Tax Tracker | Reconciliation, Baselines, SALT, IRS Funding
Links for the 2025 tax debate.
It’s been a busy week! Below, we highlight the ongoing budget baseline debate, pressure points in a narrowly divided House, and the lack of results from IRS funding. But first, we start with the reconciliation strategy and Trump’s Treasury pick.
The first question for House and Senate leaders next year will be how to construct the reconciliation package. Incoming Senate Majority Leader John Thune (R-SD) floated a two-package strategy, starting with border security, defense, and energy reforms. This would leave the tax extensions for a second package later in the year. Ways and Means Chair Jason Smith (R-MO) has been making the opposite case—advocating for a “go big or go home” approach in which he says, “the first reconciliation bill must include tax, it must include spending cuts, it must include border policy, and it must include energy policy.” Leaving tax out of the first package is a risky approach.
Also, keep an eye on President-elect Trump’s nominee for Treasury Secretary, Scott Bessent, who will be a pivotal voice in tax and trade policy in the coming year. He has outlined an ambitious 3-3-3 plan that involves faster growth, smaller deficits, and more domestic oil production. You can also read his case for tariffs here (and an antidote here).
Here are the rest of this week’s tax highlights:
Will a new baseline help Republicans pass a reconciliation package? Lawmakers are exploring novel ways to account for the budgetary impact of extending the 2017 tax cuts. Incoming Senate Finance Committee Chairman Mike Crapo (R-ID) proposes using a “current policy” baseline that assumes no fiscal impact from extending the tax cuts instead of the historically used “current law” baseline. Changing the baseline does not mitigate the nearly $5 trillion deficit effect of extending the tax cuts. The strategy could worsen deficits further by taking pressure off Republicans to include broader fiscal reforms as part of a deficit-conscious tax package.
Former director of the Congressional Budget Office, Douglas Holtz-Eakin, explained to the New York Times that playing games with the baseline may help pass the bill, but “there will be people who accuse them of changing [the rules] now because it’s convenient for them.” The budget scoring rules need to be reformed so that spending is treated like taxes—by scoring everything from current law—but making changes ad hoc is a recipe for further political exploitation in years to come.
Related links:
The Myth of the Current Law Baseline
Matthew Dickerson, Economic Policy Innovation Center
Daniel Bunn & Garrett Watson, Tax Foundation
Slim margins make for lots of pressure points. The single-digit Republican majority in the House will give small coalitions significant leverage in tax negotiations. This past week, advocates of increasing the state and local tax deduction (SALT) cap were out in force. Rep. Mike Lawler (R-NY) told Bloomberg, “I will not support a tax bill that does not lift the cap on SALT.” Resident SALT advocate on Ways and Means, Rep. Nicole Malliotakis (R-NY), told Punchbowl News, “I do want to see some SALT relief, and I think that the best thing would be increasing the deduction.” I have a SALT primer here.
In other corners of the caucus, members don’t want to fully repeal the green energy subsidies enacted in the Inflation Reduction Act (IRA) because these subsidies support projects in their districts. Other pressure points to watch include increasing child subsidies, tax exemptions for tips or other sources of income, subsidies for cars, credits for in-home care, and new deductions for charitable giving.
Fiscal hawks will also have a voice, arguing that expanding or leaving in place special interest deductions and credits is a poor use of resources and makes delivering a pro-growth tax package more challenging.
Related links:
Paying the 2025 Tax Bill: SALT Deductions
Andrew Lautz & Upamanyu Lahiri, Bipartisan Policy Center
On Inflation Reduction Act Reform, Anything Short of Full Repeal Is Failure
Travis Fisher, Joshua Loucks, & Adam N. Michel, Cato Institute
Reducing the Revenue Loss of TCJA Extension
Committee for a Responsible Federal Budget
Is all that IRS money going to good use? In 2022, Congress doubled the Internal Revenue Service (IRS) budget by adding $79 billion to increase tax enforcement, modernize antiquated systems, and improve taxpayer services. Since then, Congress has clawed back about $20 billion of the funds and subjected another $20 billion to the ongoing government funding debate. According to the Congressional Budget Office’s benchmark estimate, each dollar of additional enforcement funding should lead to more than $6 in new revenue collections (ramping up over time). Matthew Dickerson finds the early evidence shows the opposite. He writes, “every $1 of new revenue collected from the IRA’s enhanced enforcement efforts cost taxpayers $1.04.”
These are the results from the same agency that—without congressional authorization—has recently embarked on a massively complex technology project to calculate your taxes for you through the Direct File Program, taking one step toward nationalizing the private industry of tax preparers. Recent FOIA results from the Taxpayers Protection Alliance show the IRS downplayed negative taxpayer experiences with the Direct File pilot program.
Congress Should Consider Rebalancing IRS Funding
Chris Edwards, Cato Institute
The IRS Wants to Prep Your Tax Return
Wall Street Journal Editorial Board
Reminder:
Cato will host a lunch event for Hill staff next week on December 12, covering tax and budget issues in 2025. Walk-in registration will be available. More info here: “Empowering the DOGE and Extending Pro-Growth Tax Cuts: How the 119th Congress Can Grow the Economy and Fix the Debt.”
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