Policy Backgrounders

The President outlined several significant tax cut proposals in his speech to a joint session of Congress this week while also pledging to balance the Federal budget. Achieving these contradictory goals would require Congress to approve massive spending cuts.

Key Insights

The President supports a permanent extension of the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA).
The President reiterated his campaign promises of eliminating taxes on tips, overtime, and Social Security benefits, while making new tax cut proposals.
These proposals to cut taxes would reduce revenues for the Federal government and raise the deficit absent significant spending cuts. The President floated his “gold card” visa idea and eliminating the CHIPS and Science Act as ways to begin to move toward his goal of balancing the Federal budget.
Debates on tax policy occur amid negotiations to avoid a government shutdown on March 14, with a continuing resolution (CR) running until the end of the fiscal year on September 30 the most likely path forward.

The President’s Fiscal Proposals

In his speech to Congress on Tuesday night, the President touted many proposals for tax cuts while also promising to balance the Federal budget. Many of the individual income tax provisions of the TCJA expire on December 31. Both the House and the Senate have passed their versions of a budget resolution to advance the President’s legislative agenda, including extending the expiring provisions of the TCJA, with the House pursuing a one-bill strategy combining all of the President’s legislative priorities and the Senate focusing on border security and defense first before moving to a second bill to extend the expiring provisions of the TCJA later this year. But this is only a prelude to debate on extending or revising the TCJA itself.

Extension of the TJCA’s Expiring Provisions

The President said his Administration is “seeking permanent income tax cuts all across the board.” This proclamation supports the position of many Republicans in the Senate, who have demanded a permanent extension of the TCJA. In a statement after the House passed its budget resolution, Senate Majority Leader John Thune (R-SD) said, “A key part of [the President’s] agenda is making the pro-growth Tax Cuts and Jobs Act permanent, which is why we’ll work closely with our House colleagues to ensure the final package includes all of the president’s key tax priorities, including permanency [.]”

In contrast, the House budget resolution currently only allows for a $4.5 trillion deficit increase over 10 years associated with extending the TCJA tax cuts, which could be increased dollar-for-dollar for any spending cuts over $2 trillion. The Congressional Budget Office (CBO) and the Joint Committee on Taxation estimate extending the expiring provisions of the TCJA will increase the total deficit by almost $4.6 trillion over 10 years. Chair of the House Committee on Ways and Means Jason Smith (R-MO) acknowledged that the House budget resolution wouldn’t cover a permanent extension: “Let me just say that a 10-year extension of President Trump’s expiring provisions is over $4.7 trillion, according to CBO. Anything less would be saying that President Trump is wrong on tax policy.” CBO also released a report this week noting that the only way to achieve the House budget resolution’s goal of $1.5 trillion in spending cuts is to reduce Medicaid or Medicare benefits under the jurisdiction of House Energy and Commerce Committee, which is tasked with finding at least $880 billion in spending cuts.

Additional Tax Cut Proposals

In addition to permanently extending the expiring provisions of the TCJA, the President reiterated his campaign promises for additional tax cuts: “I’m calling for no tax on tips, no tax on overtime, and no tax on Social Security benefits for our great seniors.” Tax policy organizations including the Tax Foundation and Committee for a Responsible Federal Budget have estimated eliminating taxes on tips could cost between $100 billion and $250 billion over 10 years. The Penn Wharton Budget Model projects that eliminating income taxes on Social Security benefits would reduce revenues by $1.5 trillion over the next decade and accelerate the projected depletion date of the Social Security OASDI Trust Fund by two years from December 2034 to December 2032.

The President also made several other tax proposals in his speech, including tax cuts for businesses that manufacture in the United States, making interest payments on American-made automobiles tax deductible, increasing tax incentives for ship building, and reestablishing full, upfront deductions for companies purchasing short-term assets such as equipment and machinery. Regarding the last proposal, the President said, “And just as we did before, we will provide 100 percent expensing. It will be retroactive to Jan. 20, 2025.” All these proposals would decrease revenues and increase the deficit, with the Administration hoping that the resulting economic growth from reducing taxes would offset the direct revenue losses. (The President did not mention his campaign promise to “fix” the current state and local tax (SALT) deduction cap, which expires at the end of the year if nothing is done to extend or modify it.)

Balancing the Federal Budget?

Amid the flurry of tax cut proposals, the President stated his goal of balancing the Federal budget: “And in the near future, I want to do what has not been done in 24 years: balance the federal budget. We are going to balance it. With that goal in mind, we have developed in great detail what we are calling the gold card, which goes on sale very, very soon. For $5 million, we will allow the most successful job-creating people from all over the world to buy a path to U.S. citizenship.” It is highly unlikely that revenue from selling the “gold card” could meaningfully reduce the deficit, so the President is also banking that the job creation and economic growth these individuals theoretically would spur could increase revenues and lower the deficit.

Later in the speech, the President singled out the CHIPS and Science Act for elimination: “You should get rid of the CHIP Act and whatever’s left over, Mr. Speaker, you should use it to reduce debt. Or any other reason you want to.” The CHIPS and Science Act passed with bipartisan support in 2022 and authorized roughly $280 billion in new spending through fiscal year (FY) 2027. While rescinding the funding in the CHIPS and Science Act would reduce the deficit, this one-time savings would not come close to balancing the budget, with the Federal government projected to run a total deficit of almost $1.9 trillion in FY2025, increasing to $2.7 trillion by FY2035.

Conclusion

While the fiscal portion of the President’s speech focused on tax policy, the more immediate concern for the Federal government is the impending expiration of the FY2025 CR funding the government through Friday, March 14. House Republican leadership will likely try to advance a full-year CR through September 30. Speaker Mike Johnson (R-LA) will have to convince of his strategy defense hawks who are concerned about a full-year CR’s impact on Defense Department planning and operations and the hardline House Freedom Caucus who regularly demand spending cuts. Senate Democrats will also have to decide whether to oppose the full-year CR if it passes the House or risk a government shutdown. These dynamics portend another last-minute scramble next week, again highlighting the dysfunctional budget process and CED’s recent call for urgent budget process reforms.