Tax Cuts and Jobs Act (TCJA)
Lawmakers in Congress are evaluating their options to avoid an automatic taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
hike at the end of 2025, when the tax cuts adopted in 2017 are set to expire. As they prepare for future legislation, lawmakers should explore how tax revenues have performed since the 2017 law was adopted.
At the time of passage, Tax Foundation forecasted how tax revenues might evolve over time in the context of the Tax Cuts and Jobs Act (TCJA). The Congressional Budget Office (CBO) also published revenue analyses before and after the 2017 law passed.
Revenue forecasting is inherently tricky work, but a review of the data shows that federal revenues are meaningfully above forecasts from 2017 and 2018. Personal income and payroll taxes have buoyed revenues in recent years as the US economy has been resilient in the post-pandemic world.
Even though Tax Foundation economists could not have perfect foresight, our team published an analysis using information available in 2017 to help policymakers understand how revenues might change.
Since 2017, a growing trade war, a pandemic, a war in Europe, and a new conflict in the Middle East have each impacted tax revenues. Congress has also been active with massive fiscal packages in response to the pandemic and with the adoption of the CHIPS Act and the InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
Reduction Act in 2022.
Provisions for natural disasters and the surge of immigration have also impacted revenues in ways that could not be foreseen in 2017 and 2018. A recent CBO analysis points to a $0.9 trillion reduction in deficits over the 2024-2034 period due to higher-than-expected immigration. Revenues per capita are a bit below an all-time high set in 2022 of $20,088, even after adjusting for inflation.
With those various developments in mind, let’s review what was forecasted in 2017 and 2018:
- In June 2017, prior to the passage of the TCJA, the CBO published revenue projections showing that by 2024, federal revenues would be $4.55 trillion.
- In December 2017, Tax Foundation produced two forecasts of US tax revenues: one was contingent on additional economic growth from the TCJA (dynamic projection) and one ignored the economic impacts of the TCJA (static projection). The dynamic projection placed 2024 revenues at $4.62 trillion, while the static placed them at $4.48 trillion.
- In April 2018, the CBO released additional revenue projections that accounted for the impact of the TCJA, suggesting 2024 revenues would be $4.44 trillion.
Unsurprisingly, given all the changes in the US economy and the world since 2018, these forecasts were all wrong. The CBO is now projecting revenues in 2024 of $4.9 trillion. But it would be unfair to simply compare the numbers without adjusting for inflation, because, unfortunately, inflation has been significant in recent years.
The nearby charts compares the four different forecasts (adjusted for unexpected inflation) to actual tax revenues. I have three takeaways.
First, actual revenues surpassed the pre-TCJA CBO baseline projection earlier than Tax Foundation projected. In our 2017 analysis, Tax Foundation showed revenues rising above the 2017 baseline in 2024 and not earlier. Revenues surpassed the pre-TCJA 2017 CBO baseline in 2021 on the heels of the pandemic. The 2018 projections from CBO did not envision that actual revenues would surpass the 2017 baseline revenues in this timeframe. Reality was ultimately more favorable to the revenue picture than Tax Foundation’s 2017 assessment.
Second, from 2018 to 2024, revenues remain $680 billion below the pre-TCJA 2017 CBO baseline, when accounting for unexpected inflation. Before 2021, actual revenues were below the 2017 baseline level by $802 billion cumulatively. From 2021 through 2024, revenues have been above the 2017 baseline by $122 billion. Relative to the 2018 baseline, actual revenues are $502 billion above what CBO expected; from 2018 through 2020, they were below the 2018 CBO forecast by a combined $238 billion, but revenues have surpassed the 2018 forecast by a total of $740 billion from 2021 through the projected revenues for 2024.
Though the actual revenue outcomes are more positive than the Tax Foundation or the 2018 CBO projections, the TCJA has not paid for itself.
The third, and perhaps most important, takeaway is that revenue forecasting is a helpful, but limited, tool. The events and legislation mentioned above have all shaped fiscal outcomes in ways that were impossible to predict in 2017 and 2018 and certainly difficult to understand at the time they were happening. Disentangling the direct impact of the TCJA relative to the impact of other events is a tremendously difficult task that I’m sure will be the subject of debate for many years.
As members of Congress prepare to address the expiration of the TCJA, they should appreciate how revenues have evolved since 2017. But they should also understand that while estimates and projections (even from Tax Foundation) are helpful in evaluating alternatives, models cannot account for the “unknown unknowns” that will determine how revenues develop with any forthcoming legislation.
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