Potential Tax Deal Could Cost $830 Billion
UPDATE (January 2024): We have published an updated analysis of this tax deal. You can find the updated analysis here.
As Congress nears important policy deadlines, some lawmakers view the deadlines as opportunities to enact costly tax cuts. Policymakers are reportedly negotiating an expansion of the Child Tax Credit (CTC) in exchange for the revival of three business tax breaks that have adjusted or are phasing out under the Tax Cuts and Jobs Act (TCJA). While the costs of these policies are expected to total about $100 billion as written, we estimate the policies under consideration would cost $830 billion through 2033 if arbitrary sunsets are removed and the policies are made permanent. Nearly four-fifths of this cost would be for business tax breaks, and about one-fifth for the expanded child tax credit.
The piece below updates our original analysis of the rumored tax deal to reflect new information regarding the potential costs of the proposal.
Cost of Potential Tax Package (2024-2033)
| Policy | Through 2025 | Ten Years |
|---|---|---|
| Extend 100% bonus depreciation (full expensing) | $3 billion | $325 billion |
| Reinstate R&E expensing | $25 billion | $275 billion |
| Delay tighter limit on interest deductibility | $19 billion | $50 billion |
| Expand Child Tax Credit | $49 billion | $180 billion* |
| Total | $96 billion | ~$830 billion |
Sources: Joint Committee on Taxation, Congressional Budget Office, and Committee for a Responsible Federal Budget estimates. Notes: Years are fiscal years. *Cost assumes the TCJA CTC expansion is extended separately.
According to Laura Weiss of CQ (paywall), the package in question would include roughly $49 billion from expanding the CTC and $47 billion of business tax breaks. Based on discussions with Hill staff, our understanding is that the $49 billion expansion would include three tax years (retroactive from 2023 to 2025) while the business tax extenders would include retroactivity and go through 2025 as well.
The CTC expansion reportedly includes increased refundability, but other details are not available. Based on our Build Your Own Child Tax Credit tool, the $49 billion three-year cost might include full refundability along with a lookback and safe harbor for overpayment and repeal of the existing Social Security Number requirements. If made permanent, this expansion would cost roughly $180 billion through 2033.
The three business tax breaks being discussed include reinstating research and experimentation (R&E) expensing, delaying the tighter limit on interest deductibility, and reviving and extending 100 percent bonus depreciation for business equipment purchases, all through 2025. Although these provisions would cost $47 billion through 2033 if allowed to expire after 2025, that figure is artificially low due to the timing-based natures of the policies. If the business tax breaks were made permanent, we estimate they would cost about $650 billion through 2033.
While the CTC expansion and business tax breaks would have similar ten-year costs if truly enacted on a temporary basis, the business tax provisions would cost 3.6 times as much if enacted on a permanent basis. In the tenth year and inclusive of interest (which is a possible measure of “steady-state costs”), the business tax breaks cost about 2.4 times as much as the CTC. And with no reports that either is being paid for, both would add significantly to the already massive federal debt.
The business expensing provisions for equipment (bonus depreciation) and R&E both affect the timing of taxes paid and thus appear to cost substantially less when set to expire. The $28 billion net cost of those two provisions reflects more than $200 billion of revenue loss through 2025, offset by more than $170 billion of revenue recovery thereafter. If made permanent, we estimate these provisions could cost a combined $600 billion through 2033 – including $325 billion for bonus depreciation and $275 billion for R&E expensing.
We estimate that delaying the tightening of the interest limit, which costs $19 billion on a temporary basis, would cost about $50 billion through 2033 if made permanent. Finally, while we cannot estimate the permanent cost of the CTC without further details, a simple extrapolation of the three-year $49 billion cost suggests it would total about $180 billion through 2033 if made permanent. This assumes the current credit is extended beyond its 2025 expiration but does not account for the cost of that extension.
On a year-by-year basis, the package in its temporary form would cost $270 billion in the first two years while raising $170 billion in the subsequent eight years. On a permanent basis, the early cost would be the same but about $560 billion of additional costs would follow over the next eight years.
As we approach record-breaking debt levels reminiscent of World War II, lawmakers should avoid further exacerbating deficits while addressing important policy deadlines. This is true both for unpaid-for tax cuts and spending increases. As CRFB president Maya MacGuineas recently noted:
It’s hard to overstate the hypocrisy driving this deficit-financed tax cut effort. The politicians warning that deficits are out of control are teaming up with those who are denouncing tax cuts to pass yet another deficit-exploding tax cut bonanza.
2023 has been a good year fiscally – Congress and the President have enacted $1.3 trillion of ten-year deficit reduction – a downpayment on what is needed. With near-record debt levels and exploding interest payments, now is not the time to undermine that progress.
Policymakers should also be transparent about costs. If they plan to extend these policies again going forward, they should disclose that openly and avoid using arbitrary expirations as a veil to obscure the future financial implications.
