No Matter The Accounting, Extending The 2017 Tax Cuts Will Cost Over $4 Trillion

The Battle Over the Budget: Understanding the Republican Strategy and Its Implications

The debate over the federal budget has intensified this week as House Republican leaders push for a vote on their proposed budget framework. This plan assumes a staggering $2.6 trillion in economic growth resulting from tax cuts and unspecified deregulation. However, this figure is significantly higher than what conventional economic estimates suggest, raising concerns about the reliability of these projections. Meanwhile, key Senate leaders are advancing the notion that tax cuts do not truly cost anything, attempting to frame them as merely maintaining the status quo rather than new initiatives. This approach aims to downplay the fiscal impact of extending the 2017 Tax Cuts and Jobs Act (TCJA) and other tax cuts proposed by former President Donald Trump in his 2024 campaign.

A Tough Challenge: Extending Tax Cuts and Balancing the Books

Republican lawmakers face a daunting task in extending the expiring provisions of the TCJA, which are set to cost over $4 trillion in the next decade alone. When combined with President Trump’s additional tax cut proposals—such as tax-free tips, overtime pay, and Social Security benefits—the total cost could balloon to as much as $11 trillion, according to estimates from the Committee for a Responsible Federal Budget. Despite these enormous figures, Republicans are struggling to find a way to pay for these extensions without raising taxes, cutting spending, or increasing borrowing. House leaders have proposed a solution that relies heavily on the assumption of significant economic growth. Their budget framework claims that $2.6 trillion in deficit reduction will offset the costs of the TCJA extensions, but independent analyses from organizations like the Tax Policy Center (TPC) are skeptical, estimating that economic growth will only cover about 6% of the tax cuts’ costs.

The Myth of a Costless Extension: A Controversial Accounting Approach

In an effort to avoid acknowledging the high cost of extending the TCJA, Senate Finance Committee Chair Mike Crapo (R-Idaho) has introduced the idea of using a “current policy baseline” for budget scoring. This approach treats the extension of expiring tax cuts as merely maintaining existing law, thus arguing that it does not cost anything. The logic here is that since taxpayers are already benefiting from these cuts, continuing them does not constitute a new expense. However, this method of accounting is highly unconventional and contradicts the standard practice of using a “current law baseline,” which assumes that expiring provisions will sunset as scheduled. Under the current law baseline, the Congressional Budget Office (CBO) and other independent scorekeepers project that allowing the TCJA provisions to expire would reduce the federal deficit, while extending them would increase it by hundreds of billions of dollars annually.

Which Accounting Method Is Right? Separating Perception from Fiscal Reality

The debate over which accounting method is correct hinges on the difference between taxpayer perception and fiscal reality. While a taxpayer might not feel the impact of extending tax cuts if their tax bill remains unchanged, this perspective ignores the broader implications for the federal budget. Budget scoring is not about individual taxpayer experiences but about tracking how policy decisions affect deficits and debt. Imagine borrowing $100 from a friend for a year. At the end of that year, if you ask to keep the $100 for another year, it may seem like nothing has changed from your perspective. However, your friend is now missing that $100, which they could have used elsewhere. Similarly, when Congress extends tax cuts, the Treasury loses revenue that would have been collected under current law, forcing the government to borrow more or cut spending elsewhere.

Bananas and Kumquats: The Limits of Political Spin in Fiscal Policy

The tension between political spin and fiscal reality is not new. Decades ago, economist Fred Kahn, an advisor to President Jimmy Carter, faced criticism for warning Congress about the risks of rising inflation. Banned from using terms like “recession” or “depression,” Kahn humorously referred to economic downturns as “bananas” and later “kumquats” when banana growers objected. His plight highlights a timeless truth: no matter how creative the language or accounting methods, fiscal reality cannot be ignored indefinitely. The same principle applies to the current debate over tax cuts. Whether lawmakers call it a “current policy baseline” or frame tax extensions as costless, the fact remains that these policies have real and significant fiscal consequences.

The Inevitability of Fiscal Responsibility

In the end, the challenge facing Congress is clear. Extending the TCJA and enacting new tax cuts will require paying for them through higher taxes, spending cuts, or increased borrowing. There is no escaping this reality, no matter how creative the accounting or how persuasive the political rhetoric. The CBO projects that in 2027, the government will collect $5.68 trillion in tax revenue if the TCJA provisions expire as scheduled. Extending those provisions would reduce revenue by $460 billion annually, forcing the government to make difficult choices about how to compensate for the lost income. Like Fred Kahn’s bananas and kumquats, the fiscal challenges posed by tax cuts may be dressed up in clever language, but they cannot be wished away. Ultimately, Congress must confront the hard truths of its fiscal decisions.