The One Big Beautiful Bill, Explained

We break down the House GOP’s One, Big, Beautiful Bill—a sweeping tax package designed to extend key parts of the 2017 Tax Cuts and Jobs Act before they expire in 2026.

Kyle Hulehan is joined by Garett Watson, Director of Policy Analysis at the Tax Foundation, to unpack what’s actually in the bill, who benefits the most, and how it could impact the economy, federal revenue, and your taxes.

Links: 

https://taxfoundation.org/blog/house-one-big-beautiful-bill-temporary-tax-policy/

https://taxfoundation.org/research/all/federal/big-beautiful-bill-house-gop-tax-plan/

https://taxfoundation.org/blog/house-tax-plan-economic-growth-impact-business-tax-permanent/

Transcript

Kyle Hulehan: 0:00

Hello and welcome to the Deduction, the Tax Foundation podcast. I'm your host, Kyle Houlahan, and today we are back with another episode, and we are joined by Garrett Watson director of Policy Analysis at the Tax Foundation. Garrett, how are you doing today?

Garrett Watson: 0:13

Doing well,, how are you, Kyle?

Kyle Hulehan: 0:14

Are you ready to talk about our one big, beautiful bill? I mean, what a title?

Garrett Watson: 0:19

as ever. We've been spending about, uh, a week, uh, deep diving into this bill and, uh, providing all sorts of, uh, analysis, so ready to chat.

Kyle Hulehan: 0:26

So we're gonna get right into this. Uh, so tell us what is the one big beautiful bill and how does it relate to the expiring 2017 Tax Cuts and Jobs Act?

Garrett Watson: 0:36

So the one big beautiful bill is the major, uh, congressional effort to deal with, uh, in part the expiring tax provisions that are coming at the end of the year. So most of the individual tax changes that came from. 2017 tax law known as Tax Cuts and Jobs Act expire all at once in one big cliff. And this has been talked about a lot in tax policy circles. We knew it would motivate Congress to come together and try to introduce one big tax package.'cause that's typically how these things are done nowadays on the Hill. And, uh, this, uh, one big beautiful bill is the content. Finally seeing the actual legislative content of what this may look like. It was introduced and passed out the House Ways and means committee, uh, last week. It's now being stitched together with other spending changes as part of one. Big, beautiful bill that will be considered on the house floor as soon as this week. And the headline aspect of this, uh, package is making permanent most of the changes in the, uh, 2017 tax Cuts and jobs act for individuals. So we can go into that. There's a lot of other tax changes in here, both for businesses and individuals, tax cuts on top of the, the package that amount to about$4 trillion. Tax cuts over 10 years. So lots to talk about here in terms of, uh, existing and new provisions, uh, and outlook moving forward as it gets to the house floor and moves its way of course into the senate.

Kyle Hulehan: 1:53

All right, so what are the key provisions as well as some of the pay fors? You know, this seems like it could be expensive and you know, how does this affect individuals and businesses?

Garrett Watson: 2:03

Right. So the big, uh, continuity, I think, important thing to emphasize is that permanency for most of the, uh, 2017 tax laws. So that includes the lower tax rates on ordinary income, the, uh, consolidated tax brackets, the doubling of the child tax credit, and the standard deduction, the elimination of the personal exemption. The, uh, in a variety of, uh, what we call base broadens, basically tax increases in certain places to make up for the other tax cuts. So that includes, uh, the restricted limitation for mortgage interest. It includes, uh, a bit more generous salt deduction, which is interesting. That's a big flashpoint of$30,000, uh, for all individuals with some, uh, income limits for upper, uh, uh, upper earning households. Uh, in addition to, uh, a variety of other new provisions or tweak provisions, one, one, that, one big one that's come out has been, uh, a turbocharged, uh, pass through deduction that is a special deduction for, uh, pass through businesses and small businesses going from 20% under current law to 23%, making that permanent we're looking at, and as we'll get into some new tax cuts for, uh, deductions for tipped income and overtime. A few other items. Uh, and that all amounts to about a little over$4 trillion tax cut over 10 years. That was about the target they were aiming for. Uh, and what we find when we did our modeling on this is it does, uh, have some positive economic effects. So we found a 0.6% increase in long run GDP. And that does result in some revenue feedback. So on a dynamic basis, when you include the effects of the economy from this bill, it would cost about three point, uh,$3 trillion. So about a 19%, uh, haircut there on the headline cost. Uh, and of course, all of this will come together with other spending changes to see the, the net figure, uh, which we expect would increase the deficit, uh, over 10 years once it, uh, hits the house floor.

Kyle Hulehan: 3:51

And yeah, so I, I'm wondering, you know, what are the main benefits of this build? Like, you know, who are the, the notable winners and losers among these income groups?

Garrett Watson: 3:59

So on the TCJA stuff, of course we've been, uh, emphasizing that if, if no action is taken, about 62%. Of, uh, taxpayers would see a tax hike at the end of the year. So they're one big winner in that they're avoiding a tax increase. Uh, there would be this big tax cliff that they're avoiding, but that is just a continuation of the status quo. So a lot of folks would see that as just continuing, uh, this year's tax design, which is generally true, and they're avoiding a tax increase for other folks. They are gonna see. Uh, net tax cuts on top of that, most notably from some of these new ideas. So, for example, there is, uh, an exemption for tipped income For most, uh, employees who are not higher earners. Uh, there's gonna be a deduction for overtime. Uh, pay for the premium portion, the, the 0.5 and a time and a half. If you're a hourly worker, you'll be able to get that deducted from your tax return, whether or not you're an itemize. There's a special, uh, additional deduction for seniors, uh, worth up to$4,000 that will provide some benefit in lieu of the president's, uh, promise to exempt social security from tax. Social security will still be subject to tax, but you'll get that additional deduction, which might help offset some of those taxes paid on social security benefits. And there's also, uh, you know, deduction for auto loan interest. A few other. in there that, uh, will add up to an increase in, uh, after-tax incomes. Overall, we find in our distributional analysis that uh, most, uh, major income groups across the, the income spectrum would see an increase in after-tax incomes. one caveat, I think further down the line in a few years there will be tighter rules on certain credits like the child credit, the earned income credit, the Affordable Care Acts, premium tax credits that will offset some of these tax cuts. At the bottom, we find the bottom 20% by 2034 would see a 0.1% increase in after tax income. So just, just over the line. that is one element that's been emphasized is there are some. Credit restrictions that may mute some of the positive benefit for those at the bottom. Uh, but overall we're, we're seeing somewhere between, you know, a a 2%, upwards of a 4% increase in after tax incomes overall. Uh, though we do have to factor in the fact that this would increase the deficit and have some effects of its own, um, because of the debt path that we're on.

Kyle Hulehan: 6:05

So Garrett, um, I'm wondering, you know, how is this bill projected to impact economic growth and, and federal revenue over the next decade? Like, what are we seeing as like the headlines for this?

Garrett Watson: 6:15

So a couple of headline takeaways from the Bills expected economic impact. One is we do expect the long run size of the economy to be larger at about. 0.6%. And that represents, uh, you know, tens of billions of dollars of additional economic output every year, mostly from encouraging, uh, more, uh, work. So lower marginal tax rates for individuals will encourage them to work more, and that's gonna lead to a higher capital stock, a higher amount of output in the us. But there's one big caveat on that, and then that's because, primarily because of the deficit impact, we're looking at a, you know,$4 trillion tax cut here. Uh, that'll only be partially offset. That means that, uh, the government is gonna be issuing more treasury bonds to finance its operations, and a lot of that will be financed from abroad. So a lot of those payments of those treasury bonds will be remitted. To foreigners who are, who are financing this, uh, this deficit. And what that means is a lot of our income we'd otherwise accrue from this bill will end up, uh, being paid in the form of those bond payments to foreigners. And that's why we find that while American production is up by 0.6%, American incomes as measured by GNP up only very slightly by a couple hundreds of a percentage point. So it is net positive, but there is that big caveat that, uh, the, uh, the deficit impact is muting the overall benefit to American incomes in our modeling. Uh, and of course there are opportunities as this is still going through the process, right, to turbocharge the economic growth even more. There's several opportunities we can talk about, and that would of course raise American incomes further from what we've found so far.

Kyle Hulehan: 7:40

Yeah. And you know, maybe for a, a non-economist like myself, you could just very quickly dive into this, why does the deficit really matter? You know, we're talking about the deficit and how much it raises. I, I, I think that would be helpful for some people of like, why is this important? I.

Garrett Watson: 7:53

So the, the, the overall sort of deficit of the US government is really important because. Uh, someone's gotta finance it, right? And so eventually that deficit needs to be paid for either through tax changes, spending, you know, spending changes to make sure it's on a sustainable path forward. And of course, the folks who are financing it in the interim, uh, are folks who are basically loaning the US government money, right? So they expect their principle back and interest. It's that and interest part that we're finding in our modeling that has a negative effect on American incomes. And so we're paying, you know, the, uh, sometimes it's Americans, right, who are getting that, uh, the benefit of that. Sometimes it's folks from abroad. That of course represents the net outflow of, uh, American incomes, uh, relative to if we just paid for this right outright and didn't increase the deficit, we wouldn't have to make those interest payments. It's much like financing something on a credit card, right? You've gotta pay back the credit card amount plus whatever interest is owed, and that, uh, is a loss sometimes that, that there are cases where that's worth it, but, uh, it's not always worth it. As anyone with a credit card knows, you can get into an unsustainable situation and that's sort of where we're bordering on in our, with our debt and deficit. Situation. I think that's one big headline is this, this bill, as it's going through the process risks, uh, being a missed opportunity to further address the debt, either through tax changes or through responsible spending changes moving forward. And that's what's actually underlying a lot of the current debates on the hill about where this bill goes, uh, both on the house floor and in the Senate.

Kyle Hulehan: 9:13

Okay. Thank you. That, that makes a lot of sense. So we're talking about those debates. What, what are the major political debates surrounding, uh, this, this bill and including, you know, maybe some GOP divisions on stuff like the salt cap.

Garrett Watson: 9:26

Yeah, so there's a couple of flash points here. One major. Outstanding question is on the long-term design of the salt cap. There is the proposal in the bill, as we mentioned, right? Raising that cap from$10,000 this year up to$30,000, putting in some new income limits for very high earners. Uh, but there are a group of folks in Congress who want to see that deduction made more, even more generous to help constituents, uh, in their districts who are, uh, being hit by the cap. Uh, the, but the big, uh, roadblock has been, there's been no consensus on what that design may. Much more generous leadership and folks who are more skeptical of that deduction don't want something as generous. So they gotta come up with a design that everyone can live with that can be put and modified into the bill. That, of course, will cost revenue already. This$30,000 cap costs close to 200 billion over 10 years. We're talking about tens or hundreds of billions of dollars more, and that goes back to the deficit math. How do you square these? a couple of other things, of course. One is there's this bill is littered with a lot of temporary policy that a lot of folks would like to see improved. For us, the tax foundation, a big one is of course the major, uh, business provisions where we're providing full and immediate, uh, deductions for business investment, uh, are, um, included in here, but only temporarily for the next five years. And that undercuts a lot of the economic growth. Uh, so we'd like to see that, that permanency. That's one area we can talk a little more about. Uh, and of course the other. Uh, area is, um, as it relates to spending, what's gonna happen to, uh, the spending side. That's big debate right now on the Hill, on the future of Medicaid and other, other programs, uh, to make the math, uh, line up, um, between folks who are more worried about the deficit and those who are more worried about the impact of those spending changes.

Kyle Hulehan: 11:00

Okay, I, I got it Now. What do you think is the, like legislative outlook of this? You know, how likely is it to pass in its current form?

Garrett Watson: 11:09

So it's, uh, almost certain that this bill will change, uh, it from ranging anywhere from, uh, minor changes to o overwhelming sort of changes, right? Uh, the next step, uh, so now it was passed outta the budget committee late on Sunday. I. Um, so that's the committee that stitches together all the different committee, uh, uh, bills that have been, uh, put together the different text into one big bill, and now it will move on to what is known as the rules committee, which can amend this text before it hits the house floor for a formal sort of house. Vote. So that's where we expect there's already been some minor changes in some other non-tax items already today. We expect that's where maybe some other changes might happen as it relates to salts or even the green energy credits, most of which are being repealed in this bill. Uh, and so we're watching for that. And then of course, even if it passes the house, the Senate gets its own crack at the apple. So they will be, uh, you know, there's already folks, senators who have big ideas that may differ quite a bit from what the house is looking at. Um, and so that's what we'll be watching next. And of course, the White House may have its own views as well on how to design this moving forward. Once the Senate acts, then the house has to come back and if anything is different, they have to repass that legislation because of course, both chambers have to pass identical bills. So there's still a lot of runway left, a lot of work left to do to get this through Congress and get it to the President's desk. Uh, for signature, uh, the house is hoping to have something passed by Memorial Day, so we'll see if they end up in that. Uh. that, where they are in that process. But, uh, that's where we're currently standing.

Kyle Hulehan: 12:37

Yeah, we're really in the middle. I don't know if you remember from school, it was obviously a while ago, of how a bill becomes law. We're really, we're right in the middle of this process of like, everyone's tossing it back and forth to each other. So it's, uh, we're in the, the mess of it right now. Um, yeah. But so, uh. I'm curious, what do you think, like what would you like to see changed in this bill as the legislative process moves forward? What would make this, you know, a, a better bill for the American people and for our country in general? I.

Garrett Watson: 13:05

So I think there's a couple of common sense things that make a lot of sense, sort of even just stepping back from some of the big controversies. One is, uh, seeing more permanence in the bill will be really helpful. It's better to do even fewer things and make them permanent. Than to do more and more things and have them all be temporary. And that's helpful for certainty for taxpayers. It's helpful from an economic perspective. Uh, my colleague Erica Yo and I ran some numbers last week and we found that, uh, if they were, for example, make permanent, uh, the full expensing provisions for our research and development for short-lived assets, uh, in this bill, along with more generous interest deduction. Uh, if all that is permanent, you would actually double the long run economic growth effects from point, uh, from 0.6% to 1.6%. So more than doubling that effect. Um, and it would raise American income just by 0.9%. So a clear increase compared to the more muted effects of the current bill. So I think that's one, uh, lesson that can be learned. Something we've emphasized a lot, it's, it's hard because there's always a temptation for gimmicks and temporary changes. Another thing is just making sure that simplicity is really prioritized across the bill. There's a lot of complicated novel ideas ranging from, you know, reworking some of the income limitations for the pass deduction, brand new deductions that have never been tested before. Uh, just a raft of, um, of complicated things that are going to put more work on the IRS and treasury. And stuff that taxpayers are gonna have to catch up on. So I think, uh, you know, greater simplicity just across as a, as a principle across the bill would also be helpful. Um, part of this has to do with they're trying to do a lot all in one package very quickly, and that's not necessarily a recipe for a rational or simple or, or pro growth. Uh, a tax code at the end of the day. And so, you know, I think our, we do have an opportunity now with, you know, the, the house trying to finish up their work and the Senate taking a fresh look to prioritize those things. There's still, um, sort of room to, to improve the bill from where it is in ways that are incremental and not, uh, not too, um, not requiring a complete, uh, going back to the drawing board.

Kyle Hulehan: 14:59

Yeah. Now I'm curious, you, you mentioned a couple things. What, what do you see? Is it the simplicity as like the biggest con of this bill, or is it what it adds to the deficit? What do you, what do you think is like the biggest issue of the bill?

Garrett Watson: 15:11

Yeah, so, so I think, I think the, the lack of permanency, which mutes the growth effects is one big downside. That's obviously been one of the biggest legacies of the task. Custom Jobs Act was sort of the growth effects. That's something that the framers of this bill want. And, uh, there's clear steps they can take to do that. And it, it folds into the permanency and the certainty that we're providing on the individual side. So I think that that's a clear path forward, very low hanging fruit. Um, trying to, yeah, keep things as simple as possible is another. I think big one and yeah. And the third item is this deficit impact that that is. Um, we're already seeing markets move a little bit. It's early to say if, if this will move markets in a longer term way, that that worsens our fiscal situation. But, uh, this is a big opportunity to, you know, right. The ship as it were. And, uh, that's, um, this, this bill is not going in that, in that direction. It's just a question of how big it increases the deficit rather than, uh, does it, um, does it increase the deficit? So I think those are the three things that, that are probably the biggest priorities to, to, to improve the, the bill moving forward.

Kyle Hulehan: 16:06

All right, Garrett. Well, thank you for breaking all of this down for us. This is really a quick, informative, educational kind of episode. I, I wonder, real quick, is there anything, any of the work you're doing, you wanna plug real quick, let the people know what you're working on?

Garrett Watson: 16:17

Yeah, so our team is currently working on, uh, a raft of follow up, uh, blog posts and pieces covering various components of this. Package one that's coming out very shortly, uh, by our team is looking at the good, the bad, and the ugly of this bill, uh, from our, our principles and perspective. And that'll be out in the next couple of days. And, uh, should be a good overview of, of, uh, of what's going on and what.

Kyle Hulehan: 16:38

All right, Garrett, thank you for being on the show today. And before we sign off, I just wanna let you guys know if you have any burning questions. Look, you can obviously drop a comment on YouTube, you know how to do that. You can email us at podcast@taxfoundation.org. There's always our dms on Twitter. You can find us there. And thank you for listening.