Policy Backgrounders

CBO View: What if Congress Does Not Extend the 2017 Tax Cuts?

December 13, 2024

Key Insights

The Congressional Budget Office (CBO) released an analysis of the effects of the expiring individual income tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) on its ten-year economic forecast, showing that letting the cuts expire would assist with deficit reduction and promote investment, albeit with marginal impact on real GDP. However, extending these expiring provisions is one of the signature priorities of the President-elect and Republicans in Congress next year, and Congress is likely to pass an extension of the cuts in some form.

• CBO estimates that if the individual income tax cuts expires as scheduled, this would increase annual revenues by 1 percent of real GDP, which in turn will lower annual deficits and the overall national debt.
• By borrowing less, the Federal government will “crowd in” (increase) private investment in the economy, increasing real GDP. However, the higher marginal individual income tax rates scheduled to occur in 2026 would reduce aggregate demand and lower the labor supply, thereby reducing real GDP.
• In CBO’s analysis, the effects of higher private investment and a lower labor supply roughly offset each other. Thus, CBO’s projections of real GDP are not significantly affected by the expiration of the individual income tax provisions of the TCJA.
• The Conference Board’s economic modeling of not extending all the expiring provisions of the TCJA shows a short-term drop in real GDP and increases in the unemployment rate in 2026 and 2027, followed by minimal effects over the rest of the forecast period.
• However, most observers anticipate that Congress will extend the TCJA tax cuts in some form, which would increase the deficit if not offset with corresponding reductions in spending.