Now that the ink has dried on the big budget reconciliation bill passed by Congress on July 3, it is a good opportunity to look at what its tax provisions really mean for households and the economy. Step back from the details and, at 30,000 feet, the bill has four overriding characteristics. It is regressive, expensive, complicated, and it treats people who make roughly the same amount of money in very different ways.
The bill’s main focus is extending the individual provisions of the 2017 Tax Cut and Jobs Act (TCJA), which would have expired at the end of this year. But it also creates a new tax deduction for older adults; continues, restores, and makes permanent some corporate tax benefits; and adopts scaled-back versions of some of President Trump’s campaign promises, such as tax-free tips and overtime.
The biggest tax cuts come from the bill’s extension of the TCJA’s individual income tax rate reductions and higher standard deduction. The bill also temporarily raises the cap on the state and local (SALT) deduction to $40,000 for some households, and extends the 20 percent special deduction for pass-through businesses such as partnerships and sole proprietorships. The bill allows some owners of those firms to avoid the SALT deduction cap entirely by continuing to take advantage of state-enacted loopholes.
The Measure Is Regressive
It distributes most of its benefits to high-income households.The Tax Policy Center finds the bill’s revenue provisions would cut 2026 taxes on average by about $2,900. The biggest beneficiaries would be households making between $460,000 and $1.1 million (the 95th-99th income percentile), who would get an average tax cut of $21,000, raising their after-tax incomes by 4.4 percent.
By contrast, middle-income households, who make between $67,000 and $119,000, can expect a 2026 tax cut averaging about $1,800, raising their after-tax incomes by 2.3 percent. The lowest-income households, who make less than about $35,000, will get a tax cut averaging $150, or less than 1 percent of their after-tax income.
Bottom line: On average, all income groups benefit from the tax cuts. But high-income households benefit the most. Keep in mind, those estimates reflect only the bill’s revenue provisions. Low-income households end up worse off after taking into account the bill’s spending cuts, especially for Medicaid, SNAP (food stamps), and Affordable Care Act health insurance subsidies.
The Bill Is Expensive.
The congressional Joint Committee on Taxation estimates the final budget bill would slash federal revenues by more than $4.5 trillion over the next decade.
Many costly provisions are set to expire within the 10-year budget window. But because future Congresses are likely to extend those provisions, as they just did for the TCJA, the true cost is likely to be much higher, according to the Committee for a Responsible Federal Budget (CRFB).
To lower the net cost of the budget bill, lawmakers cut Medicaid and the Affordable Care Act subsidies and repealed many green energy tax breaks that were included in the 2022 Inflation Reduction Act.
Including those spending reductions and tax hikes, the overall budget bill will increase the federal debt by $3.3 trillion over the next decade, the Congressional Budget Office projects. Additional interest adds another additional $700 billion, the CRFB estimates.
The Bill Is Complex.
The complications result from its many phase-ins and phase-outs, the income tests it imposes on various tax breaks, and the inherent intricacy of some provisions.
For example, while Trump proposed “no tax on tips,” Congress approved no tax on some tips. But the tax break is limited by the taxpayer’s annual tip income, a household’s total income, and even the kind of business the tip earner worked for, all of which will have to be reported on a tax return.
Similarly, workers who earn overtime pay may get a tax break, but only on their first $12,500 in OT ($25,000 for joint filers) and if they earn less than $150,000 (or $300,000 for couples who file jointly). And they likely will face a raft of other anti-abuse rules that have yet to be written.
Violating The Principle Of Horizontal Equity
The idea is that equal incomes should be taxed the same way. There is no good economic reason why someone who makes a living through tips should get a tax break while someone who makes the same income through a salary does not. Or why certain business owners should get a special tax deduction and the ability to avoid any limits on their SALT deduction while all workers and other business owners get neither benefit.
Congress extended some of what worked in TCJA—a higher standard deduction, limits on itemized deductions, an expanded child tax credit, and protection from the Alternative Minimum Tax (AMT). But it missed an opportunity to improve on other provisions. Instead, it made the tax code worse. At least, if history repeats itself, it will have an opportunity to revisit the tax code again soon.