The U.S. Senate has been in almost continuous session the past several days debating the One Big Beautiful Bill (OBBB), which would extend the expiring tax cuts of the Tax Cuts and Jobs Act (TCJA) of 2017 and make other changes.
One big pro-growth improvement in the Senate bill is that it makes full expensing for business equipment permanent. Before TCJA, a business buying new equipment would have to pay phantom taxes on the money they spent for the new equipment. Full expensing corrects that mistake, and analysts think it will double the growth potential from the bill from the House version.
One sticking point – particularly with Senator Rand Paul (R-Kentucky) but also with many taxpayers – is the possibility for more savings to reduce impacts on the national debt. The analysts at the Economic Policy Innovation Center, for instance, estimate that the Senate draft would save $1.5 trillion over ten years, short of the $2 trillion they promised the House. There are different estimates about the bill’s debt impacts, but taxpayers know more savings is a good thing.
Here are five ideas for the bill to save even more:
Changes to the Federal Medicaid Assistance Percentage (FMAP). One proposal that several senators are seeking is to restrain the growth of Medicaid by reducing the federal share of the post-2010 expansion to able-bodied adults, from 90% down to the federal share level for traditional Medicaid, which varies by state according to a formula. The proposal would make the change in 2031, allowing transition time for states to adjust and saving an estimated $313 billion. Removing the statutory floor, which guarantees some states get matching funds higher than the formula calculates, would be another reform that could be paired for additional savings. Savings (over 10 years): $300 billion to $600 billion.
Limit the Cost of the SALT Deduction. Republicans in high-income, high-tax states insist on quadrupling the cap on the state and local (SALT) deduction, from $10,000 to $40,000. The change steers over $300 billion of tax relief to states like New York, New Jersey, and California who impose aggressive income and business taxes on out-of-state people. The House version makes the $40,000 cap permanent, ends state laws that allow some to work around the cap, limits the benefit to the 32% bracket, and phases out the benefit for those making over $500,000. The Senate version has the higher cap expire after 4 years, but keeps state workaround laws. Fewer than 10 percent of Americans take the SALT deduction.
If $40,000 is a red line for SALT legislators, there are ways to do it while blunting the deficit impact, as Andrew Lautz of the Bipartisan Policy Center notes. The $40,000 level could be only for married couples, with single taxpayers at $20,000. The amounts could phase to reach $40,000 over time, such as starting at $20,000 in 2025 and increasing $2,000 per year until 2035. All itemized deductions could be limited at the 24% bracket or at 28% where median-income Americans are, rather than at the 32% or 35% bracket. The House language restricting workaround laws could be kept. Savings (over 10 years): $200 billion to $300 billion.
Stick to Extending, Not Expanding, Tax Cuts. OBBB avoids a $500 billion automatic tax increase that would take effect on January 1, 2026 if Congress fails to act. But several provisions do more than merely extend existing tax cuts, but rather add to their generosity. In addition to the SALT cap discussed above, these include the standard deduction (increased from $15,000 to $16,000), the child tax credit (increased from $2,000 to $2,200 or $2,500), the estate tax exemption level (increased from $13.99 million to $15 million), and in at least the House version the 199A pass-through deduction (increased from 20% to 23%). The bill also adds new deductions for charitable contributions and auto loan interest.
An extension of TCJA is a win for taxpayers, and focusing the bill on that rather than increasing the level of tax cuts in each of these could be one way to prevent increasing the debt. Savings (over 10 years): $250 billion or more.
A Simpler Path to Tax-Free Tips and Overtime. President Trump campaigned on popular ideas to exempt tips and overtime from federal income taxation. But the bill’s version requires verification of amounts and is administratively complicated, creating a nightmare for taxpayers and the IRS alike.
A better approach, explained by my NTU colleague Brandon Arnold, would be to give a bonus deduction of $1,000 to all workers eligible for overtime or who received tip income. If you meet the requirements, you simply check a box on your tax return and collect the $1,000 deduction. For tips, the Treasury Secretary would publish a list of traditionally tipped occupations and if you work in one, you check the box. For overtime, workers who work in a nonexempt job under the Fair Labor Standards Act – which is most full-time workers who make $35,568 or less – you check the box.
This approach would be far simpler for taxpayers. It would be a tax cut of around $13 billion a year, compared to $30 billion a year in the Senate version and $41 billion a year in the House version. Savings (over 4 years): $68 billion.
Extend the Mandatory Sequester. The Senate can also use existing budget tools to cut costs in a consistent manner rather than targeting individual programs. Procedures allowed by Pay-as-You-Go (PAYGO) to reduce spending have been law since 2011 to bring fiscal discipline to Congress, yet are frequently waived in favor of maintaining the status quo.
Extending the mandatory sequester would simply reduce spending across mandatory programs to offset deficits, with limits to such reductions. The amount of spending cuts are tracked through the PAYGO scorecard which is set at zero when Congress waives the requirement. Mandatory sequestration is in effect until Fiscal Year 2032 and will take place if Congress does not pass legislation to waive the requirement. Congress can extend mandatory sequestration beyond 2032 to ensure future savings. Savings (over 3 years): $89 billion or more.
Bonus Idea: Enact Broad Reforms. In addition to these targeted changes within the OBBB, lawmakers should pursue broader structural reforms to the federal budget process. Federal policymakers should regularly undertake the hard work of prioritizing, streamlining, and scrutinizing how taxpayer dollars are spent. There should not be 1,115 federal programs lacking congressional authorization, some of which have had no goal-setting or congressional oversight since 1979. That we have 160 housing programs across 20 federal entities, 84 different energy programs, 30 broadband internet access programs across 15 agencies, and 30 federal entities involved in disaster recovery shows the need for reforms to address fragmentation and duplication. Voters want lower taxes and lower spending.