Tax Tracker | VATs, Tariffs, and the GOP Budget Resolutions

Links for the 2025 tax debate.

This edition of the Tax Tracker begins by covering the reciprocal tariff debate and how value-added taxes (VATs) are not protectionist trade barriers. We then break down the latest developments in the evolving budget debate, as lawmakers have made significant forward progress on the path to reconciliation—although the two chambers have conflicting endpoints.

The last section highlights a few reforms that have been part of the budget debate, including Medicaid, muni bonds, SALT, and green tax subsidies.

Here are this week’s tax highlights:

A VAT is not a tariff, and tariffs are not a solution to VATs. The latest Trump trade announcement is his plan for “reciprocal tariffs”—setting US tariffs on imported goods to approximate the origin countries’ tariff and non-tariff barriers. Cato’s Scott Lincicome breaks down all the many ways this idea is unwise and unworkable.

Trump’s order singles out the VAT as an example of a tariff-like barrier, which it is not. “A VAT is a consumption tax, not a tariff. It applies equally to all goods sold in a country – domestically produced or imported,” as explained by the Mercatus Center’s Veronique de Rugy. VATs do create trade distortions, but they are not protectionist, and they certainly don’t benefit the countries that impose them. De Rugy concludes that “countries with VATs are penalizing themselves the most.” In a follow-up piece, she notes that a reciprocal harmonization policy with VAT countries would undermine America’s competitive edge.

Related links:

• What Is VAT? The Tax Fueling Trump’s Latest Trade Fight
  Konrad Putzier, The Wall Street Journal

• Reciprocity Is a Misguided Response to US Economic Strength
  Jack Salmon, Reason

• The European VAT is Not a Discriminatory Tax Against US Exports
  Sean Bray, Jared Walczak, and Erica York, Tax Foundation

The quest for reconciliation continues. The full House will soon take up the Budget Committee’s resolution, which sets the parameters for an all-in-one fiscal agenda to extend the 2017 tax cuts and address the rest of the Republicans' agenda. The resolution includes an amendment from Rep. Smucker (R-PA) that enforces the $2 trillion in spending cuts by reducing (or increasing) the size of the allowable tax cut if the committees of jurisdiction undershoot (overshoot) the spending cut target. EPIC’s Matt Dickerson has a good explainer. Despite trillions of spending cuts, the House budget will not stabilize the growth of US debt.

Early Friday morning, the Senate passed their skinny budget, which does not address the expiring tax cuts. However, Senators are also jockeying to shape the tax package. Senator Steve Daines (R-MT) led a letter to President Trump stating that Finance Committee members “will not support a tax package that only provides temporary relief from tax hikes.” As I recently told the New York Times, permanent tax cuts are the most pro-growth tax cuts.

Meanwhile, Finance member Bill Cassidy (R-LA) filed an amendment to the Senate budget resolution that would “strike references to current policy accounting,” which is many Senators’ preferred tax accounting mechanism to score more than $4 trillion in tax cuts as having no fiscal cost. Axios reports that the current policy vs. current law debate may also still be playing out in the House, where Speaker Johnson is surveying members’ feelings on the issue. We already know that Rep. David Schweikert (R-AZ) thinks the current policy baseline approach is "an intellectual fraud."

Related Links:

• Comments on the House and Senate Budget Plans
  Adam Michel, Cato Institute

• GOP Spending Cuts Too Small
  Chris Edwards, Cato Institute

• Republicans Bedeviled by Trump’s Trio of New Tax-cut Ideas
  Burgess Everett and Eleanor Mueller, Semafor

Budget debate quick hits. Instead of playing games with the baseline, Congress should focus on crafting a reconciliation bill that reforms spending programs, reduces the threat of resurgent inflation, and boosts the US economy. Toward this end, here are some quick hits that have been in the news recently:

• Medicaid: Republicans are looking at ways to reduce waste, fraud, and abuse in federal welfare programs, including Medicaid. EPIC for America explains how to reduce Medicaid’s improper payments, which amount to almost $600 billion. The Paragon Institute also has a new explainer on Obama-era, Washington Post-endorsed reforms to Medicaid money laundering through “provider taxes” and how to end federal funding discrimination against low-income children, pregnant women, seniors, and people with disabilities.

• Muni bonds for stadiums. Max Adler at Bloomberg highlighted Trump’s call to end tax breaks for sports teams. Adler featured our proposal to end the tax-exempt status of municipal bonds used to finance private infrastructure to meet Trump’s demand and raise as much as $400 billion.

• SALT deduction. George Will recently described the negotiations over how much to raise the state and local tax (SALT) deduction cap as “fiscal vandalism…presented as tax ‘relief.’” He ends with the astute observation that “the $10,000 SALT cap is $10,000 too high.”

• Green tax subsidies. With some Republicans considering reneging on their campaign promises to repeal the Democrat’s Green New Deal energy subsidies, more than 50 free-market organizations argue in a letter to Congress that full repeal of the Inflation Reduction Act’s green tax credits is necessary. Making a similar point, with different examples, The Tax Foundation’s Danial Bunn argues against letting “the loophole lobby decide the tax debate.”