CBO Offers Budget Projections for Extending TCJA Provisions

Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues

MAY 2024

The Congressional Budget Office regularly publishes baseline budget projections that show federal spending, revenues, and deficits over the next decade under the assumption that the laws governing spending and taxes generally remain unchanged.¹ This report shows how different assumptions about future legislated policies would affect those budget projections.

CBO's baseline projections are not intended to be a forecast of budgetary outcomes; rather, they are meant to provide a benchmark that policymakers can use to assess the potential effects of policy decisions. The projections follow procedures set in law as well as longstanding guidelines. For example, laws require the agency to incorporate the assumption that discretionary funding — that is, the budget authority generally controlled by appropriation acts — grows with inflation. (CBO also incorporates limits on such funding established by other laws.) In addition, provisions of law require CBO to construct its projections of mandatory spending to reflect the assumption that laws governing such spending generally continue beyond their statutory expiration.² By contrast, CBO's revenue projections generally reflect scheduled changes to provisions affecting the tax code, including changes in statutory tax rates.³

This report presents the budgetary implications of alternative assumptions about future funding for discretionary programs and the continuation of certain revenue provisions that recently changed or are currently scheduled to change. Some of those alternatives could result in significant changes to the economy that would, in turn, affect the budget. However, the estimates in this report do not account for such effects.

Changes in spending or revenues can affect the economy through three main channels. First, any change in spending or revenues is likely to alter aggregate demand, which can affect output in the short run. Second, any change in spending or revenues will result in the federal government's borrowing more or less than projected. An increase in federal borrowing would decrease the resources available for private investment (an effect often referred to as crowding out) and thus reduce output. Third, changes to spending or revenues can affect output by altering people's incentives to work, save, and invest. Such effects would depend on the combination of alternative assumptions that were considered because some assumptions would interact in ways that would alter their economic and budgetary impacts.

This report includes 10 alternative assumptions — 3 about discretionary spending and 7 about policies affecting revenues.⁴ The effects of those assumptions (considered in isolation) on primary deficits over the 2025-2034 period range from a decrease of $1.5 trillion to an increase of $3.3 trillion. (Primary deficits exclude net outlays for interest.) Most of the alternatives examined in this report would increase projected deficits and debt.⁵

Alternative Assumptions About Discretionary Funding

For the most part, current law does not specify discretionary appropriations for years after 2024.⁶ However, section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985 (Public Law 99-177) requires that projections of funding for discretionary programs reflect the assumption that funding in years for which there is not yet an appropriation will be equal to the amounts provided for the current year with increases for inflation.⁷ The Fiscal Responsibility Act of 2023 (FRA, P.L. 118-5) established limits — also known as caps — on discretionary funding for 2024 and 2025. In CBO's baseline, those caps reduce most discretionary funding in 2025. Because CBO's projections of discretionary funding for years after 2025 are based on the amounts projected for 2025, those caps reduce funding through the end of the projection period.

CBO translates projected funding into projected outlays for each year by estimating how quickly agencies would spend the money provided. Lawmakers generally determine the actual amount of funding provided to discretionary programs through the appropriation process, and when those amounts differ from the amounts in CBO's baseline projections — as they usually do — actual outlays are greater than or less than projected.

To illustrate how discretionary funding that differed from CBO's baseline projections would affect budgetary outcomes, the agency estimated such outcomes under three alternative assumptions about future appropriations (see Table 1). Those alternative assumptions are as follows:

• Discretionary funding constrained by the caps grows at a rate faster than the rate used in the baseline after 2025,

• Discretionary funding constrained by the caps is frozen at the 2025 amounts after that year, and

• The discretionary funding provided by the Infrastructure Investment and Jobs Act (IIJA, P.L. 117-58) and the Bipartisan Safer Communities Act (BSCA, P.L. 117-159) is not projected beyond the last year for which funds were provided in those laws.

Discretionary Funding Constrained by the Caps Increases at the Growth Rate of Nominal GDP After 2025

Using a measure that generally grows faster than the measures CBO currently uses to project discretionary funding would provide another benchmark that could serve as an alternative to CBO's baseline projections of discretionary outlays. Because the measures that CBO uses grow more slowly than gross domestic product (GDP), projected discretionary outlays shrink in relation to the size of the economy over time. If, instead, discretionary appropriations that are constrained by the caps and obligation limitations for certain transportation programs were projected to grow at the same rate as nominal GDP after 2025, discretionary outlays in 2034 would amount to 5.7 percent of GDP.⁸ That is greater than the 5.1 percent of GDP such outlays equal in 2034 in the baseline but less than the 6.0 percent projected for 2025. On a nominal basis, discretionary outlays over the 2026-2034 period would be $1.2 trillion higher — and thus primary deficits would be $1.2 trillion larger — than they are in CBO's baseline. The debt-service costs associated with those additional outlays would increase net interest outlays by $126 billion. (Debt service is the change in interest payments resulting from an increase or a decrease in the deficit.)

Discretionary Funding Constrained by the Caps Is Frozen at the 2025 Amounts

Projecting spending under the assumption that discretionary funding constrained by the caps and transportation-­related obligation limitations are frozen at the amounts projected for 2025 provides another alternative benchmark. Under that assumption, discretionary outlays over the 2026-2034 period would be $1.5 trillion less than they are in the baseline. (The debt-service savings would reduce net interest outlays by $157 billion.) In 2034, discretionary outlays under such a freeze would equal 4.3 percent of GDP rather than the 5.1 percent they total in the baseline.

IIJA and BSCA Funding Does Not Continue

Enacted in November 2021, the Infrastructure Investment and Jobs Act appropriated funds for programs related to transportation, the environment, and other areas for each year from 2022 through 2026. The Bipartisan Safer Communities Act, signed into law in June 2022, provided funds through 2026 for states to implement laws controlling access to guns and other safety measures. The total funding provided by both acts decreases each year over that period as funding for different programs ends in different years.

In CBO's baseline projections, however, funding related to those acts increases in most years. That is because, in consultation with the budget committees, CBO followed its typical practice for constructing the baseline in its treatment of that funding. Thus, for years for which the IIJA and the BSCA did not provide any funding, CBO projected funding related to those laws by starting with the latest annual amounts they provided and adjusting them for inflation.⁹

If, instead, CBO did not project funding related to the IIJA and the BSCA into the future and included only the funding specifically provided by those laws in its projections, discretionary outlays through 2034 would be $267 billion less than they are in CBO's baseline projections. Under that scenario, discretionary outlays in 2034 would equal 4.9 percent of GDP instead of the 5.1 percent they total in CBO's baseline. Debt-service savings would reduce net interest costs by $23 billion, CBO estimates.

Alternative Assumptions About Policies Affecting Revenues

CBO's baseline projections generally reflect the effects of scheduled changes in revenue provisions, including the assumption that temporary provisions will expire as scheduled under current law.¹⁰ If certain temporary revenue provisions were instead made permanent, revenues would differ from the amounts in CBO's baseline projections. To illustrate how different revenue policies could affect budgetary outcomes, CBO and the staff of the Joint Committee on Taxation (JCT) estimated such outcomes under seven alternative assumptions.¹¹ Four of those assumptions relate to provisions of the 2017 tax act (P.L. 115-97), and three address other revenue provisions.¹²

The estimated effects of each of the individual provisions would depend on the order in which they were estimated (because of interactions among the provisions), but the total effect of implementing all alternative policies discussed in this report would be approximately equal to the sum of the estimates for each alternative.¹³

The 2017 Tax Act's Changes to Individual Income Tax Provisions Are Extended

Most of the individual income tax provisions of the 2017 tax act are slated to expire at the end of calendar year 2025. The expiring provisions affect major elements of the individual income tax code, including the statutory tax rates and brackets, the allowable deductions, the size and refundability of the child tax credit, the 20 percent deduction for certain business income, and the income levels at which the alternative minimum tax takes effect.¹⁴

According to JCT's estimates, if the expiring individual income tax provisions of the 2017 tax act were extended, primary deficits over the 2025-2034 period would be $3.3 trillion larger, on net, than those in CBO's baseline projections (see Table 2). Most of the effects would occur after 2026. Increased net outlays for interest would add $467 billion to those deficits.

The 2017 Tax Act's Higher Estate and Gift Tax Exemptions Are Extended

The 2017 tax act also temporarily doubled the exemption amount for estate and gift taxes. That change expires at the end of calendar year 2025. If that expansion was extended, primary deficits over the 2025-2034 period would be $167 billion larger than they are in CBO's baseline projections, JCT estimates. Most of those effects would occur after 2026. Increased net interest outlays would add $22 billion to those deficits.

The 2017 Tax Act’s Changes to the Tax Treatment of Investment Costs Are Extended

The 2017 Tax Act's Changes to the Tax Treatment of Investment Costs Are Extended The 2017 tax act temporarily expanded a provision known as bonus depreciation, which allows businesses to immediately deduct a portion of the cost of certain investments. That law increased the deductible amount to 100 percent of the cost of such investments through calendar year 2022 but set the provision to be phased out thereafter. In calendar year 2023, 80 percent of the total eligible cost could be deducted, and this year, 60 percent is deductible. The deductible portion is scheduled to fall to 40 percent next year, to 20 percent in calendar year 2026, and to zero the following year. Extending that provision by permanently setting the deductible portion to 100 percent (including retroactively for 2023) would result in primary deficits over the 2025-2034 period that were $378 billion larger than those in CBO's baseline, JCT estimates. Increased net interest outlays would add $91 billion to those deficits.

Certain Business Tax Provisions Altered by the 2017 Tax Act Are Maintained

Some provisions of the 2017 tax act that affect business taxes have scheduled expiration dates or include changes that do not take effect for several years. Scheduled changes include reductions in the size of the deduction for certain types of foreign income and an increase in the tax rate applied for the base erosion minimum tax (a provision put in place to keep corporations from avoiding tax liability by shifting profits out of the United States). If those scheduled expirations and changes did not occur, primary deficits over the 2025-2034 period would be $172 billion larger than they are in CBO's baseline projections, JCT estimates. Increased net interest outlays would add $25 billion to those deficits.

The Expansion of Premium Tax Credits Is Extended

The Affordable Care Act provides tax credits to individuals who purchase health insurance through the marketplaces that were established under that law. Before 2021, eligibility for those premium tax credits was limited to individuals whose income was less than 400 percent of the federal poverty guidelines. The American Rescue Plan Act of 2021 (P.L. 117-2) temporarily waived that limit, thereby boosting the number of people who received premium tax credits; it also increased the amount eligible individuals would receive. Those benefit expansions were most recently extended through calendar year 2025 by the 2022 reconciliation act (P.L. 117-169). If those changes were permanently enacted, primary deficits over the 2025-2034 period would be $335 billion larger than they are in the baseline, CBO and JCT estimate (see Table 3).¹⁵ Increased net interest outlays would add $48 billion to those deficits.

Certain Other Expiring Tax Provisions Are Extended

In addition to the revenue provisions described above, JCT estimated the budgetary effects of extending 25 other expiring provisions. Of those provisions, the one with the largest effects is the advanced manufacturing production tax credit, which can be claimed for producing battery components and components used to generate wind or solar power. If those temporary tax provisions were permanently extended, primary deficits over the 2025-2034 period would be $199 billion larger than they are in the baseline, JCT estimates. Increased net interest outlays would add $17 billion to those deficits.

Trade Promotion Programs Are Extended

Trade promotion programs are programs that reduce or eliminate customs duties on certain products from participating countries. Three such programs — administered in accordance with the African Growth and Opportunity Act, the Caribbean Basin Trade Partnership Act, and laws granting trade preferences to Haiti — are set to expire at various points between 2025 and 2034. In addition, the Generalized System of Preferences (the largest and oldest U.S. trade preference program) expired in December 2020. If each of those programs was permanently extended and the Generalized System of Preferences was reinstated retroactive to 2021, primary deficits over the 2025-2034 period would be $18 billion larger than they are in the baseline, CBO estimates. The resulting increase in net interest outlays would add $4 billion to those deficits.