariffs).
An alternative consideration is what would happen if TCJA expires (the true do-nothing option): would the resultant tax increase be a sufficient drag on the economy to reduce growth or even to throw the economy in a recession? I have not seen any macroeconomic forecasts of that scenario (probably because of the widespread recognition of its low political probability) but it may be plausible – especially if the current or a higher version of tariffs remain in place. It could be avoided by making some of the good features of TCJA permanent, phasing-out gradually some of its cuts, and jettisoning most of the tariffs (e.g., other than those that have a real national security rationale). Both scenarios are so unlikely politically they’re not worth expending mental energy on.
Bottom line: don’t expect much growth, if any, from enacting OBBBA. In terms of tax principles, OBBBA flunks the efficiency or neutrality test. Sure, the lower rates reduce the tax drag, but all the special favors and giveaways are a major missed opportunity, and the rising debt is a bigger drag than the investment incentives and rate cuts.
Complexification
Simplicity is a cardinal principle for evaluating tax policies. Simpler taxes are easier for taxpayers to comply with and understand and for administrators to apply and enforce. Societal resources unnecessarily spent on tax planning, compliance, administration, and enforcement are wasted and should be avoided to the extent they can be minimized with better tax design. Of course, other considerations such as equity and efficiency (or using the tax system to further unrelated public policies – i.e., tax expenditures) force tradeoffs and support more complex provisions. Generally, though, simpler is better.
One of the positive features of TCJA was that it simplified tax compliance and planning for many ordinary taxpayers with its large increase in the standard deduction and by limiting itemized deductions (e.g., SALT, home mortgage, and miscellaneous deductions). Full disclosures, it did the opposite for business taxpayers – QBI, to take a prominent example, is immensely complicated, as are the limits on business interest, and so on.
OBBBA goes in the opposite direction, especially by enacting many of the grab bag of Trump’s campaign promises – no tax on tips and overtime pay, deductions for car loan interest, and so on. As formulated in the bills, these new breaks avoid the standard deduction’s simplification by providing them as above-the-line deductions (i.e., in calculating AGI).
Each of these provisions adds complexity for three reasons. First, the qualifying rules must be specified. For example: What types of tipped employees qualify? what is a tip? what type of overtime pay qualifies? what type of cars qualify? is a motorcycle a car (yes)? does the de facto interest component of payments on a vehicle lease qualify? The issues are legion and important to affected taxpayers, employers, and service providers.
Second, to prevent abuse and higher revenue losses, the provisions often include additional guardrails. These are over and above simple definitional rules and often are intended to prevent taxpayers from restructuring legal arrangements to qualify. So, the no tax on tips requires the IRS to “publish a list of occupations which traditionally and customarily received tips on or before December 31, 2024″ to limit businesses from shifting to a tip-compensation system so their employees qualify. SEC. 110101(g) of OBBBA (House Version). The break for overtime pay is linked to the Fair Labor Standards act rules, providing at least an existing and independent body of law. But that just increases the salience and importance of those rules, requiring tax experts to educate themselves about an unrelated area of law.
They may impose income limits. The breaks for tips (Senate version), seniors, and car loan interest include income limits, for example. That means taxpayers (okay, usually software) may need to go through complicated calculations to see if they fully or partially qualify.
Third, these new provisions interact with preexisting provisions and each other. These interactions must be resolved, adding more complexity. For example, the wages a pass-through business pays are an important qualifying rule under QBI. That requires resolving whether exempting tips or overtime pay affects those rules.
OBBBA contains many more provisions (surely, well into the hundreds) than these headliners that add yet more complexity to an already mind-numbingly complex set of tax rules. Most of these are tax expenditures, more de facto spending through the tax system, foisted on us by legislators who purport to be committed to reducing spending (government intervention in the economy) but really are not.
TCJA moved us a bit forward in simplifying things for many taxpayers; OBBBA goes backward even if not fully reversing TCJA’s improvements in that regard. To read the summary (e.g., Senate) of the new and modified provisions and the qualifications and rules involved with them is mind boggling.
One small example, a favorite hobby horse of mine, are the tax incentives for charitable contributions. The flaws in the tax incentives for charitable contributions were exacerbated by TCJA. A side effect of the much higher standard deduction was that now an even smaller subset of the population qualifies for the incentives. (The incentives had many other flaws before TCJA’s changes.) I have written about this with my thoughts on the implications for Minnesota and how it should respond (e.g., here and here).
The House and Senate OBBBA bills, to their credit, attempt to address two of the policy flaws that I (and many others) have noted: (1) TCJA’s narrowing of the incentive to apply to only about 10% of taxpayers because of the big increase in the standard deduction and (2) providing tax breaks for giving that likely would occur no matter what.
The Senate OBBBA version does that by layering additional provisions on the already complicated structure: (1) reupping and expanding the above-the-line deduction for nonitemizers and (2) imposing a 0.5% AGI floor on the itemized deduction. Standing alone, these are both good policy moves.
That is a highly simplified description of the changes. The bills contain more changes in the charitable contribution rules, some applicable only to corporations (1% floor in House bill), limiting the deduction of top-bracket taxpayers, allowing breaks for specialized contributions (e.g., to tuition granting entities), etc. See this Brookings piece for a fuller description and critique of the House bill. The overall effect is to make incentives more complicated and harder to understand, likely muddying the message on the incentive to give.
The reality is that the combined charitable giving incentives could have been reformed into one incentive that is simpler, cheaper, fairer, and more effective. The policy design would have been relatively easy, the political sell very difficult. Congress took the easy way out making the system more confusing and complicated. This one example says a lot about why the state of the tax system is so poor.
SALT implications
My habit when going through federal tax legislation, borne out the responsibility for working on Minnesota tax conformity, was to sort provisions based on their conformity implications. Does the provision materially increase or decrease the state tax base if the legislature updates the state law IRC reference for the new federal law? For administrative provisions like OBBBA’s repeal of the expanded information reporting for gig workers, the effect can be automatic. For others, like retirement or health plan rules, nonconformity may not be practical (e.g., because of complexity or the geographic scope of the plans). My hope always was that the net effects for conformity would be small or modestly positive so that the politicos would be able to minimize the added complexity when they enacted a conformity bill for the state.
My now long retirement has allowed me to minimize that instinctive filter for reading federal bills but has not banished it completely. In scanning through the JCT estimates, the effects do not look starkly bad or disruptive. The decision to move Minnesota’s conformity link upstream to AGI helps significantly. The process should be easier for the legislature than the TCJA conformity decision was as a result. Much of this should be rerun of TCJA conformity with many hard decisions already made. However, there will be curveballs – e.g., the Trump Accounts, briefly described below, will present some unique conformity challenges if the legislature opts not to conform.12
The 2023 legislative decision to lean heavily on revenues from GILTI will raise the sensitivity to changes in the international tax regime. These effects may largely be indirect and hard to assess. Changing the rules related to tip income, even if the legislature does not wish to conform, is likely to erode compliance and the tax base. There are a surprising number of provisions (with negative effects on the tax bases) of health care related changes that I assume will be difficult to avoid conforming to. (The federal revenue offset for changes in ACA tax credits will not affect state revenues.)
On balance, the direct spending changes in the bill, modifying Medicaid and SNAP rules, will be a much bigger deal for the legislature and the state budget than tax conformity issues. The magnitude of the effects on the state budget could verge on the catastrophic given some of the changes – at least in the long run.
Hamstringing the IRS by cutting back on its funding and dramatically reducing its personnel (especially compliance related personnel) is probably a bigger problem than OBBBA’s direct effects on the state’s tax base in the long run. At least, that would be my second big concern after the direct aid cuts (Medicaid, SNAP, etc.). Conformity effects are a distant third.
Opaque process
I didn’t think the federal tax legislative process could get worse. It has. Congress is making massive changes in tax law without so much as releasing legislative language, giving the public time to review it, and then holding hearings with an opportunity for testimony. They truly were writing this stuff on the fly (see the Trump Accounts discussion below).
The Republicans heavily criticized the process used to consider and pass the Affordable Care Act. By comparison, that process looks transparent and deliberative (it wasn’t). FWIW, the process the Dems used to pass the IRA wasn’t a lot better, but the tax changes were also less consequential.
Oddities and niche provisions
A large sprawling tax bill like OBBBA is bound to include quirky little or not so little provisions that cause one to scratch your head, often chocking them up to lobbying, score settling, parochial interests, and similar. OBBBA doesn’t disappoint. What follows are a few items that caught my attention from lists, media coverage, or going through the bill.
Remittance tax
In the hunt for offset revenues, both houses have landed on imposing an excise tax on remittances – essentially money transfers made to foreign recipients by individuals without social security numbers (typically but not always a noncitizen who does not have a green card allowing him/her to obtain an SSN and legally work). A typical situation would be an undocumented worker who earns money and sends it to his family in a foreign country. The tax rate is 3.5% and as far as I can tell anything over $15 is taxable unless otherwise exempted as is the case with the Senate version.
The revenue raised is relatively modest, $25 billion in the House and only $1 billion in the Senate. (The Senate bill exempts transfers funded with certain types of US bank accounts.) The latter is so low that imposing tax is making some other point than trying to raise revenues. That’s likely true of the former as well.
To provide some context for this: Both versions of the bill make TCJA’s doubling of the estate and gift tax exemptions permanent. That raised the lifetime exemption from the unified transfer taxes to $15 million ($30 million for a married couple). It sure pays off to be a citizen or hold a green card. (The remittance tax exemption is $15 and the estate and gift tax exemption $15 million.) The 10-year revenue loss from making the estate and gift tax exemption increase permanent is over $200 billion.
As an aside, in reading about remittance taxes, I discovered Oklahoma imposes a state taxfee on wire transfers with a minimum fee of $5 and a rate of 1%. It apparently raises millions in revenue per year. I would think that would raise commerce clause, constitutionality issues, but it may not have been challenged.
Revenge tax
That is the catch phrase that industry has given to the collection of provisions intended to combat the international effort to impose minimum taxes (Pillar 2) and digital services taxes (DSTs). Both congressional Republicans and Trump have not liked those efforts to minimize the ability of multinational corporations (MNCs) to avoid taxes through legal and accounting efforts that relocate corporate profits to very low-tax countries. (DSTs involve other issues.)
This is not a minor or niche provision. JCT estimates that the House version would have raised $116 billion over ten years. Nor do I pretend to understand it. See here for a TPC piece describing it in very general terms. The new taxes largely target foreign corporations and individuals who earn income in the US. The Senate bill’s provisions are much more modest, so the lobbying by the foreign multinationals must be having some effect (FWIW, Medtronic is technically a foreign multinational, since it did an inversion about a decade ago).
I have a couple of observations (based on my limited 100,000-foot understanding of the issues):
Reading through the bill language, major components of this tax appear to be discretionary (discriminatory and extraterritorial taxes). That is, the secretary of the treasury determines whether they apply, albeit subject to extensive statutory definitions. The amount of discretion may be illusory as a result, but given the unitary executive theory (i.e., this will Trump’s call) recent experience with tariffs gives me pause. I can imagine bluster and threats employing this authority in negotiations with our trading partners.
There was a general consensus that TCJA improved the US tax regime that applies to MNC’s international operations. The consensus included both the MNC interests (who have a vested interests in low taxes on MNCs) and tax academics. But some serious concerns about the revised structure remain. Simplistically, TCJA exchanged a system that allowed (in theory) indefinite deferral of US tax on domestic income that was artificially shifted to low tax foreign countries for a system that imposed a low-rate tax (GILTI) on those earnings but in doing so rewarded actually moving real operations (not just artificially shifting profits) to foreign locations. The latter is not good, obviously. Brad Setzer makes this point. The Revenge Tax will discourage foreign MNCs and individuals from investing in the US and likely violates tax treaties. IMO buying into the international agreement and enacting a US tax that complies with Pillar Two is preferrable. It’s an obvious nonstarter with those in charge of both the Congress and executive branch, but imposing a retaliatory tax as a matter of spite that likely will deter foreign investment? That’s a really bad idea.
After I wrote this, the Trump administration asked Congress to drop these revenge tax provisions from the bill according to a NYTimes story (6/26/2025). Apparently, a deal has been reached with the G7 exempting US MNCs from the global minimum tax. Dropping it should assuage the panic on Wall Street and by foreign headquartered MNCs. It raises the deficit cost of the bill.
Endowment tax
TCJA started down the road of taxing the endowments of colleges and universities with a very low rate (1.4%) tax on a handful of institutions with the very largest endowments. OBBBA doubles down on that strategy by expanding the endowments it applies to and increasing the rate of tax. The House version goes so far as to tax the largest endowments (> $2m/student) at the rate that applies to for profit corporations (21%) on their net investment income. The bill, not surprisingly, limits students to citizens and green card holders, increasing the effective rate for institutions with higher proportions of international students and sufficient endowments. The Senate bill’s top rate is 8%.
This is a twofer – it provides a small revenue offset ($23 billion in the House version, much less in the Senate) and punishes woke colleges and universities (qualified religious institutions are exempt). If enacted, it is sure to cause standard tax avoidance strategies similar to those used by corporations and high net worth individuals. See here for a general description of categories of these types of responses.
In my book, this is an inappropriate use of the tax system, assuming that it is intended to get back at institutions whose policies, faculties, students, or administrators one dislikes. The general context – Trump’s and the Republican Congress’s battle with Harvard, Columbia, and other elite institutions – strongly suggests that this is just another battle in that ongoing war. It has apparently gotten to the point that the WH and congressional members think they should be able to oust university leadership based on their policy preferences (i.e., policies that are asserted to violate federal law under push-the-envelope legal theories). See, e.g., Trump Justice Dept. Pressuring University of Virginia President to Resign (he did resign after the article was published).
EV tax
The plan to repeal the Inflation Reduction Act’s clean energy subsidies, including the tax credit for EV purchases, has gotten a fair amount of media attention. The House bill (it didn’t make it into the Senate bill that will be enacted) imposes a federal motor vehicle registration tax of $250 on EVs and $100 on hybrids (indexed for inflation). SEC. 100003 (House bill). The feds are not directly tasked with collecting it; that’s left to the states. If a state fails to do so, its federal highway aid is docked.
This looks surprisingly like a federal property tax – i.e., it is an amount imposed on ownership of property, a specific type of motor vehicle – which presumptively must be apportioned among the states on the basis of population (not EV ownership). (Bill language: “The Administrator of the Federal Highway Administration shall impose for each year the following registration fee amounts on the owner of a vehicle registered for operation by a State motor vehicle department * * *.”) It’s not. It’s an excise tax under 18th century SCOTUS precedent, Hylton v. U.S., 3 U.S. 171 (1796), which upheld a structurally similar tax on carriages. But that precedent has been called into the question by the litigants and some opinions (indirectly) in the recent Moore case.
One wonders, if this had been enacted, whether the interests behind the Moore litigation will take it as a clear opportunity to get the issue of the constitutionality of a wealth tax cleanly before SCOTUS. It would present the issue more directly than the repatriation tax in Moore did and does not involve the revenue risks to the fisc with invalidating pass-through income taxation regimes. I would guess they would have viewed it as a golden opportunity.
I’m sure state highway interests considered it to be an encroachment on what is one of their traditional tax bases. Minnesota in its most recent session increased its EV fee. See here (art. 2, sec. 16). The minimum is now $150, varying based on the vehicle’s MSRP, to give a sense of the magnitude of the proposed $250 federal tax. That is likely why it did not survive.
Big tobacco dust up
Big tax bills invariably include provisions that mainly affect one or a handful of businesses in dramatic ways. They’re often a way that their lobbyists fix a narrow tax problem or secure a benefit for them. Occasionally, these provisions split an industry group, where a few players benefit and others do not. That can spark intramural fights.
Two of the largest tobacco firms in the United States are waging a lobbying battle over a key provision in the GOP’s massive tax and spending bill.
The version of the legislation that the House passed last month included language to claw back a $12 billion tax break that tobacco producers — most of them in North Carolina — use to make their products cheaper to export. The version of the legislation the Senate is considering would leave the tax break untouched.
….
The “duty drawback” tax policy at issue makes it easier for U.S. firms to export their leaf. Some companies buy tobacco from farmers, ship it overseas to be assembled into cigarettes, cigars and other products, then import the finished product.
Because final assembly of the product did not take place domestically, the companies receive a rebate on federal taxes and certain import duties. Companies that manufacture tobacco products in the United States, such as Altria, which largely does not sell finished products outside the country, do not receive the same tax rebates.
“This has ended up being quite an arm-wrestling competition between one of our domestic companies and everybody else,” said Ray Starling, general counsel for the North Carolina Chamber of Commerce.
Altria, the parent company of Philip Morris USA and the firm pushing to end the tobacco tax treatment, has spent nearly $5 million lobbying Congress on this legislation and other issues through the first two quarters of 2025, according to federal disclosures.
The two firms that benefit the most from the tax break — British American Tobacco, which owns RJ Reynolds, and Japan Tobacco International — have each spent $170,000 on lobbying in the same period.
During Trump’s first term, his administration attempted through executive action to eliminate the drawback program tobacco companies and some other exporters use, but that policy was blocked in court.
At Tillis’s urging, the Senate Finance Committee eliminated the drawback provision from its version of the tax bill, which would preserve the tax rebate.
Since the Senate version prevailed, Altria won.
Lesser bad things
These sprawling bills are chocked full of more minor provisions (in terms of revenue effects) that are bad – i.e., they seem to me to be unnecessary, make the tax system hard to understand, comply with, administer and enforce, lose revenue, reduce fairness of both types, etc. The following are four of favorites (in a bad way):
The Senate bill extends and expands the capital gain exclusion (in some cases a full exemption) for investments in qualified small business stock. The revenue reduction is $17 billion, trivial in the large scheme of bill provisions but still a big deal for a tax expenditure for which 75% of the benefits go to those making more than $1 million/year. The businesses are often tech startup types and not small businesses (despite the statutory name) by any stretch – think companies like Uber, Airbnb, etc. In my opinion, investment incentives that are contingent on success and provide the biggest return for the most successful are fatally flawed. It’s the lottery theory of investment incentives, which is not the way rational investors make decisions. I have always thought this exclusion is a good candidate for state nonconformity to save some revenue. Legislators I pitched that to, never agreed. The small business moniker was hard to get around.
Place-based tax expenditures – the New Markets Credit and Opportunity Zones (OZs). These were both bad ideas when enacted with the Opportunity Zones the worst by far. (The story goes that OZs were Sean Parker’s idea. Allowing tech bros to make tax policy is a bad idea.) These incentives hand out tax breaks to investors in designated areas meeting criteria for economic distress on the theory that the resulting developments will help the residents. They typically give investors a lot of tax benefits with varying degrees of success in reviving the areas physically, but benefiting the residents comparatively little, some of whom may actually end up being displaced. The revenue loss for these provisions, most of it for OZs, is over $70 billion.
Both bills authorize Trump accounts, a new form of IRA-style savings accounts for children under the age of 18 to which $5,000 can be annually contributed. These contributions are generally post-tax, except employer contributions are allowed (up to $2,500) and are not income to the employee (effectively making them pretax) and some other contributions are also allowed with similar effects. Moneys in the accounts cannot be withdrawn before the child reaches age 18. This complicated provision adds yet another tax-preferred savings option (e.g., for college costs as an alternative to 529 plans) with additional wrinkles – posing more planning challenges for parents and layering on more complexity. The bills provide a pilot program under which the federal government will seed $1,000 in Trump accounts for every child born in 2025-28 for which an election is made. That ensures that there will be a lot of these accounts. The revenue reduction is over $17 billion, much of which I assume is the $1k government contributions. The Senate Finance summary of the provision had this qualifier at its end: “Further refinements to the text included in the House-passed H.R. 1 with respect to the Trump accounts program continue to be developed and finalized in coordination with the Trump Administration.” That proved true – the House version and version in the initial Senate Finance Committee amendment was much more complicated that the still complicated final version that will be enacted into law. I’ll put my snarky observations in the note.13
The bills repeal many of the Green Energy credits (e.g., for wind and solar projects). That was to be expected, given Republican climate change views, they were a Biden/Dem proposal, etc. But just phasing them out would be too easy and simple. Instead, it is be done by changing the qualifying rules to prohibit specified types of foreign content (e.g., Chinese) under an indecipherably complex set of rules that have more or less the same result. Just reading the The Tax Law Center’s summary of them makes one’s head spin. To make matters worse, at the eleventh hour of the process, somebody decided taking subsidies away wasn’t enough and used those rules to also withdraw basic tax benefits (e.g., accelerated depreciation etc.). Fossil fuel projects and nearly all business investments, of course, get those benefits. Opponents characterized this as a tax on solar and wind projects (it didn’t apply to nuclear and hydro) that were funded with private money. Although that’s technically not quite accurate, I understand it as a way to convey the economic reality to the public. That was a bridge too far and the provision was dropped on the Senate floor.
Endnotes
Some of the nontax provisions, such as the Medicaid cuts, may well be worse (potentially matters of life and death if one believes some of the research and the CBO estimate that millions will lose their coverage), but that’s outside of the scope of my expertise and blogging. ↩︎
These nutty titles carry over to the bill’s subtitles, which appear intended to reaffirm their authors’ MAGA bona fides. Examples: “Make American Families Thrive Again,” “Make Rural America and Main Street Grow Again,” “Make America Win Again,” and “Working Families over Elites” (title of a part). Seems misplaced, since I can’t imagine who beside tax nerds reads these. ↩︎
The Penn Wharton Budget Model says the current fiscal situation is not sustainable. Here’s an alarming quote from the estimate: “Current law, even before the policy change, is not sustainable. Currently, capital markets have not unraveled, although stress signs are showing. So, financial markets currently hold some belief in a future resolution. Out of consistency with our practice during the previous presidential administration, [the estimates of the bill’s effects], therefore, includes the effect of a future, efficient, broad-based value-added tax (VAT) that avoids financial collapse.” The House-Passed Reconciliation Bill: Budget, Economic, and Distributional Effects↩︎
This has not occurred with any tax bill during my career. As a theoretical matter, if you have punishingly high tax rates, this could be the case. Laffer curve and all that – 99% rate to take a silly example. Often resultant revenue increases in response to a cut (e.g., in capital gains rates) are simply shifting when taxes are paid to an earlier tax year. ↩︎
Sure, there is some modest amount of cutting that could be done without creating material pain but if we’re talking serious spending cuts, there will be real pain. ↩︎
OBBBA is front-loaded with more costs in the early years due to temporary tax cuts. CBO’s tariff estimate is backloaded by contrast. The Senate bill, which is the more likely version to be enacted or something close to it, has about a $1 trillion higher costs. So, there is that too. ↩︎
A major problem is that the reason for the tariffs is unclear. Are they intended to raise revenues, to pressure other countries to reduce their trade barriers, to revive American manufacturing, or some other purposes? The administration won’t say (while suggesting all of the above at one point or another) and probably doesn’t know. Their purpose is crucial to know if the revenues are to be relied upon as a long-term budget fix. If their purpose is other than raising revenues (and it almost certainly is), their revenues cannot be relied as a permanent budget fix. ↩︎
So far, the tariffs’ effects on inflation have not shown up. The reason for this is clear if you look at tariff revenue by month. See the graph in this NY Times article. The surge in revenues first shows up in April and especially May. Tariff revenues are collected when goods are imported. So, retailers have been selling off inventories of goods that they purchased pre-tariffs. The consumer price effects will likely begin showing up in the June and July inflation data. ↩︎
If one wants to offset the tax cuts’ revenue loss with a consumption tax, the obvious answer is to enact an effective and more neutral consumption tax, like a VAT. Trump claims the VATs, universally imposed by all other developed nations, are a trade barrier that his tariffs are attempting to counter. If that’s so, the answer is for the US to enact a VAT, not to imposed distortionary tariffs. VATs are not trade barriers, they impose equal burdens on all consumption, regardless of where the goods or services consumed were produced. ↩︎
Technically, one could cut spending to fix the problem, but not politically IMO. ↩︎
FWIW, the Senate’s bill making its expensing allowances retroactive has the same effect. It’s unnecessary, expensive, and dumb, but that’s just my opinion. It’s only saving grace is that it is a one-time revenue cost, rather than ongoing costs like rate cuts. ↩︎
Refusing to fully conform to the Trump Accounts will present a variety of administrative challenges. For example, taxing the income earned by the accounts (dividends paid on index funds – bill actually specifies the required investments for the accounts) will have no federal information reporting and many of the trustees will be national companies that would likely ignore a Minnesota-specific information reporting requirement. ↩︎
Random observations about the Trump Accounts: (1) I assume some smart House staffer or member came up with the idea of calling them Trump accounts. That essentially ensured they couldn’t be taken out of the bill by the Senate, even though Trump himself may not even know about them. Clever. (2) Writing the required administrative guidance and rules will be one more big challenge for an IRS decimated by DOGE and other cuts to its personnel and budget. (3) This is characterized as a pilot program but applies nationwide to everyone who qualifies for a 4-year period. (4) The lack of an income limit for the pilot’s $1k government contribution seems odd. So, Elon Musk’s future IVF kids who are born in 2025-28 will each qualify, I guess. (5) I suppose Melvin Carter can claim they’re stealing ideas from him. ↩︎
Environmental Protection Agency
Education
Commerce
Labor
Housing and Urban Development
State
Energy
Interior
Agriculture
Defense (civilian work force)
Health and Human Services
Small Business Administration
Transportation
Social Security Administration
Justice
Office of Personnel Management
Homeland Security
Veterans Affairs
Treasury
SALT Speak - Joel Michael's Blog 