Republicans’ Big Beautiful Bill Needs Work

House Republicans have passed their “One Big Beautiful Bill Act”—that’s indeed the title—to be sent to the Senate for consideration and reworking. Would the bill, in its current form, improve or worsen the status quo?

It needs work. As written, the bill extends the tax cuts enacted in 2017 at considerable cost, adds numerous gimmicks to the tax code, and only partially addresses the damage to the budget with spending cuts.

The biggest, if least surprising, downside of the legislation is that the numbers don’t add up. Over ten years, the House bill would cut taxes far more than spending, adding about $3 trillion to the debt. That’s atop the roughly $30 trillion in public debt that the United States has already racked up—about equal to our gross domestic product for an entire year.

Just paying interest on that debt will cost nearly $1 trillion this year. My Manhattan Institute colleague Jessica Reidl warns that if interest rates run even one point higher than expected in the decades ahead, interest on the debt could consume four-fifths of federal revenue.

The tax cuts will also not pay for themselves through added growth. The folks at the Tax Foundation predict only a 0.6 percent long-run boost to GDP from the cuts, and the House failed to make permanent some low-profile but growth-juicing business provisions involving depreciation and expensing.

The bill’s centerpiece is its permanent extension of the individual income-tax cuts enacted in 2017, with some additional adjustments. Here, Congress forced its own hand.

The 2017 law permanently cut the corporate rate but set the individual cuts to expire at the end of 2025. On paper, that brought down the cost of the bill, but in practice, it merely created political pressure for an extension. According to a Tax Foundation calculator, a married couple with two kids, making $90,000, will see an almost $2,000 tax hike if the cuts are allowed to expire.

Critics, of course, will call the renewal yet more “tax cuts for the rich.” Unlike the payroll levies that fund our entitlement system, income taxes are highly progressive. Thus, across-the-board income-tax cuts like those enacted in 2017 tend to affect the wealthy the most. The new proposal is “progressive” in the sense that it gives the less well-off larger cuts as a proportion of their income-tax burden, but about 60 percent of the tax cuts’ benefits flow to the top 20 percent—who pay the most in income taxes to begin with.

While Democrats would be inclined to let rates rise for the wealthy while preserving the 2017 cuts for everyone else, Republicans are looking fully to extend the lower rates, at a cost of around $2 trillion over ten years. The Tax Policy Center estimates that preserving the cuts for the top rate alone, which applies to income well above $500,000, accounts for about 10 percent of the cost of extending the 2017 law.

The bill also adjusts the Child Tax Credit, which the 2017 law had increased to $2,000 but not indexed for inflation. The bill would boost the credit to $2,500 through 2028—another case of reducing the cost through an expiration date that may not actually materialize. The underlying $2,000 amount will also be indexed going forward (with 2024 as the base year). The extension and changes here will cost about $800 billion.

The tax provisions contain a hodgepodge of brand-new gimmicks. These include no tax on tips, albeit with income and occupation guardrails to limit abuse. This is an idea that polls well but makes little sense as tax policy; there is no serious reason to tax a waiter far less than a retail worker with the same total earnings. The bill also includes a similar no-tax provision for overtime, as well as a pilot program seeding a “Trump Account” with $1,000 for children born between 2025 and 2028. Further, there’s a $4,000 boost to the standard deduction for seniors, America’s most financially secure age group, because why not? All these provisions add around $250 billion to the price tag.

The most controversial provision has been the federal deduction for state and local taxes (SALT), which effectively subsidizes high-tax states. When a state raises taxes, its residents can deduct those higher payments from their federal taxable income—spreading part of the bill to taxpayers nationwide. The 2017 law capped this deduction at $10,000 and also raised the standard deduction, making itemizing less attractive in the first place.

But thanks to the slim House majority, Republicans from high-tax states had the leverage to demand a higher SALT cap—and secured a $40,000 limit, phased out for those earning more than $500,000. Compared to extending the $10,000 cap, this change could cost maybe $300 billion in revenue over ten years.

All these tax cuts are only partly offset by spending reductions. Two of the largest, totaling around $1 trillion, target Medicaid and food stamps (formally, the Supplemental Nutrition Assistance Program, or SNAP), which provide health coverage and food assistance to low-income Americans.

These programs have grown rapidly in recent years and suffer from serious dysfunctions. Still, using safety-net reform to (partially) fund tax cuts is politically fraught. Many on the left are quick to oppose any attempt to rein in poverty programs—regardless of scope—and readily frame such efforts as giveaways to the rich.

On Medicaid, the bill would impose work requirements, reduce subsidies to states that cover illegal immigrants, and limit “provider taxes”—a tactic states use to inflate their federal Medicaid funding. The Left warns that these changes will lead to major coverage losses, citing reduced funding, the exclusion of able-bodied nonworkers, and burdensome work-hour documentation.

However, as my colleague Chris Pope recently explained, the proposed work requirements may be too weak to generate significant savings—and could even prompt red states to adopt Obamacare’s Medicaid expansion. States have also shown creativity in sidestepping funding restrictions in the past. Pope argues that a better approach would be to cap spending growth in the most expensive states.

Similarly, the food stamp changes would require states to cover at least 5 percent of the program’s cost, extend work requirements to previously exempt groups (including parents of school-age children), and tighten rules on waivers for high-unemployment areas. Just as they’ve fine-tuned the art of maximizing Medicaid funds, states have figured out how to exempt as many residents from food-stamp work requirements as possible, such as by gerrymandering waiver areas or requesting exemptions for regions with unemployment somewhat above the national average, even when national rates are historically low. Under the new legislation, waivers would be limited to counties with unemployment above 10 percent—period.

Other notable, if less attention-grabbing, savings include significant reforms to student loans and cuts to green-energy tax credits. As substantial as all this may be, though, a massive budget gap remains when paired with the proposed tax reductions.

Extending the 2017 middle-class tax cuts is a political inevitability, and safety-net reforms shouldn’t be off the table. But as it stands, the House legislation is weighed down by too many gimmicks and inflicts too much damage on the budget. One can hope the Senate pursues a narrower, more fiscally responsible approach—but Republicans hold slim margins there as well, must appease a range of factions, and remain reluctant to work with Democrats unless the process completely breaks down.

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