CBO's Revenue Savings Options

The Congressional Budget Office (CBO) recently released its Options for Reducing the Deficit, outlining a number of options to reduce the deficit. We have already discussed CBO’s Medicare, Medicaid, other mandatory, and discretionary options in our Budget Offsets Bank. But a large share of CBO’s budget options would raise additional tax revenue, which could help fund new initiatives or reduce the deficit.

The federal government is currently projected to raise about $68 trillion of revenue from 2026 through 2035, which is $22 trillion less than it is projected to spend. Revenue collection would fall to roughly $64 trillion if expiring elements of the Tax Cuts and Jobs Act were extended. Just over half of all revenue is projected to come from the individual income tax, one-third from payroll taxes, seven percent from the corporate income tax, and the rest from various excise taxes, tariffs, and fees.

Excluding Social Security-related revenue (which will be included in an upcoming addition to our Offsets Bank) and any rate increases, CBO’s revenue options could generate well over $12 trillion of revenue, relative to current law. Rate increases could generate trillions more. It is important to note that many of these revenue estimates would change significantly were policymakers to extend the Tax Cuts and Jobs Act. In a previous addition to our Offsets Bank, we have estimated the effects of a few of these policies relative to such an extension.

Note: these options are based on the FY 2026-2035 budget window; savings would likely be 15 percent less over the FY 2025-2034 budget window, varying by option. Savings are estimates based on CBO scoring, are rounded to the nearest $5 billion, and are subject to change based on policy specification.

The table below is a menu of options and does not represent recommendations from the Committee for a Responsible Federal Budget, its board, or its staff.

Options to Raise Revenue Through the Tax System

Sources: Committee for a Responsible Federal Budget calculations, Congressional Budget Office.  

Perhaps the simplest way to raise revenue is to incrementally increase current tax rates. For instance, increasing the seven marginal individual income tax rates by one percentage point would raise $1.2 trillion from 2026-2035, while increasing only the top 4 brackets would raise $300 billion. A similar proposal to impose a one percent surtax on adjusted gross income above $20,000 for a single taxpayer or $40,000 for a married taxpayer would raise $1.5 trillion in a broad-based manner, while imposing the surtax only on income above $100,000 ($200,000 married) would raise $560 billion. If instead payroll taxes were raised by one percentage point without a cap, that would increase revenues by $1.3 trillion.

The tax code contains several methods of preferential treatment for income earned from capital assets over wage income, including preferable rates and “stepped-up” basis which allows heirs to avoid paying any taxes on capital gains accrued by the deceased. Raising all three long-term capital gains and qualified dividend tax rates by 2 points – boosting them from 0 percent, 15 percent, or 20 percent to 2, 17 and 22 percent – would raise $110 billion in revenue. Ending stepped-up basis would raise $230 billion if instead gains were “carried over” to the heirs for when the asset is sold, or $570 billion if the gains were taxed at death. Expanding the 3.8 percent Net Investment Income Tax (NIIT) to owners of pass-through businesses who pay neither the NIIT nor Medicare payroll taxes would raise an additional $440 billion. And closing the “carried interest loophole,” which allows investment fund managers to take their compensation for managing a fund at lower capital gains rates would raise $15 billion.

Most Americans take the standard deduction when they file their taxes, but a significant minority (typically higher-income Americans) itemize their deductions. Limiting these deductions in aggregate, whether by allowing taxpayers to write off no more than four percent of their income, or by limiting the value of an itemized deduction to 15 percent (currently the value varies with the individual’s marginal tax rate, which is 37% for the highest-income taxpayers) would save $800 billion to $2.0 trillion, and eliminating itemized deductions altogether would save $3.7 trillion. CBO estimates that limiting the charitable deduction – either by restricting it to just cash equivalent donations or only allowing deductions above 2 percent of income – would raise about $350 billion. Note that since the Tax Cuts and Jobs Act greatly limited itemized deductions, these revenue scores would be much lower if one assumes that law is extended.

A few types of income are exempt from taxation entirely but could be brought into the tax system. For instance, subjecting lifetime monthly disability payments from the Department of Veterans Affairs to income taxes would raise $255 billion. Another tax-exempt income source is the interest a taxpayer receives from buying qualified “private activity bonds.” Unlike most tax-free bonds which are issued by state and local governments for their own public projects, private activity bonds back private projects that state and local governments certify as providing public benefits – for example, these bonds have been used to finance the building of professional sports stadiums, sewage treatment facilities, and housing developments. Eliminating this exemption would save $45 billion.

CBO also outlines a number of other possible changes to individual income taxes. Limiting “Head of Household” filing status to unmarried parents with children under the age of 17 would raise $80 billion, while requiring all taxpayers who currently file as “Head of Household” to file as “single” would raise $215 billion. Per the Joint Committee on Taxation (JCT), the tax exclusion for defined contribution retirement plans is the largest tax expenditure. If lawmakers were to lower the annual IRA contribution limit to $6,000, lower the contribution limit for 401(k)-type plans to $20,000, eliminate extra “catch-up” contributions for older workers, and eliminate the ability of very high-income taxpayers to convert their savings from traditional IRA plans to Roth IRA plans, the deficit savings would be $195 billion. 

CBO also outlines several alternatives for limiting the tax exemption for the most generous employer-based health insurance plans starting in 2028, which would save from $1.2 trillion to $630 billion. Repealing the two tax credits for higher education expenses, the American Opportunity Tax Credit and the Lifetime Learning Tax Credit, would save $130 billion. Requiring claimants of the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) to have Social Security Numbers that are valid for employment that would raise $30 billion, while tightening the amount of investment income a claimant can have and still qualify for these refundable credits would raise $10 billion.

Domestic income earned by corporations is taxed at 21 percent. Raising this rate by one percentage point would bring in $140 billion in revenue over ten years. Taxing corporate income from overseas at normal corporate tax rates – instead of the complex, but lower rates under the GILTI and BEAT tax regimes – would raise $350 billion over ten years. Eliminating the several business inventory accounting methods like “last in, first out" and the "lower of cost or market" and "subnormal goods” inventory valuation methods would produce less flexible inventory assessments and would save $105 billion. Finally, advertising costs are completely deductible in the year they are incurred. If instead half of advertising costs were required to be amortized over 5 years, that would save $85 billion, and amortizing over 10 years would save $180 billion. Repealing the Low-Income Housing Tax Credit (LIHTC) program would save $70 billion.

Apart from the individual and corporate tax regimes, lawmakers could also choose to enact a new tax or to raise one of the existing federal excise taxes. For instance, the current excise taxes on different forms of alcohol could be raised, standardized and indexed to inflation, which would raise $105 billion in revenue. Likewise, federal taxes on tobacco could be increased by 50 percent, the taxes on cigars and cigarettes equalized, and certain other changes made, which would raise $50 billion. Finally, the federal excise tax on gasoline and diesel fuels has been unadjusted on a per-gallon basis since 1993. If the tax was increased by 15 cents per gallon and indexed to inflation, $215 billion would be raised.

A 5 percent Value-Added Tax (VAT), which functions like a national sales tax on nearly all goods and services, could raise $2.3 to $3.5 trillion dollars depending on what goods and services it applied to. A carbon tax on the emission of greenhouse gases could raise nearly $1 trillion over a decade if set at $25 per metric ton and increased by 5 percent annually. CBO outlines several other permutations of this carbon tax that could raise $730 to $850 billion over the next decade. Finally, a financial transaction tax of 0.01 percent of the value of each stock and payment under a derivatives contract would generate roughly $340 billion over ten years. 

Increasing revenue can be an important tool for financing new initiatives and helping to put the U.S. on a sustainable debt path. Lawmakers should consider all parts of the budget and tax code when deciding how to reduce the deficit and how to pay for new policy priorities. Follow our Budget Offsets Bank to find more deficit reduction options on both the spending and revenue side.