The New Cost for 2025 Tax Cut Extensions -
$5 Trillion

At the end of 2025, several tax provisions from the 2017 Tax Cuts and Jobs Act (TCJA) and the 2022 Inflation Reduction Act (IRA) expire. With policymakers in both parties poised to push for extensions to significant parts of those laws, a new report from the non-partisan Congressional Budget Office (CBO) demonstrates just how much of a challenge this cliff poses to the nation’s already daunting budget trajectory.

CBO finds that extending individual, estate, and business tax provisions of TCJA—along with IRA’s expansion to tax credits that subsidize the purchase of health insurance on Affordable Care Act exchanges—would increase deficits by nearly $5 trillion from fiscal years 2025 through 2034, adding to the rising pile of debt.

TCJA

The bulk of these costs come from extending the individual income tax cuts in TCJA:

• Across-the-board rate cuts (+$2.2 trillion in deficits);
• Limiting the reach of the individual Alternative Minimum Tax (AMT) (+$1.4 trillion);
• Doubling the standard deduction (+$1.3 trillion); and
• Doubling the Child Tax Credit (CTC) (+$748 billion).

TCJA included offsets that broadened the individual tax base. Specifically, the provisions that would raise revenue (and thereby decrease deficits) if extended are:

• Repealing personal exemptions (-$1.7 trillion); and
• Limiting itemized deductions like the state and local tax (SALT) deduction and the mortgage interest deduction (-$1.3 trillion).

But even extending these offsets with the tax cut extensions outlined above would blow a multi-trillion-dollar hole in the deficit.

Beyond TCJA

Extending the expansion of health insurance premium tax credits from the 2022 IRA—which will be a top priority for some Democratic policymakers next year—costs less than TCJA extension but would still increase deficits by $383 billion over 10 years (inclusive of debt service effects). Many Democrats also continue to support further expanding the CTC, which, depending on design, could cost anywhere from hundreds of billions of dollars to trillions of dollars over a decade.

Policymakers in both parties have expressed support for reversing some of the business tax offsets included in TCJA; doing so would increase deficits by several hundred billion dollars more over 10 years.

Technical Factors

While the $5 trillion cost outlined by CBO is extraordinary, technical factors in CBO’s baseline could push the overall cost for extension even higher.

Between now and a possible resolution of the December 31, 2025, tax expirations, the first fiscal year in CBO’s 10-year window—FY2025—will come and go. A one-year shift in the 10-year window—from FY2025 through FY2034 to FY2026 through FY2035—will likely increase the cost of tax cut extensions by hundreds of billions of dollars, particularly because the extension costs almost nothing in FY2025 (which ends on September 30, 2025).

Further, if higher inflation, interest rates, and Treasury borrowing costs persist, the debt service impacts of tax cut extensions will also increase. The $5 trillion estimate should be seen as a floor, not a ceiling, as policymakers grapple with the cost of extension next year.

The Need for Offsets

All of these factors—the baseline cost for tax cut extensions, the political pressure for further tax cut expansion, and the technical factors that could raise the cost of extension higher—point to the urgent need for policymakers in both parties to begin proposing offsets for next year’s tax cut debate.

A combination of four approaches may be needed:

1. Letting some TCJA and/or IRA tax cuts expire;
2. Broadening the reach of offsets included in TCJA to raise more revenue than under a simple extension;
3. Proposing new revenue offsets; and
4. Proposing offsets on the spending side of the government ledger.

Dynamic scoring—a method of estimating the cost of legislation that includes macroeconomic feedback from changes to tax or spending laws—can reduce the deficit impact for some tax cuts, but cannot fully offset the budget impact of those tax cuts either.

One option that should be off the table for lawmakers is declining to propose significant offsets or using a “current policy” baseline—which assumes the tax cuts are extended rather than expiring under “current law”—to appear as if they’re wiping away the cost of TCJA extension. Doing so would worsen an already woeful budget outlook, at a time of rising interest rates on our debt and impending solvency crises for Social Security and Medicare.