Five Ways the Senate Can Improve OBBBA
The House-passed One Big Beautiful Bill Act (OBBBA) would add roughly $3 trillion to the debt including interest through 2034 as written, and we estimate it would add roughly $5 trillion if temporary provisions are made permanent. OBBBA would also significantly narrow the tax base, worsen tax complexity, and make large parts of the tax code temporary while failing to enact structural entitlement reforms. Based on available analyses, the bill would do very little to grow the economy, and dynamic feedback would not pay for any meaningful share of the bill’s deficit impact.
At the same time, the House-passed OBBBA does include several thoughtful reforms – including nearly $3 trillion of tax and spending offsets. As the Senate works to develop their own version of OBBBA, they should improve upon the House bill to ensure it is fiscally responsible and pro-growth.
Some ideas to improve the House bill include:
- Cut the expiration gimmicks by prioritizing a few permanent policies instead of numerous temporary changes.
- Strengthen Medicaid gaming limits to focus on existing financing schemes, as well as future ones.
- Cut the SALT deduction by eliminating or most strictly limiting it for individuals and businesses.
- Lower Medicare costs by adopting common-sense reforms to address excessive payments.
- Match tax cuts with offsets by adopting additional spending cuts, raising new revenue, and adjusting various parameters of Tax Cuts and Jobs Act (TCJA) extension.
Cut the Expiration Gimmicks
The House-passed OBBBA relies on several dozen arbitrary expirations to hide roughly $2 trillion of potential debt through 2034. Although these expirations reduce the official cost of the legislation, they create immense pressure for future extensions and expansions that can further boost the debt; after all, the current tax cut debate was caused by the expiration of the individual provisions in the TCJA. The temporary nature of these policies also makes it difficult for households and businesses to plan, thus limiting their effectiveness in promoting economic growth. In place of the large number of temporary provisions, the Senate should identify the most important of these changes and make them permanent while abandoning those not important enough to offset.
Among the temporary policies in effect through 2028 or 2029 in the House bill are income tax cuts for tips and overtime; a larger standard deduction and Child Tax Credit; a higher bonus standard deduction for seniors; the funding of $1,000 deposits for new tax-advantaged “Trump Accounts” for newborns; and full expensing of equipment, domestic research, and factories. New spending on defense, immigration, and border security is also temporary.
We estimate that the temporary tax policies, as written, would reduce revenue by roughly $750 billion through 2034.1 As an example, that revenue could be used to permanently end income taxes on tips, restore full expensing for domestic research, restore 100 percent bonus depreciation for equipment, and allow businesses to immediately expense half of their investment in factories. In addition to being more fiscally responsible than the House version, this swap would do more to improve tax simplicity and would grow the economy more than the current bill as written or if extended.2
The Senate could also consider incorporating some of the House’s temporary tax cuts into more structural reforms. For example, the Senate could adopt a new depreciation regime for all assets that incorporates generous treatment of research, equipment, and factories. Or they could increase the child tax credit as part of a broader family benefits reform that also addresses the child and dependent care tax credit, the Head of Household Filing Status, and child portion of the Earned Income Tax Credit.
Strengthen Medicaid Gaming Limits
The House-passed OBBBA would reduce projected Medicaid spending by roughly $800 billion, with nearly three-quarters of savings coming from changes to reduce projected Medicaid enrollment due to work requirements, redeterminations, and other eligibility and enrollment changes as opposed to structural financing reforms.
The bill would save nearly $200 billion by preventing states from worsening their existing financing gimmicks. This includes by banning new and increased provider taxes, blocking new or increased State Directed Payments (SDP) in excess of Medicare payments (or 110 percent of Medicare payments in some cases), and closing a loophole in provider tax laws that allows big gaps in tax assessments on different providers – which can be far more egregious than other provider taxes.
While these changes represent important improvements that would prevent states and providers from siphoning off additional federal funds, they leave most existing financing gimmicks in place.
The Senate should adopt the House reforms and build upon them by phasing in restrictions for existing gimmicks. For example, the Senate could gradually reduce the 6-percent-of-revenue limit on current provider taxes and could phase in the SDP cap for current payments at Medicare rates. Alternatively, the Senate could limit current SDP payments to no higher than their current nominal levels (to the extent it exceeds Medicare) rather than letting them continue to grow as commercial rates do.
Importantly, limits to existing financing schemes complement the House-passed restrictions on new schemes, since those restrictions prevent states from replacing banned schemes with new ones.
Our Medicaid Budget Offsets Bank includes a number of additional options.
Cut the SALT Deduction
The House-passed OBBBA would increase the existing $10,000 cap on the state and local tax (SALT) deduction to $40,000 for individuals and couples making less than $500,000 per year. It would also put some limits on existing SALT workarounds that currently count capped personal taxes as uncapped business taxes and would limit the value of the SALT deduction to the 32 percent rate for the highest earners.
As we’ve shown before, increases in the SALT cap reduce revenue, make the tax code more regressive, worsen tax complexity, weaken horizontal equity in the tax code, and disproportionately reward taxpayers in high-tax, high-income states like New York and California. The largest benefit from the House changes would go to households making half a million dollars a year or more. Rather than expand the SALT deduction, the Senate should be eliminating it – not only for high income taxpayers, but businesses as well.
Relative to the House bill, fully eliminating the individual and corporate SALT deduction would save over $1 trillion. Even retaining the House-proposed $40,000 cap for couples below $500,000 while setting it to $20,000 for single taxpayers and extending it to businesses – which would still leave an overly generous deduction – could save over $500 billion.
Our TCJA Budget Offsets Bank includes a number of options to limit the SALT deduction.
Lower Medicare Costs
With an expected $13 trillion of costs through 2034, Medicare is the largest government program subject to direct changes in reconciliation (only Social Security and interest are larger overall). There is bipartisan consensus on numerous ways to lower Medicare costs without meaningfully reducing the quality or accessibility of health care. Yet the House-passed OBBBA leaves Medicare virtually untouched.
The Senate should incorporate common-sense Medicare reforms to improve incentives and reduce excessive payments. For example, lawmakers could adopt site-neutral payments so hospitals are no longer paid more than doctor’s offices for the same services. And they could limit overpayments to Medicare Advantage plans due to upcoding by making it harder to inflate risk scores and strengthening ‘coding intensity adjustments.’
The Senate should also consider ending Medicare reimbursements for bad debts, reducing post-acute care payments, reforming how Medicare pays for medical residents and uncompensated care, fixing the 340b drug discount program, moving toward more bundled payments, restricting costly Medigap supplemental plans, reforming Medicare’s benefit design, or other changes.
These changes could easily save hundreds of billions of dollars and could generate upwards of $2 trillion in ten-year savings if adopted aggressively.
Our Medicare Budget Offsets Bank includes a number of options to reduce Medicare costs as does our Health Savers Initiative and our options to secure the Medicare trust fund. In his previous term, President Trump also put forward a number of Medicare savings options, many of which are similar to ideas former President Obama had also supported.
Match Tax Cuts with Offsets
Although very aggressive changes to temporary policies, Medicare, Medicaid, and SALT could theoretically be large enough to eliminate the $3 trillion of borrowing in the current bill,3 it is likely additional changes will be needed. And given our current fiscal outlook, reconciliation should be used to reduce deficits – not increase them.
To bring OBBBA’s spending and revenue in line and begin reducing deficits, the Senate should expand on the offsets in the current bill. Our Budget Offsets Bank includes trillions of dollars in potential offsets, ranging from cutting farm subsidies to reforming federal worker retirement benefits (as in the previous version of OBBBA) to eliminating tax breaks for private activity bonds to reforming international tax rules.
TCJA extensions could also be made more strategically to ensure they do not exceed available offsets (see our Build Your Own Tax Extensions tool). Instead of increasing the 199a pass-through deduction from 20 percent to 23 percent, for example, that 23 percent of income could be taxed at capital gains rates (as proposed by Doug Holtz-Eakin), or the deduction could be limited to returns on investment (as proposed by Scott Greenberg).
Additionally or alternatively, tax cuts for high earners could be allowed to expire. Letting the top rate return to 39.6 percent, for example, could shrink the bill’s revenue loss by $250 to $600 billion, depending on details. Letting other tax cuts expire could raise hundreds of billions more.
The Senate could also adjust the parameters of the tax code itself. Since the TCJA passed, most tax thresholds and parameters have risen more than 25 percent as a result of inflation. The House-passed bill restored the Alternative Minimum Tax (AMT) exemption to its 2018 level of $1 million, down from today’s $1.25 million. Applying that same modification to some or all of the tax rates (for example, reverting the top two tax rate thresholds from $767,000 and $640,000 in the bill to $600,000 and $400,000) could generate large amounts of revenue. We recently estimated that a two-year freeze of all tax parameters would generate $700 billion over ten years.
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The Senate has an opportunity to meaningfully improve the House-passed One Big Beautiful Bill Act to ensure that it reduces debt and grows the economy, as opposed to the other way around. Getting rid of the expiration gimmicks, strengthening Medicaid savings, cutting the SALT deduction, and incorporating Medicare savings can all lead to a more sensible package. Combining additional offsets with a more strategic TCJA extension can ensure the bill is fiscally responsible.
With debt approaching record levels and interest costs exploding, the Senate should accept nothing less.
[1] In some cases, such as the increase in the Child Tax Credit, part of the impact is a refundable credit and technically appears as outlays.
[2] Unlike the bill as written, this package would continue to promote business investment in the second half of the decade and beyond. Compared to the bill if extended, this package would lead to far less debt in the first five years and over the long term.
[3] A very aggressive package of savings could fully eliminate the SALT deduction for individuals and businesses (~$1 trillion), phase out all grandfathered provider taxes and state directed payments over five years (~$500 billion), double the Medicare Advantage minimum coding intensity adjustment (~$500 billon), and adopt a number of changes to reduce Medicare provider payments (hundreds of billions of dollars). With interest, these adjustments might be just sufficient to ensure the near-term budget neutrality of OBBBA.
