President Trump and Congressional Republicans have been working throughout 2025 to create a plan to change the federal income tax system. This task is becoming more difficult each week.​
Many Republican lawmakers aim to reduce federal spending by $1.5 to $2.5 trillion over the next ten years, with a likely target around $2 trillion. Reaching this agreement is difficult due to the Republicans’ narrow majority in Congress.​
The House and Senate have significant disagreements. They can’t agree on whether to have one, two, or even three reconciliation bills. There’s also debate on making tax cuts temporary or permanent.​
President Trump and several prominent Republicans have proposed various tax cuts, including:​
- Extending the Tax Cuts and Jobs Act (TCJA): This would continue the tax cuts from the 2017 law, costing about $4.6 trillion.​
- Exempting Overtime Pay from Taxes: Workers wouldn’t pay taxes on overtime earnings, reducing federal revenue by approximately $300 billion.​
- Exempting Tips from Taxes: Service industry workers’ tips would be tax-free, costing about $200 billion.​
- Lowering Corporate Tax Rates for U.S.-Made Products: Companies producing goods in the U.S. would pay less in taxes, decreasing revenue by around $150 billion.​
- Removing the State and Local Tax (SALT) Deduction Cap: Eliminating the $10,000 limit on SALT deductions would cost about $1.2 trillion.​
- Ending Taxes on Social Security Income: Retirees wouldn’t pay taxes on Social Security benefits, reducing revenue by about $1.5 trillion.​
- Eliminating the Estate Tax: Also known as the “death tax,” removing it would cost approximately $300 billion.​
Over 200 other tax cut proposals are also being considered.​
Recently, Axios reported that President Trump might support increasing taxes on the wealthy to offset the cost of not taxing tips. Many Republican lawmakers may oppose this idea.​
Passing a reconciliation bill in the Senate requires following specific rules. If not adhered to, Democrats could use a filibuster to block the bill. Senate Parliamentarian Elizabeth MacDonough plays a crucial role in interpreting these rules.​
Since 1974, Congress has used the “current law” baseline for budgeting. This method assumes that there is a cost to extending temporary tax cuts. The Congressional Budget Office (CBO) is the official scorekeeper and estimates the costs. They consider expected economic growth and the associated revenues in their calculation. They also consider the lost revenue from decreasing income taxes.​
As a Certified Public Accountant, I find the “current law” baseline logical.​
Some Republicans propose shifting to a “current policy” baseline, which hasn’t been used since 1974. This approach would assume existing policies, like the TCJA tax cuts, continue indefinitely, effectively assigning them a cost of zero. This change would allow for more tax cuts but could significantly increase the federal debt over the next ten years. Experts have differing opinions on this.​
Senate Parliamentarian Elizabeth MacDonough is expected to decide soon on whether the “current policy” baseline can be used to extend the TCJA.​
If she approves the “current policy” baseline, it will greatly impact this reconciliation bill and make it easier for both parties to extend temporary provisions without offsetting their costs. This shift could affect debt markets and potentially raise bond yields.​ Many would consider this change a seismic shift.
If she insists on maintaining the “current law” baseline, Republicans will need to completely reassess their strategy.​
Ultimately, President Trump’s tax reform plans depend significantly on Elizabeth MacDonough’s forthcoming decision.​