Discussion on the Budgetary Impact of Extending Tax Cuts
If Congress fails to act, taxes for millions of Americans will increase on January 1, 2026 as the individual provisions TaxA Tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
Cuts and Jobs Act expires. Senator Mike Crapo, the soon-to-be chairman of the Senate Finance Committee (R-ID), argues that policymakers should extend current tax code as though it had no additional budgetary effect. Specifically, he has called for using a current policy baseline to measure the impact of extending the tax cuts rather than the current law baseline.Let’s break that down. The Congressional Budget Office and the Joint Committee on Tax measure legislative changes in relation to a projection based on assumptions regarding the future path of revenue and spending. That projection is called a baseline.
Spending and revenues are not treated the same in the baseline. The baseline assumes that the majority of spending will continue, even if the legislation supporting it is temporary. This approach assumes that the current spending policy will continue in future years. Tax legislation is measured according to how it is written in law. In the years after the temporary tax cut expires, revenues are projected to adjust based on the tax rules prior to that temporary tax cut. Tax Foundation estimates that extending the TCJA past 2025 will result in a revenue reduction of $4.2 trillion (or $3 trillion on a dynamic base) over a period of 10 years. Tax Foundation estimates the average tax increase per taxpayer in all congressional districts would be $2853 compared to a scenario that extends the entire TCJA. Most taxpayers haven’t heard anything about the upcoming expirations. You could say that the average taxpayer has a current policy baseline in their head when they think about their future taxes.
While taxpayers may operate under a current policy baseline, if lawmakers do the same when evaluating legislation to extend the TCJA, it will have significant implications.
First, future deficits are higher under a current policy baseline because it includes lower revenues from extending the expiring parts of the TCJA. Since the lower revenues from TCJA extensions are already baked into a baseline policy, enacting legislation that continues the TCJA will have no additional budget impact. The fact is that many lawmakers would welcome the opportunity to extend tax cuts through legislation that does not score as having additional costs. However, this would mean that higher deficits and interest costs would already be baked in the projections for the future. Changing the baseline for scoring purposes doesn’t change the actual trajectory of revenues, deficits, and debt under a continuation of the TCJA’s expiring provisions.
The CBO helpfully keeps track of alternative policy scenarios and their impact on budgetary measures. The CBO provides an analysis that shows that extending the 2017 tax cut would result in annual budget deficits exceeding 2 trillion dollars (6.6 percent GDP) beginning in 2027. The budget deficit in fiscal year 2024, which ended on September 30th 2024, was $1.8 trillion (6.4% of GDP). Additionally, the current policy baseline for TCJA adds $605 billion in net interest costs over 10 years.
President-elect Trump’s nominee for Treasury Secretary, Scott Bessent, has argued that annual deficits below 3 percent of gross domestic product (GDP) by 2028 should be a priority. Bessent’s fiscal discipline target is admirable, but Congress would have to reduce annual deficits by nearly $1.5 trillion to meet it, based on the current policy baseline. This would require serious cuts to mandatory spending programs like Social Security, Medicare, and Medicaid, something that Congress has been unwilling to do for decades. The bottom line is that the current baseline will increase deficits, even if it allows lawmakers to claim that legislation extending Tax Cuts and Jobs Act is not costlier. Extending tax cuts is not the same as cutting taxes. You are avoiding a tax hike. There may be additional tax cuts that lawmakers want to introduce, but if the legislation just extends current policy, then it’s not really a tax cut under that baseline.
Third, if policymakers use the current policy baseline, then the growth impact of the tax policy will be included in future projections. Republicans like to say that tax cuts will boost the economy, and certain policy levers can certainly help. The current baseline would show that the lawmakers could avoid a growth drag (which would happen if the tax cut expires), but it would not give them an advantage for extending these policies. They could argue that extending TCJA will boost growth after 2025. Not extending the tax cuts does nothing to current growth projections.
Tax Foundation has found that, relative to current law, a permanent extension of the TCJA would boost GDP by 1.2 percent over the long run and support an additional 829,000 full-time equivalent jobs.
Finally, there is another procedural layer to consider. Budget reconciliation will be used by lawmakers to extend the TCJA. This can allow a bill pass the Senate using a simple majority. If the current policy baseline is used, extending the TCJA would not change revenues relative to that baseline and the reconciliation rules would be violated. If the current policy baseline is used, extending the TCJA would not change revenues relative to that baseline and the reconciliation rules would be violated.
Lawmakers may choose to use the current law baseline to avoid creating additional procedural hurdles while focusing their rhetoric on logic that uses the current policy baseline.
Doing so would be similar to the fiscal cliff of 2012 (resolved in the early morning of Jan. 1, 2013). Congress passed bipartisan legislation extending the majority of tax reductions implemented during the Bush administration. CBO and JCT both used the current law as a baseline for their analyses, but the Obama White House opted to use the current policy baseline. They claimed $737 billion of deficit reduction on a bill which CBO estimated would increase deficits by nearly $ 4 trillion over ten years compared to the baseline set up by the current law. We mention the 2012 fiscal-cliff policy scenario because Sen. Crapo cited it himself when arguing for current policy baseline. Tax Foundation looked at ways to extend TCJA provisions using a baseline of current law. Lawmakers could also find ways to save money on the spending side, and even increase revenues, with a significant pro-growth overhaul to the tax code. Just adjusting the baseline won’t reduce deficits in coming years. Additional reforms will be needed to achieve deficit reduction.
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