Republican Tax Talks in Flux

House Speaker Mike Johnson (R-LA) said that Republicans were expecting to unveil a tax package over the weekend — but it was still unclear Friday what might be in that package and how much it would cost. Meanwhile, the Senate moved first, releasing a budget resolution focused on border security, defense, and energy on Friday.

Republicans, including Johnson, had a lengthy meeting with President Donald Trump a day earlier, but had still not nailed down the details of the tax package as of Friday. Lawmakers are scrambling to address the many expiring tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA, P.L. 115-97).

Johnson said there were “a few more things to work on” but added, “we’re planning for a mark up on probably Tuesday,” Reuters reported.

Unwilling to wait, Senate Budget Committee Chair Lindsey Graham (R-SC) released a Fiscal Year 2025 Budget Resolution that would provide funding for a border wall, immigration enforcement efforts, and military readiness. The proposal — part one of the two-bill approach forwarded by several lawmakers — would also ease restrictions for on- and offshore lease sales and end the methane emissions fee.

Graham’s approach would save tax reform for a second bill later this year.

Notably, Graham’s budget proposal calls for $1 billion in cuts each for laws under the jurisdiction of several House and Senate committees, including the Senate Finance Committee.

Trump’s tax priorities.

As Republicans continued to debate what will go into a tax package — and whether there will be one bill or two — Trump pushed them to include certain tax cuts he promised on the campaign trail.

On Thursday, White House Press Secretary Karoline Leavitt shared with reporters the tax priorities the president had “laid out” for congressional Republicans.

Individual tax cuts. Trump is continuing to prioritize eliminating tax on tips, overtime pay, and “seniors’ Social Security,” said Leavitt. While details were not shared, all three of these tax cuts have been the subject of Republican-backed legislation since Congress convened last month.

Trump had reiterated his promise to eliminate tax on tips in late January. That proposal has received support from some Democrats as well.

SALT deduction. On the state and local tax (SALT) deduction — which was limited to $10,000 annually under the TCJA — Trump is calling for “adjusting” the cap.

Republicans from so-called SALT states have backed legislation that would eliminate the cap entirely. Representatives Andrew Garbarino’s (R-NY) Securing Access to Lower Taxes by ensuring (SALT) Deductibility Act (H.R. 430) is sponsored by several Republicans, including Representatives Young Kim (R-CA), Chris Smith (R-NJ), Mike Lawler (R-NY), and Thomas Kean (R-NJ).

Under current law, the cap is set to expire at the end of 2025.

Carried interest loophole. Leavitt also revealed Thursday that Trump is looking to “close the carried interest tax deduction loophole.” The loophole, which allows private equity and hedge fund managers to pay a lower tax rate on their earnings, has been the focus of lawmakers for years.

The TCJA took steps to address how carried interest provided as compensation for investment fund managers’ services is taxed, but it did not entirely close the loophole. Under the TCJA, to be treated as long-term capital gains and thus subject the lower capital gains rate — versus the much higher top income tax rate — interests needed to be held for at least three years.

Trump’s announcement coincided with Democrats’ reintroduction of the Carried Interest Fairness Act in the House and Senate to tax investment services partnership income at ordinary income tax rates. It was unclear whether Trump’s plan aligns with that legislation.

The Biden administration’s Fiscal Year 2025 Budget Request included a similar proposal to close the carried interest loophole. Democrats say their proposal would increase revenue by $6.5 billion over 10 years.

Private investment groups immediately came out against any effort to close the loophole, saying it would negatively impact innovation and small investors.

Other Trump priorities, Leavitt shared, are to “eliminate all the special tax breaks for billionaire sports team owners” and adopt “tax cuts for made-in-America products.”

Cost.

Regardless of Trump’s tax reform asks, Congress will need to consider the overall cost of a tax package.

While the carried interest proposal would have positive budget impacts, that won’t come close to covering the cost of extending the many expiring provisions of the TCJA — let alone Trump’s additional tax cut asks.

“Extending nearly all expired, expiring, and changing tax provisions would add $5.2 trillion ($6.1 trillion with interest) to deficits through FY 2035,” said the Committee for a Responsible Federal Budget (CRFB).

Treasury Office of Tax Analysis’ January 10 report put the cost to extend just the expiring individual and estate tax provisions for 10 years at $4.2 trillion.

Andrew Lautz of the Bipartisan Policy Center explained that the “baseline cost” of extending the TCJA “requires some nuance, because it doesn’t include a few things that are constantly included in … the extended TCJA universe.” That includes “full expensing for R&D” and “a relaxed business interest deduction,” according to Lautz.

Indeed, the January Treasury report found reversing certain TCJA business tax increases and extending a phasing-out business tax cut would add $1.3 trillion in costs.

Picking a baseline.

But some Republicans say cost estimates are flawed in that they use current law — under which the 2017 cuts are slated to expire — as a starting point.

Senate Finance Chair Mike Crapo (R-ID), among others, has proposed instead using a “current policy baseline” that assumes existing policies will extend indefinitely, regardless of whether they are slated to expire under current law.

This week, Treasury Secretary Scott Bessent, speaking on Fox Business, revealed that he supports using a current policy baseline. He accused the Congressional Budget Office’s scoring methods of being “tilted towards spending” — referring to the differing baselines used for tax cuts versus spending programs.

The U.S. Chamber of Commerce, too, said using a current policy baseline better “reflects reality.” The approach also would head off another “fiscal cliff,” said the Chamber. “If Congress adopts a current-law baseline in its FY 2025 budget resolution, then it is all but certain that most — if not all — of the TCJA’s temporary tax provisions would once again have to be sunset.”

However, CRFB’s Maya MacGuineas called the use of a current policy baseline “a clear accounting gimmick to end-run the choices required in budgeting.” According to MacGuineas, “Pretending the TCJA is permanent now wouldn’t reduce its price tag; it would just hide it.”