Adam N. Michel
Some Republican members of Congress believe that extending the 2017 Trump tax cuts with anything less than $4.7 trillion in revenue reductions is impossible. This belief is misguided. Such a large tax cut—without equally large spending cuts—suggests Republicans may have given up on cutting spending and other subsidies in the tax code. The tax code still has trillions of dollars in loopholes and spending that should be easy to cut in reconciliation.
The Tax Cuts and Jobs Act’s (TCJA) net tax cut of $5.5 trillion was more than 70 percent paid for with other tax changes that increased revenue. This model of pairing base broadeners with tax cuts should be a road map for 2025.
There is plenty of spending to cut outside the tax code, but those cuts should not preclude members from also cutting spending and loopholes in the tax code. House Republicans should push the Ways and Means Committee to look harder in their own backyard. There are trillions of dollars of spending in the tax code that should be repealed or reformed.
The House Budget Committee recently detailed 30 options to raise revenue and reform the tax base. In a recent Tax Foundation blog, William McBride explains how “curtailing tax expenditures could offset several trillion dollars of tax cuts.” I’ve detailed a list of twelve revenue-raising improvements to the tax code, and the Cato Tax Plan includes over $14 trillion to cut in distortion tax credits, deductions, and loopholes. There is no shortage of lists that detail ways to offset tax cuts with other changes to the tax code.
The political response is often that many of these reforms are not politically viable, which may be true of some. However, even the messy political process leaves many tax expenditures ripe for elimination or reform. For example:
Green energy subsidies. The Inflation Reduction Act (IRA) of 2022 dramatically expanded tax subsidies for the environmental left’s favorite energy sources. Reforming a fraction of the tax code’s $1.2 trillion in ten-year energy subsidies could lead to substantial savings. Repealing all IRA and pre-IRA energy tax programs would offset more than 20 percent of the tax package. Just repealing the electric vehicle credits could raise as much as $224 billion over ten years.
Tax breaks for stadiums. President Trump recently asked Congress to eliminate “special tax breaks for billionaire sports team owners.” One subsidy many sports teams benefit from is tax-exempt bonds financed by state and local governments. According to one estimate, 57 stadiums benefit from a subsidy that resulted in a $4.3 billion loss in federal revenue. Repealing the broader category of tax-exempt muni bonds could raise as much as $400 billion over ten years.
Corporate SALT reform. In 2017, Congress put a $10,000 cap on the state and local tax (SALT) deduction for individual and pass-through businesses. As bad as it would be for sound policymaking, politics may require raising the cap for individuals. Whatever the level, the individual SALT cap should be paired with a similar limit on the deduction for large corporations and a rule against state workarounds to level the playing field between big and small businesses. Whatever size Congress decides the deduction should be, the cap should be evenly applied to all business types and sizes. Depending on design, business SALT reform could raise between $400 billion and $800 billion over ten years.
Other examples of tax offsets that should be easy to include:
Repeal the pandemic-era Employee Retention Tax Credit. Savings: $77 billion.
Limit noncitizen access to refundable tax credits. Savings: $28 billion to $230 billion over ten years.
Repeal limitation on the recapture of Obamacare exchange subsidy overpayments. Savings: $96 billion over ten years.
Limit deductibility of fringe benefits, such as commuting expenses, gyms, and meals. Savings: $157 billion to $300 billion over ten years.
Reform treatment of the tax-exempt economy. Savings: $400 billion over ten years.
This list is just a fraction of the roughly $14 trillion in distortionary loopholes, credits, deductions, and other spending in the tax code. Republicans should not give up on cutting spending across the entire federal budget, including in the tax code. More aggressive cuts will allow Congress room to design a permanent, pro-growth tax reform that allows Americans to keep more of their hard-earned money.