Capitol Hill Recap: Soaring Deficits and Tax Policy

Congressional budgeters paint Federal coffers with red ink as lawmakers discuss tax cuts.

What Went Down:

• The Congressional Budget Office updated its budget report showing a worsening deficit situation as backroom talks about extending tax cuts begin on Capitol Hill.

Let’s Get To It:

Budget Woes

The Congressional Budget Office (CBO) is basically Congress’s bookkeeper and this week it announced some bad financial news to Capitol Hill.

Congress is projected to run a federal budget deficit for fiscal year 2024 of $1.9 trillion. That is for one year. The figure is also an increase from CBO’s prior deficit projection of $1.6 trillion in February.

The red ink Congress has created could become historically large.

From the CBO:

Over the long haul, the CBO projects that “the deficit for the 2025–2034 period is projected to total $22.1 trillion, $2.1 trillion more than CBO projected in February.”

If the projection is accurate, Congress will have amassed a total debt of more than $50 trillion by 2034. That amount of debt would be larger (122%) than the nation’s Gross Domestic Product, according to the CBO.

How did this happen? It’s not rocket science.

Congress spends too much and collects too little.  Projections for fiscal year 2024 show outlays of $6.8 trillion and revenues totaling $4.9 trillion.

And despite the lack of revenue, spending is projected to increase. The CBO states that “federal outlays rise from $6.9 trillion in 2024 to $10.3 trillion in 2034, an average annual increase of 4.1 percent.”

A big chunk of that spending will go toward entitlements, i.e., providing people retirement and medical benefits.

From the CBO:

Entitlements, like Social Security or Medicare, are the big spenders and the primary drivers for the escalating debt.  But cutting entitlements is basically a political death knell for any lawmaker who supports such a move. Also, cutting back on discretionary spending (like infrastructure or agency budgets) will barely make a dent in reducing the amount of red ink flowing from the Capitol. 

If lawmakers can’t cut spending in a meaningful way, then they might look at the other side of the ledger: Tax policy.

Call it a coincidence, but the CBO released a report about exploding debt as lawmakers begin behind-closed-door negotiations about extending Tax Cuts and Jobs Act (TCJA) provisions slated to expire in 2025.

Here are some of the measures that are set to revert to 2017 tax law in 2026:

• Marginal tax rates, currently 10%, 12%, 22%, 24%, 32%, 35%, and 37% will revert to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
• The Standard deduction will basically be cut in half.
• Gift and estate tax exclusion levels are halved.
• The $2,000 Child Tax Credit will revert to $1,000.
• High exemption levels for the individual Alternative Minimum Tax cease to exist.
• The Pass-Thru deduction expires.

The SALT cap is also scheduled to expire in 2025.

The full list of expiring TCJA provisions is here.

Extending TCJA provisions beyond 2025 is projected to add $3.9 trillion ($4.5 trillion with interest) to the deficit over the next ten years, according to the Committee for a Responsible Federal Budget, a D.C. thinktank.

There are differing perspectives when it comes to mounting debt and tax policy.

Allowing the TCJA tax cuts to expire would extract roughly $400 billion from the economy every year – for the next ten years. Individuals would pay roughly 11 percent more in taxes, according to the CBO, and that level of taxation could mean the U.S. economy takes a financial hit.

If the U.S. economy retracts, then jobs are likely lost, which means that people no longer have salaries and aren’t paying taxes, leading to a revenue decline for the Federal government.

So, the $400 billion increase in annual revenue to the Federal government could never materialize. Meanwhile, the amount of debt increases because more people are jobless and dependent on Federal assistance.

Legislative outlook: As stated before in this space, the fate of TCJA tax provisions lies with the outcome of the 2024 elections.

But here is something new to consider: Federal deficits might be getting too large for income taxes to cover. Lawmakers might need to look at enacting additional revenue streams, like a Value Added Tax (VAT) or a carbon tax.

Discussions about adding a new revenue stream to Federal coffers is not new on Capitol Hill, but those talks have never amounted to much. As more red ink gets added to Federal coffers, those talks might become more serious.

Pardon if this recap missed a monumental moment, but we can recap it next time!

Adios amigos!