Tax cutters are beating deficit hawks in the early phases of the Republican Party’s fiscal tug of war.
Republican leaders call extending trillions of dollars in expiring tax cuts a must-pass item next year that can’t fail. They are considering changing budget rules so that tax-cut extensions appear to have a negligible effect on red ink. And GOP lawmakers are leaning into the contentious idea that some of their tax cuts would generate enough growth to largely pay for themselves.
While President-elect Donald Trump has scrambled Republican orthodoxy on trade and entitlement programs and expanded his coalition deeper into the working class, the GOP’s economic-policy core remains clear: Low taxes are a big priority. And that emphasis often puts reducing deficits on the back burner.
“It is in the DNA of a Republican to say, ‘Cut taxes.’ And I support that, generally speaking,” said Rep. Chip Roy (R., Texas), who said that he won’t blindly support tax bills without a clear path to reducing budget deficits and that spending too much is morally reprehensible. “A majority of Republicans’ impulse is to spend money we don’t have, and I would dare anybody to prove otherwise.”
The fight is still in its first rounds. Top Republican lawmakers haven’t set fiscal parameters for next year’s tax bill, which they can advance through Congress without Democrats. They may offset some tax cuts by limiting clean-energy tax credits and cutting spending outside Social Security and Medicare.
Many Republicans are cheering the spending cuts being explored by Elon Musk and Vivek Ramaswamy and their nascent Department of Government Efficiency. Scott Bessent, Trump’s Treasury secretary pick, says cutting budget deficits should be a priority.
And, because of their slim margins in the House and Senate, Republicans need near-unanimity to enact a new tax law. So even a handful of ardent deficit hawks, particularly in the House, can insist on attaching spending cuts to tax cuts and pull the party in their direction.
But broadly, lower taxes are taking priority over lower budget deficits as the party develops its plans.
“Any effort to significantly cut spending, significantly raise taxes—even in the context of paying for tax-cut extensions—it is a little bit like fighting gravity,” said Andrew Lautz, who tracks fiscal issues at the Bipartisan Policy Center.
Republicans emphasize the importance of extending the tax cuts from 2017 that expire Dec. 31, 2025. They are also trying to incorporate Trump’s campaign-trail promises, such as ending taxes on tips, overtime pay and Social Security benefits. Republicans know they must relax the $10,000 cap on state and local tax deductions to get any bill through the House.
“We’re going to figure it out, and we’ll get it done,” House Majority Leader Steve Scalise (R., La.) said at the American Petroleum Institute. “You start out with the attitude that failure is not an option.”
Congress will consider a tax bill against a fiscal backdrop that is starkly different from 2017, when Republicans last controlled the full government. Then, the deficit was 3.6% of gross domestic product and publicly held debt was 77% of GDP.
Now, after Republican tax cuts, bipartisan pandemic legislation and Democratic spending programs during the Biden administration, the annual deficit tops 6% of GDP, a threshold unprecedented outside of wars, emergencies or recessions. Publicly held debt, at almost $29 trillion, is nearing 100% of GDP and interest rates are higher.
Projections show steadily rising debt, driven by the cost of providing Social Security and Medicare to an aging population. If Congress does nothing, the national debt will grow by an additional $22 trillion by 2034. Extending expiring tax cuts would add $4 trillion to that total.
Rep. David Schweikert (R., Ariz.) said his worry that Congress will just extend expiring tax cuts without any meaningful fiscal restraint sits at about 9.25 on a 10-point scale.
“There is a default setting to avoid difficulty,” said Schweikert, who is pushing for targeted policies that could boost growth, such as business-tax changes, talent-based immigration and government-technology improvements. “This is the moment to actually bathe in complexity and do things that are both great economics and moral.”
Republicans are exploring ways to make the deficit impact of tax cuts look smaller. Led by incoming Senate Finance Committee Chairman Mike Crapo (R., Idaho), they are saying that Congress should start by assuming the tax cuts’ extension happens, then measure any costs against that yardstick. Currently, Congress assumes temporary tax cuts expire as scheduled, making any extension count as a deficit increase.
Crapo’s proposed change would mirror how lawmakers in both parties talked about the 2013 extension of President George W. Bush’s tax cuts. It would treat taxes like some spending programs.
That’s common sense, said Sen. Steve Daines (R., Mont.).
“We’re not talking about cutting taxes,” he said. “We’re talking about preventing a tax increase.”
Under current rules, a bill extending $4 trillion in expiring tax cuts and cutting $1 trillion in spending would look like a $3 trillion net deficit increase. With Crapo’s proposed yardstick, the same bill would appear as a $1 trillion deficit-reducing spending cut. The actual fiscal health of the nation wouldn’t be any different.
Crapo’s critics call the move a blatant bait-and-switch gimmick. Republicans in 2017 intentionally set the 2025 expiration to keep the headline cost at $1.5 trillion. They would, in effect, be deciding that an extension they viewed as a cost back then is free now.
Treating the tax-cut extension as a given changes how Republicans can talk about their plans, making them less reliant on the idea of selling a continuation of the status quo as a big win. They can shift their focus to finding ways to pay for Trump’s new tax-cut proposals and other ideas.
Republicans dismiss deficit concerns by arguing that their tax cuts and other policies will boost growth. They discount estimates from Congress’s official nonpartisan experts, who say the individual tax-cut extensions don’t generate much growth at all, just a modest short-term economic boost that by 2033 would be overwhelmed by the drag caused by higher budget deficits.
Rep. Jason Smith (R., Mo.), chairman of the House Ways and Means Committee, noted that the Congressional Budget Office’s estimates don’t necessarily include the effects of executive branch deregulation.
“CBO will always predict a dark future when Republicans propose tax relief—but the reality is never so dire,” he said.
The effects of the 2017 law loom over the current debate. Republicans point to the strong economy and real wage growth in 2018 and 2019 and highlight federal revenue exceeding projections as evidence that the tax cuts didn’t cost as much as originally thought. The CBO said most of that jump was caused by inflation and tariffs, not faster growth induced by tax cuts.
In one sense, though, the CBO provides a clear Republican road map. Potential economic gains from deficit reduction could be larger than a decade ago, when interest rates and the federal debt burden were lower. Smaller deficits mean less federal borrowing, which means more capital available for private investment. As a result, extending individual tax cuts, reviving business tax breaks with bigger growth effects and including spending cuts could be a solid recipe for growth.
Republicans may yet take that route, but for now they have been arguing that the CBO is wrong and counting on revving up economic growth to cover their tax cuts.
“How do you pay for this? I’ll tell you how to pay for it,” House Majority Leader Scalise said. “You actually get this country moving again.”