Year-End Tax Deal Could Cost Over $800 Billion if Made Permanent

UPDATE (January 2024): We have published an updated analysis of this tax deal. You can find the updated analysis here.

According to press reports, policymakers are apparently negotiating a possible year-end tax package that would temporarily expand the Child Tax Credit (CTC) and revive certain business tax breaks. Senate Democrats have reportedly suggested roughly $100 billion in total tax relief, in place through the end of 2025. However, we estimate making these provisions permanent would cost over $800 billion through 2033.

According to Laura Weiss of CQ (paywall), the package in question would include roughly $49 billion from expanding the child tax credit and $47 billion of business tax breaks.

While details of the package are not yet released, the business tax breaks likely include reinstating research and experimentation (R&E) expensing, delaying the tighter limit on interest deductibility, and extending 100 percent bonus depreciation for business equipment purchases through 2025. These provisions were in the American Families and Jobs Act and are estimated by the Joint Committee on Taxation to cost exactly $47 billion.

The CTC expansion reportedly includes full refundability, but other details are not available. Based on our Build Your Own Child Tax Credit tool, the $49 billion two-year cost could be achieved by combining full refundability with a roughly $200 (10 percent) increase in the credit amount, a bonus $600 credit for children under the age of six, or some other combination of policies.

In all cases – and especially in the case of the business expensing provisions – the 2025 expiration date significantly masks the costs. If the policies were ultimately made permanent, we estimate costs would go up eight-fold – to about $825 billion.

Cost of Possible Year-End Tax Package (2024-2033)

Policy Through 2025 Permanent
Extend 100% bonus depreciation (full expensing) $3 billion $325 billion
Reinstate R&E expensing through 2025 $25 billion ~$200 billion
Delay tighter limit on interest deductibility through 2025 $19 billion ~$50 billion
Expand Child Tax Credit $49 billion ~$250 billion*
Total $97 billion ~$825 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.

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 $525 billion through 2033 – including $325 billion for bonus depreciation and $200 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 $49 billion two-year costs suggests it would cost about $250 billion over a decade. This assumes the current credit is extended beyond its 2025 expiration but does not account for the cost of that extension.

With debt approaching record levels, lawmakers should avoid a year-end tax cut binge. As CRFB president Maya MacGuineas recently noted:

Certainly, there’s a case for improving the tax code to better support business investment and children in need. But we shouldn’t just add the cost to the nation’s credit card. That extra borrowing will crowd out investment and further burden our children with debt and slower growth.

Rather than adding to the cost of possible extensions of the 2017 Tax Cuts and Jobs Act, policymakers should be working to rein in those costs and ensure any extension is at least budget neutral.

Policymakers should also be transparent about costs, rather than rely on arbitrary expirations to hide the future costs if they continue making the same actions.