The Right Way to Renew TCJA: Smarter Cuts, Fewer Gimmicks

The House just passed a spending bill that authorizes $4.5 trillion in tax cuts. But there’s a catch: Congress must first identify $2 trillion in spending reductions over the next decade. If the goal isn’t met, the tax cuts will be proportionally reduced. For instance, if proposed spending cuts amount to only $1.5 trillion, tax cuts would be capped at $4 trillion.

Congress has tasked the Energy and Commerce Committee with finding $880 billion in savings, which presumably will come from Medicare and Medicaid. The Education and Workforce Committee is expected to contribute another $330 billion, while the Agriculture Committee may cut $230 billion; the funds will likely come from student-loan programs and SNAP benefits, respectively. Yet even if these reductions materialize, they will likely fall short of the $2 trillion target, limiting any tax cuts to a maximum of $4 trillion.

This presents a significant challenge. Simply extending the tax provisions of the Tax Cuts and Jobs Act (TCJA) that expire this year could cost up to $4.6 trillion when factoring in additional interest payments on the debt. Moreover, some of the most pro-growth and desperately needed policies, such as bonus depreciation, would add another $322 billion to the cumulative deficit on a dynamic basis.

Congress has two options: find more spending cuts, or reduce the net cost of tax cuts by closing loopholes. The latter falls under the jurisdiction of the House Ways and Means Committee and the Senate Finance Committee, which oversee tax legislation within the reconciliation process.

Plenty of actions can be taken to meet the whopping $2 trillion mark. For starters, policy-makers should resist costly and economically inefficient tax changes, such as raising the state and local tax (SALT) cap, which would add $230 billion to the deficit. The SALT cap workarounds should also be repealed. Currently, 35 states allow pass-through businesses to exploit this opportunity, and eliminating it would reduce the cost of extending the TCJA provisions by $200 billion. Including corporate income in the $10,000 SALT cap would raise another $290 billion.

Also ripe for reform is the mortgage-interest deduction, a de facto subsidy that distorts market efficiency. The TCJA already lowered the deduction limit by $250,000; cutting it by another $250,000 to $500,000 would further reduce renewal costs by roughly $148 billion.

Additionally, there’s the exclusion of municipal-bond interest from federal taxation. This provision gives these state-government-issued bonds an unfair advantage over private investment. Removing this exclusion would generate an additional $613 billion in tax -- more than enough to offset the most expensive pro-growth tax policies.

Then there’s the elephant in the room: the Inflation Reduction Act’s green-energy tax credits and corporate subsidies. These green subsidies cost about $800 billion, and they should be repealed in their entirety. If policymakers are serious about reducing costs, these subsidies are low-hanging fruit.

Altogether, these measures could raise about $2 trillion in additional tax revenue. And, when combined with pro-growth tax reform like full expensing and bonus depreciation, they would be a win-win for fiscal responsibility and economic growth. Rather than engaging in politically convenient giveaways like no taxes on tips, lawmakers should focus on creating a tax code that is fair, neutral, and supportive of investment. While we appreciate any efforts to reduce spending and further encourage spending restraint in the future, reform should also be paired with tax simplification, lower rates, and broader bases.

If Congress is willing to make these tough but necessary choices, it could achieve tax reform that fosters growth without breaking the bank. The alternative -- expanding the deficit through poorly targeted tax breaks -- would be fiscally reckless. Washington has an opportunity to pair tax relief with responsible spending cuts and loophole closures. But will lawmakers take it?