What's in the House GOP's ‘Big Beautiful’ Tax Bill?
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From the opinion pages of The Wall Street Journal, this is Potomac Watch. House Republicans unveil more details of their big, beautiful reconciliation bill, including their plans for the tax code and the Medicaid health insurance program. But has Speaker Mike Johnson managed to bridge the GOP divisions enough to get this over the line? And what if this is good policy? And what can the Senate ditch? Welcome. I'm Kyle Peterson with The Wall Street Journal. We're

We're joined today by my colleagues, Editorial Board Member Kate Batchelder-Odell and columnist Alicia Finley. Three big House committees are set today to mark up their portions of the big reconciliation bill that the narrow GOP majority wants to use to pass its priorities and President Trump's agenda.

They include the Ways and Means Committee, which has jurisdiction over America's mess of a tax code. And on Monday, that committee dropped the details of its proposal. As a reminder, big portions of the 2017 tax cuts signed by President Trump are set to phase out at the end of this year, including the lower rates on individual income tax earners.

And so a big part of what is motivating Republicans is that if this Congress takes no action, that amounts to a tax increase over the next decade of about $4.5 trillion. Kate, you've looked at this House proposal. What do you make of what is headed today toward the Ways and Means Committee?

Well, to your point, Kyle, all three major committees, Energy and Commerce, the Agriculture Committee, and Ways and Means are all advancing their bills today on Tuesday. And so it is an enormous amount of policy moving through Washington at once. I would note, too, even if these bills move through committee today, I think the House is still in a live negotiation and will have to make further changes to this bill before they take it to the Rules Committee and try to get a version of it on the floor.

So what we have now are drafts from these three committees. You asked about ways and means. The ways and means draft I would call a mixed bag. You want tax policy to raise revenue for the government while minimizing distortions. You want it to improve the incentive to work and invest. And on that score, I think there are a couple pro-growth provisions in the bill. Extending, expensing is a pro-growth provision. And I'd also add in a couple places, Republicans resisted a lot of

internal pressure to make matters worse. The bill doesn't include outright increase on the top marginal tax rate. Republicans are not going to touch the permanent 21% corporate tax rate, which doesn't expire. But many of the populists who want to realign the Republican Party toward the working class claim that we need to do those things.

But that said, there are a potpourri of deductions and carve-outs in the bill that we can get into that do take away from the better parts of Trump's 2017 tax reform. So there are some extensions of the better stuff from his first term, but also some new ideas from his second term that aren't so good. One thing that is good is the extension of those individual income tax rates, making them permanent. And as a reminder, the 2017 tax rates were cut more or less permanently

across the board. So the 15% tax bracket, for example, went to 12. The 28 went to 24. The 39.6, that's the top bracket, went to 37. So Alicia, it is a big deal if the House and Senate can get together and make those individual income cuts

permanent and not have to have another cliff in a decade or so when those expire next time. That's the habit of these kinds of tax cuts in the past. Alicia, what is your sense of what else might be in this bill that is worth noting and particularly any provisions that you think are helpful in good tax policy? Well, I'm probably a little bit more in the Bahambo camp of things that I don't really see many silver linings here. Okay, yes, it does extend the rates or makes them permanent.

But Democrats supported that for all but the top rate, too. And so I guess the other silver lining would be, well, if you don't have another opportunity in another 10 years for this kind of negotiation, there isn't another opportunity to include all these carve-outs and exemptions that have just become bonanza for lobbyists.

Now, I guess maybe a couple other highlights and we can get into the lowlights of which there are many more. The highlights would be that it eliminates the IRS direct file program, which was essentially it's the IRS's version of TurboTax, but instead of

minimizing your tax liability, it would probably seek to maximize your tax liability. And also, I think it increases the penalties for unauthorized leaks of taxpayer information, such as happened a few years ago with the IRS contractor Charles Littlejohn. And so this could discourage similar leaks to press outlets like ProPublica.

There's also an increase in the small business deduction from 20% to 23% and it would be permanent. So this would essentially be a tax cut for small businesses, which is something. But there's a lot of other carve outs and exemptions and loopholes for favored group, particularly favored groups or industries that to Kate's point, really just muck up the tax code and reverse some of the simplification that happens

those major benefit of the 2017 reforms. Let's dig into some of those carve outs. One of them is no tax on tips and no tax on overtime. These were promised by President Trump on the campaign trail in the 2024 election. So Republicans maybe felt that they had to do something on those. But Kate, it does strike me as a big step back

backward for a tax code that is supposed to treat all sources of income equally, that is not supposed to have distortions. I worry it's going to motivate people to reorganize their business affairs and their working affairs. And there's going to be arguments about who is going to qualify for these, how it's going to be structured. Notably, this is from the Ways and Means Committee report.

write up of what is in this bill. It says tips must be received by an individual in an occupation that traditionally and customarily receives tips on or before December 31, 2024. So they are trying to avoid non-tipped jobs from turning into tipped jobs.

But I think that's going to be hard to avoid. And there are going to be arguments at the margins of whether housing contractors, electricians and so forth are people you give tips to. What about people who are working the front desk at a fast food restaurant? I mean, those historically have not been tip jobs, but lately everything has been turned into a credit card kiosk. And now more and more of them are taking tips. It's going to be a bonanza, I think, for the tax lobbyists.

It will be a bonanza for the tax lobbyists because you'll have government having to define what industries constitute an industry that's customarily tipped. My joke already has been, don't forget to tip your lawyer. Industries will find ways to get in under this customarily definition. I'd also note that some of these carve-outs are ostensibly temporary or only for a few years, which is just a complete gimmick. You have to do that because they're expensive on paper to have permanent operations.

But the assumption is that they'll be extended forever. And I think that's the right assumption because they become very difficult to get rid of. I mean, another one that Trump is certainly driving is the deduction for car loans, which serves no economic purpose. Another low light is expanding the child tax credit for just a handful of years to $2,500. There's no economic rationale for that. It's just a favorite constituency of the GOP that has to be given something as you cobble together this bill. And I think

comes through in the bills draft generally is just you're trying to manage different constituencies. The blue state Republicans want this enormous deduction for state and local taxes. Trump wants these things that he promised on the campaign trail, including we haven't even mentioned just a pure stop to seniors. If you're a senior, you just get another deduction. That's just a vote buying exercise. And so the accumulated effect of this, it starts to look like just a bizarre of tax handouts.

And just as a purely practical matter, once you invite some of this in, as you write your tax bill, it becomes harder to resist any of it. And so there is a risk of loading up the bill with too many of these extraneous priorities. But one thing real quick, I want to make sure to bring up since we were talking about the tax rates is just even though Republicans, I think, deserve a lot of credit for not doing an outright increase on the top marginal tax rate, they have a

layered in a bunch of things here that really do function as increases on the top marginal tax rate. And one of those would be they have this wonky way of treating the state and local tax deduction where you get a $30,000 deduction for state and local taxes. But if you earn more than $400,000, they start to claw some of that back.

They phase out other deductions as your income increases. Those are essentially increases on the top rate, but they don't want to say as much. And that is just also, again, the opposite direction as Republicans were pulling in 2017 when they were trying to get simpler tax policy, lower rates for everyone and permanent changes. So we do see a little bit of regression on really all of those fronts. Hang tight. We'll be right back.

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As a podcast listener, enjoy 20% off current ticket rates with code podcast. Visit wsj.com slash FOE podcast to secure your spot. Welcome back. On the point about the phase outs, I would underline that this tax provision for tips and for overtime, according to the bill, it is only in effect through tax year 2028. But Alicia, that looks to me like kind of a

budget writing gimmick because after people have rearranged their affairs so that they are taking advantage of this overtime and tips tax provision for four years, it is going to be extremely hard to ever claw that back. And there's sort of a reverse game being played, Alicia, with some of the green energy provisions. So, for example, there is a clean electricity production program

credit. And that is being phased out, but it's a phase down. It looks like starting in like the year 2029. And what do you make of that? I mean, the GOP has promised to repeal some of those green credits for a long, long time. But now when push comes to shove, they're pushing it off until the next presidential administration, more or less. Well,

Well, there are a lot of, as Kate's points, there are a lot of temporary gimmicks. I mean, the senior deduction, $4,000 for seniors that also expires in 2028, an increase in the standard deduction for about $2,000 for couples that's also expires in 2028, the auto loans.

MAGA accounts that provide $1,000 to newborns. Those are only available to newborns through the end of 2028. So don't be surprised if we get a small little baby boom in December 2028. Yeah, start your family planning early. But there are a lot of just temporary exemptions, car routes that will invariably be extended. Republicans criticize Democrats when they try to do this with a lot of the kind of income transfers and...

And the entitlements in the Build Back Better bill, including an expansion of the child tax credit, a new child care entitlement, paid family leave. These were also just three or four years because they were trying to disguise the cost on paper. And Republicans are essentially doing the same. And I think Democrats, so everyone will line up in 2028 and extend them for another, who knows, could be a decade. And you'll probably actually see increase in some of these deductions and benefits.

basically increases in deductions and the benefits. Now going to the IRA tax credits. So the Inflation Reduction Act increased the tax credits for various kinds of green energy. What this does is it does start to phase it out under the IRA. These tax credits, particularly for wind and solar, would effectively never phase out.

because they were linked to a reduction in the electricity system's greenhouse gas emissions. And under all forecasts, that the U.S. would not achieve that at least for another 40 years. So the Republicans are effectively...

trying to phase them out. But this won't happen. If you look at the history of the wind production tax credit and the solar investment tax credit in 1992 and 2007, they were all supposed to be temporary with phase outs scheduled every three or four years. And the Republicans and Democrats would link arms at the end of the year right before they phase out and they'd extend them for another three or four years. And I will guarantee you

I'm willing to bet a few thousand dollars right now that that will happen right before these start to phase out in 2029. And again, one of the reasons they're doing this phase out is so that they can

They can claim that they're phasing them out and they're ending this kind of green scam that they campaigned on, but they're not really willing to take on the renewables lobby to do it. Alicia mentioned MAGA accounts. Let's talk about this idea a little bit. This is a provision for money accounts for growth and advancement.

That is the MAGA account acronym. It says it's a new kind of savings account designed to incentivize education, entrepreneurship, and home ownership. And for years, any child born between 2024 and 2028, the federal government will put $1,000 into this account. The idea is that it can grow with...

investment returns. At age 18, account holders can start taking some of that money out for higher education, training programs, business loans, or first-time home purchases. And by age 30, they can liquidate the account, Kate, if they choose. What do you make of this idea? I think

the MAGA accounts idea, unfortunately, looks to be like just layering another entitlement onto all the entitlements that we already have. I will say that if you were going to do something like

Take the child tax credit, which sends money to parents via the tax code and sometimes to people who pay nothing in taxes. If you're going to take something like that and put it instead into a kind of a baby bond like this, that could arguably be an improvement over the current inefficient system. Okay. But.

What we learn, as always, is that we're not going to trade one idea for another. We're going to get these accounts layered on on top of the existing tax regime. So I don't view these as much of an improvement because all the arguments apply about how Democrats always bid up the price of these things. That's been the history of the child tax credit, which started in the 90s as a $500 tax credit that wasn't refundable, meaning you couldn't get a cash check for it.

and has just been ratcheted up on a bipartisan basis. Anytime the Republicans suggest raising it to say $2,500, the Democrats say, why not $3,000? And why not pay it out in monthly checks? And even Senator Josh Hawley, the Republican in the Senate, wants to make his party vote on a $5,000 credit. So that one-way ratchet is going to be exactly what happens to these new accounts. And so I don't view it as an improvement for that reason, even if

I think there is some good intention here to deliver a benefit in a better way. We're not dealing with a de novo system. We are trying to improve the one that we have, and we will end up with ever larger government contributions, more things you can spend the money on. If you can take the money out so early at 18 and 30, that defies some of the purpose of accumulating wealth in these accounts. So I guess for all those reasons, Kyle, the empirical history of these kinds of benefits really, I think, counsels against adding another one.

Hang tight. We'll be right back after one more break. Don't forget, you can reach the latest episode of Potomac Watch anytime. Just ask your smart speaker. Play the Opinion Potomac Watch podcast. From the opinion pages of The Wall Street Journal, this is Potomac Watch.

Welcome back. One final thought on the tax piece of this, Alicia. We've talked a little bit about the SALT deduction, the state and local deduction going up to $30,000 from the $10,000 cap under the 2017 tax law. Notably, though, some of the SALT caucus members are saying that that is not enough. Nick Lolota, congressman from New York, says this, the bill is effectively dead on the floor.

unquote. I think that's remarkable getting a tripling of the SALT deduction to have a Republican out there saying that he is going to torpedo this big, beautiful bill for the GOP as a whole. Do you think he means that? And can they

Should they go higher on that SALT amount or is that too much already? I'm a little skeptical that they're going to kill the whole bill over the SALT provision. And they're already getting much of what they want at $30,000. Now, this won't necessarily benefit people necessarily.

who earn over 400 grand, as Kate points out, because of the phase out. But it'll still cover a substantial share of their middle class, which is really the voters. Maybe it won't help all the people earning $1 million in income. And I say that because the IRS has already provided an enormous carve out for states to provide essentially loopholes for pass-throughs and hedge funds and such.

So really the salt hits the wage earners not so much as these partners and law firms, accounting firms, private equity and such.

Now, if he were to try to blow up the entire tax bill over this, I think there would be a lot of anger in the caucus. I don't think he would really be able to get anything he wanted on anything else. And you'd have to keep in mind that he'd be raising some $4 trillion in taxes on other members.

One other point is that Democrats in these kind of moderate districts from New York, New Jersey and California said the same thing in 2021 and 2022 when Democrats were debating the Inflation Reduction Act.

And they didn't. The Democratic leadership didn't make any changes to the SALT. They didn't bow to these members. They let them howl about it and continue to campaign on it. But they didn't end up actually bowing. In part, I think they wanted the increased revenue from the SALT. If they were to try to increase the SALT limit or eliminate it entirely, it would be very expensive on paper. And then they'd have to find some other ways to raise the revenues to cover it.

And so I think that that's the issue that Republicans have is if you try to increase even more than the 30,000, let's say 60,000 that some are proposing, that is going to be a lot of lost savings that they could use for extending other parts of the reforms or other tax carve-outs, which I'm not supporting, but it would just mean fewer of the provisions on Donald Trump's wishlist get into the final bill.

Moving out of the Ways and Means Committee, Kate, we've also talked on the podcast about what Republicans might do on the Medicaid health program. We also now have that hard proposal going to markup today. So what is the plan? I think the most notable element of the House Medicaid proposal is that they ducked the real problem in Medicaid. And I have been banging this gong for a while on the podcast, but Medicaid pays states $9 for every $1 they spend on able-bodied adults.

And it's much lower for the money that they spend on pregnant women, on the blind, on children with complex medical needs. And this is dysfunctional and Republicans need to fix it. And it's a hangover from Obamacare. So the House draft doesn't currently deal with that issue. It retreats to things like fixing program eligibility, getting people off the rolls who aren't eligible, checking those rolls more frequently, etc.

It also includes a work requirement for folks who want to use Medicaid, but it doesn't take effect until 2029. Some watered down details there. I do think that even if the bill manages to get through the Energy and Commerce Committee today, it will be a challenge to move this on the floor without fixing that problem I just described in Medicaid. And that's because one, the House conservatives are not moving on real Medicaid reform as one of their priorities in the bill.

And two, I think a lot of politicians understand that if you're going to touch something like Medicaid, which Democrats will attack, they're already saying that Republicans want to take health care away from children and moms, which is just patently untrue. But if you're going to touch Medicaid, you need to actually make the fixes that are worth the effort and explain them to voters. And right now, Republicans are kind of surrendering their best argument, which is that we need to get this program back on track so that it serves

pregnant women and the vulnerable and not men in their 30s who watch YouTube. So I think you could see the Senate say, we're going to try to include some improvement on that question of how much the federal government spends on Medicaid. And a way that I've laid out that might give them some political cover is just,

We're going to spend less on able-bodied adults and we're going to take some of those savings and we're going to spend it instead on low-income children and increase their match rates. I think it would be better simply to wind down the extra money for able-bodied men. But if Republicans want to take some of that money and put it into the traditional population on Medicaid or pregnant women and so on, that is defensible. What's not defensible is just leaving it how it is. So I think the Senate might try to improve it.

The House conservatives might insist that they get something for this. And so that makes this very much a live negotiation in the House, even if the bill moves this afternoon. Thank you, Kate and Alicia. Thank you all for listening. You can email us at pwpodcast at wsj.com. If you like the show, please hit that subscribe button. And we'll be back tomorrow with another edition of Potomac Watch.