As lawmakers gear up for tax negotiations, the Congressional Budget Office (CBO) released its assessment of how extending expiring individual tax provisions could impact the economy. While some praised the analysis — which looked at the macroeconomic effects of the provisions — others critiqued the scope.
Using dynamic scoring, CBO found that if the individual provisions in the 2017 Tax Cuts and Jobs Act (TCJA, P.L. 115-97) are allowed to expire, total deficits would be $3.7 trillion smaller over the next 10 years.
Marginal tax rates on labor and business income would be higher if the provisions are allowed to expire, CBO concluded. It projected a decrease in hours worked — particularly in the years immediately after the consequences of the expiration are fully understood. That decrease would level off at about 0.45% fewer hours worked than if the provisions were extended, said CBO.
But expiration of the provisions could boost private investment, CBO found, due to the resulting smaller deficits. Increased tax collection would reduce how much the federal government borrows — leading to lower interest rates. However, CBO said that the increase could be partially offset by the smaller labor supply and reduced demand.
GDP growth would slow immediately after the provisions expire, CBO found. However, in the long-term, it anticipates accelerated GDP growth as increased private investment offsets reductions in the labor supply.
Lawmakers react.
Senate Budget Committee Chair Sheldon Whitehouse (D-RI) lauded the report, citing it as the latest in mounting evidence that extending the 2017 provisions is fiscally irresponsible. “The cost of new handouts to the wealthy and well-connected would be even greater under dynamic scoring,” read Whitehouse’s press release.
Meanwhile, House Ways and Means Chair Jason Smith (R-MO) disputed the CBO’s findings. “CBO is simply not equipped to calculate the costs of the totality of all pro-growth policies that President Trump has pledged, including regulatory reform, which would address over $3 trillion in costs,” said Smith.
Allowing the TCJA’s tax cuts to expire, Smith explained, would lead to a $4 trillion tax increase. To him, it’s clear that increase would have negative economic effects.
Experts weigh in.
The Committee for a Responsible Federal Budget (CRFB) said there are a few caveats to keep in mind when looking at CBO’s analysis. Among those are that CBO has assumed extensions of the individual provisions are debt financed. Extending those provisions as part of a broader, deficit-neutral package, says the CRFB, could actually boost economic output in the long run.
In addition, while the CBO analysis focuses on expiring individual tax provisions, extending other expiring TCJA provisions “may prove to have stronger economic growth effects and perhaps weaker interest rate effects.” Those include estate tax provisions and business provisions, such as bonus depreciation, said CRFB.
The TCJA temporarily doubled the estate and gift tax exemption level through 2025. And under TCJA reforms to Code Sec. 168(k), businesses could immediately write off 100% of the cost of certain property that they acquired and placed in service between September 27, 2017, and December 31, 2022. That percentage decreases by 20 points each year, before phasing out in 2027.
Kyle Pomerleau, of the American Enterprise Institute, agreed that lawmakers should consider extending the TCJA provision that allowed for full bonus depreciation. In addition, he called for reversal of a provision under Code Sec. 174 that now calls for amortization of research and development costs over five years, rather than immediate deduction.
While neither provision is included in the CBO’s analysis, both are pro-growth and would incentivize investment, said Pomerleau. They would also “more than offset the negative effects of extending the individual provisions,” he added.
According to Pomerleau, several “significant pro-growth elements” of the TCJA are permanent, so simply extending the expiring provisions won’t have the same economic benefits as the original law.
But he said that the CBO analysis offers two important takeaways for lawmakers — that they should prioritize pro-growth measures and minimize federal borrowing during the 2025 tax reform discussions.
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