Tax Bill Falls Short of Pro-Growth Reform

Adds complexity, misses key growth reforms, and doubles down on costly subsidies.

The House Ways and Means Committee has released its first full draft of the new tax package. While the bill is likely to change as it moves through Congress, this opening bid falls short of delivering serious, pro-growth tax reform.

Instead of making the most important business investment provisions permanent, the bill offers only temporary extensions and expansions for immediate investment deductions. Meanwhile, the list of subsidies continues to grow: on top of higher SALT deduction caps and Trump’s campaign pledges to exempt tips and overtime, the bill includes new or expanded tax breaks for the elderly, childcare, family leave, low-income housing, student loans, seafood processing, and more.

There’s some modest progress: many of the most egregious green energy subsidies are rolled back, and new safeguards are added to some individual credits. And, at least for now, the worst proposed tax hikes have been avoided.

The Joint Committee on Taxation (JCT) estimates the bill will reduce revenue by $3.72 trillion, coming in under their target of between $4 trillion and $4.5 trillion. This additional fiscal space should be used to improve the bill’s pro-growth provisions and not to buy votes for additional special interest subsidies. Section-by-section summary from JCT here.

Here's a rundown of the major provisions organized around the framework in my Guide to this Week’s Tax Markup:

Pro-growth changes

Policies that permanently lower the effective tax rate on businesses, investments, and work are the biggest drivers of long-term growth. The bill makes many provisions permanent, but lets the most important business expensing changes expire. The bill could be improved by making the temporary provisions permanent.

• Revives 100% expensing from January 20, 2025, through 2029.

• Revives domestic R&D expensing for 2025 through 2029.

• Revives more generous EBITDA limitation for interest deduction for 2025 through 2029.

• 100% expensing for “qualified production property” structures from January 20, 2025, through 2029. Excludes offices, admin services, lodging, parking, software engineering, etc.

• The TCJA personal rates and bracket structure are permanent. Adds an additional year of inflation adjustment in 2026 for all but the 37 percent bracket, effectively taxing more of Americans’ income at lower rates.

• Permanently raises estate tax exemption to $15 million per person (up from $14 million in 2025).

• Makes permanent the larger TCJA alternative minimum tax (AMT) exemption.

• Increases section 179 expensing (for small businesses) to $2.5 million (up from $1.2 million) and increases the phase-out permanently.

• Permanent international tax rates at 2025 levels for FDII, GILTI, and BEAT.

• Expands cash accounting for small/medium manufacturers.

New and expanded tax preferences

The bill includes at least 20 new or expanded tax preferences, many only for four years. Each one entails fiscal costs, adds complexity, opens new avenues for tax avoidance, and delivers little in the way of long-term growth. Each of these should be dropped, scaled back, or entirely repealed.

• No tax on tips through 2028. Guardrails on customarily tipped industries, can’t be a specified service trade or business, can’t be highly compensated.

• No tax on overtime pay through 2028. Keeps base pay taxable, highly compensated individuals excluded.

• $4,000 increase to the already larger deduction for seniors through 2028. Phases out above $75k/$150k. This is a way of giving Trump “no tax on Social Security.”

• No tax on car loan interest through 2028. Generally available personal deduction for interest paid on domestic assembly cars. Income limits apply.

• Raises individual SALT cap to $30k and phases down to $10k above $400k/$200k. Cracks down on state workarounds for some passthroughs.

• The $2,000 child tax credit is permanent. Temporarily increases the credit by $500, to $2,500 beginning in 2025, through 2028; after which point the base credit is indexed for inflation. Requires a Social Security number for the child and both parents, if filing jointly.

• Makes passthrough business deduction (Section 199A) permanent, increases it from 20 percent to 23 percent, and expands access by phasing in guardrails more slowly.

• Creates a new nonrefundable individual income tax credit for donations to scholarship-granting organizations. Federalizes the state school choice movement.

• Creates a “money account for growth and advancement” (MAGA account). Investment accounts for kids with a temporary program to put $1,000 in every account (kids born 2025-2029). Qualified distributions (education, business start-ups, house) are taxed as cap gains. Others are taxed at normal rates with an additional penalty for distributions before 30.

• 12.5% increases in the low-income housing tax credit ceiling (2026-2029).

• Big increase in employer-provided childcare credit. Credit for 40% (50% small business) of expenses (up from 25%), with $500k/$600k limit (up from $100k).

• Permanent expansion of paid family leave credit.

• Makes $5,000 of the adoption tax credit refundable. Adoption credit is ~$17k in 2025.

• Revives pandemic-era above-the-line charitable deduction at $300/$150 through 2028.

• Permanently keeps the pandemic-era exclusion from gross income for employer student loan payments.

• New Opportunity Zones with tighter definitions on low-income tracks and a requirement for rural designations.

• New targeted subsidy for loans made to agriculture, fishing/seafood processing, and aquaculture. Via a 25% interest income exclusion through 2029.

• Revives and extends the clean fuel production credit through 2031, repeals transferability.

• Expands EITC to Purple Heart recipients previously on SSDI.

• The larger standard deduction is permanent. Adds a temporary $2,000 ($1,000 single) increase in the standard deduction, starting in 2025, through 2028. Permanently repeals the personal and dependent exemptions.

Base-broadening and subsidy elimination

The bill makes modest reforms to existing subsidy programs and repeals many of the Inflation Reduction Act's green energy tax credits. The bill could be improved by adding more tax preferences to this list.

• Repeals previously owned and commercial clean vehicle credits after 2025.

• Repeals EV clean vehicle credit after 2026. Adds per manufacturer limits for 2026.

• Repeals alternative fuel vehicle refueling property credit after 2025.

• Repeals the energy efficient home improvement, new energy efficient home, and residential clean energy credits after 2025.

• Electricity production and investment credits: phased out by 2032, repeals transferability, adds guardrails for foreign entities.

• Carbon Oxide Sequestration Credit: restricts access by foreign entities, repeals transferability.

• Nuclear Power Production Credit: creates a phase-out by 2032, ends one year earlier than before.

• Repeals the hydrogen production credit after 2025.

• Advanced manufacturing production credit: adds restrictions, ends transferability, and is fully repealed after 2031.

• Geothermal investment credit: repealed by 2032 (3 years early), ends transferability.

• Makes permanent TCJA’s $750,000 limit on mortgage interest deduction, and other smaller itemized deduction changes.

• Adds new overall limit on itemized deductions for those in the top tax bracket, capping the rate at which you can make itemized deductions at 35%. Overall limits add complexity, but this improves the previous Pease limit.

• Creates a “one-percent floor” for the corporate charitable deduction, denying the first 1% of corporate charitable deductions.

• Limits ACA exchange credits: limited to citizens, green card holders, and a few other narrow categories, requires exchanges to verify income/eligibility, and repeals recapture limits for those above 400% of the federal poverty line.

• Social Security Number requirement for higher-ed tax credits, Lifetime Learning and American Opportunity Credits.

• Limits employee retention tax credit claims.

• New EITC system to certify eligible children before they can be claimed, to reduce errors and fraud.

• Limits Medicare eligibility to US citizens, green card holders, and other specified categories.

Anti-growth tax increases

The bill mostly avoids the most damaging tax increases that could have been included, like raising the corporate tax or increasing the top income tax rate.

• Makes passthrough loss limitations permanent.

• Adds new retaliatory tax tools for discriminatory foreign taxes (DSTs, OECD Pillar 2).

• Excludes 50% of sports teams' intangibles from amortization.

• Adds entity aggregation rules to executive compensation limits under 162(m).

• Raises endowment excise tax based on endowment-to-student ratios, ranging from 1.4%, rising to 21%.

• Raises private foundation excise tax based on total assets. Rates starts at 1.39% and rises to 10%.

• Tightens definitions for the $800 de minimis exemption for low-dollar trade.

• 5% tax on remittances, with exemption or credit for US citizens.

Other

The bill covers many other issues across more than 400 pages. Not summarized here are many changes to the tax treatment of health care through HSA expansions and other changes. The following reforms also strengthen the bill.

• Returns 1099K reporting thresholds to $20k or 200 transactions. Current law was an unworkable $600 that the IRS had repeatedly delayed.

• Raises 1099-MISC reporting threshold from $600 to $2,000 (indexed).

• Repeals 10% Obamacare tax on indoor tanning services.

• Several modifications to UBIT rules.

• Transfer tax on firearm silencers reduced to $0.

• Expansion of 529 eligible expenses.

Summary

While the Ways and Means tax bill avoids the most harmful tax hikes and includes some welcome clean-up of existing credits, it falls short of what’s needed for meaningful, pro-growth tax reform. To make the bill better, lawmakers should prioritize making full expensing permanent, eliminate or scale back the flood of new and expanded tax preferences, and go further in repealing costly and distortionary subsidies.

A tax code that is simpler, more neutral, and better aligned with long-term economic growth is still within reach, but this bill doesn’t get us there yet.

Disclaimer: Many of these provisions are highly complex. The summaries reflect my best interpretation on a first read and may be updated if my understanding evolves.