Republicans stare down massive deficits to extend Trump tax cuts

Caught between the debt and their tax base, Republicans are considering some novel ways to account for the cost of their legislative agenda as disagreements over budget cuts look set to hamstring early moves on their tax bill.

Known as working from the “current policy baseline,” the nonstandard accounting method would let Republicans sweep nearly $5 trillion of debt under the rug.

Using that baseline would keep the cost of extending expiring provisions of the 2017 Tax Cuts and Jobs Act out of the bill's budgetary score, but include the potential benefits of renewing those provisions. Doing so would likely produce a much smaller number by which the tax legislation would add to the deficit.

“That’s a $5 trillion question,” PwC tax expert and longtime Capitol Hill staffer Rohit Kumar told reporters in January, noting the policy baseline method could be used in either a one-bill or two-bill scenario for the Republican agenda. 

Jane Gravelle, senior specialist in economic policy at the nonpartisan Congressional Research Service (CRS), said using current policy baseline accounting would be a significant move.

“It’s obviously a big deal,” Gravelle told The Hill. “Everything having to do with the debt is a big deal, because we’ve got a big problem with the debt.”

Despite President Trump's preference for "one big, beautiful bill" with which to advance his agenda, Republicans may opt for two, after the House GOP failed to reach agreement on a top-line budget number at their retreat in Florida last month. Speaker Mike Johnson (R-La.) has said he wants to vote on a number by the end of February.

If the CBO were asked by Congress to score the costs of the tax legislation relative to a current policy baseline, the agency would do it, while also providing a score based on the primary accounting method, known as the “current law baseline.”

Current law baseline considers the 2017 Trump tax cuts as they are written into law, accounting for the expiration of provisions such as cuts to personal income tax rates.

The 2017 cuts were made temporary in the first place in order to satisfy the requirements of the budget reconciliation process, a legal workaround that sidesteps the need for 60 votes in the Senate and that Republicans are aiming to use once again.

Ultimately, it’s a difference of assumption — but one with real consequences for the deficit, which ballooned to new highs after the pandemic and is a major concern for many Republicans. Total U.S. debt stock stands now at about $36 trillion, or 120 percent of annual gross domestic product.

On an annual basis, the budget deficit was $1.83 trillion in 2024; the government collected $4.92 trillion in revenue while spending $6.75 trillion, mostly on health and retirement insurance, defense and interest on the debt.

The CBO expects that annual shortfall to increase to $2.7 trillion by 2035, a number that doesn’t include the tax cut extensions Republicans are seeking. Total U.S. debt stock will reach $59.3 trillion by 2035, CBO estimates.

Alex Muresianu, senior policy analyst with the Tax Foundation, called the distinction between the law and policy baselines a “gimmick.”

“The current law baseline, assuming that these tax cuts expire, looks a certain way and then if you assume a current policy baseline where everything is assumed to be extended, then the current policy baseline would be worse. It’s just sort of a gimmick in terms of the actual fiscal position of the United States,” he said.

It’s not unusual for the CBO to provide lawmakers with accounting projections based on assumptions that differ from current law, if lawmakers request that kind of information, though the agency differentiates between such analyses and considers the letter of the law to be the objective standard.

For example, the CBO published a cost estimate for the Biden administration’s Build Back Better in November 2021, which Republicans then asked the agency to modify assuming the policies were made permanent, rather than temporary. The estimates differed by an order of magnitude, jumping to $3 trillion from $367 billion.

“Right now they use the current law baseline, which says that in 2026 all these provisions will expire and so to restore them there will be a revenue cost,” Gravelle told The Hill.

Democrats have used policy baseline accounting projections in the past to advance their own agenda, Kumar noted.

“Is Congress going to have to officially account for the cost of extending the expiring provisions — just the expiring stuff — or are they going to take the view, as the Obama administration did in 2012, that that which is law today we should just assume [is] permanent?” he said.

“This is a harder question to answer,” Kumar added.

Republican leadership is well aware of the challenges that lie ahead as it attempts to cut taxes and not explode the deficit.

“We don’t want to blow a hole in the deficit by extending the Trump-era tax cuts, for example,” Johnson said on Fox News on Monday. “But we’re definitely going to get that extended. We’ve got to find those savings.”

Johnson said last week that the budget cuts Republicans had been considering amounted to a minimum rather than a maximum, but that minimum appears too low for the party’s deficit hawks. Rep. Ralph Norman (R-S.C.), a member of the conservative House Freedom Caucus, told The Hill that $500 billion worth of cuts was a “nonstarter.”

Some unusual activity in recent months in the bond market, which is sensitive to the deficit, may be signaling further concerns about the national debt. As the Federal Reserve slashed short-term interest rates over the fall, longer term interest rates in the bond market have gone up, indicating investors want a greater return for their money. Analysts have described this divergence in rates as unusual. 

Ratings agency Fitch downgraded U.S. creditworthiness from AAA to AA+ in 2023 following a debt ceiling standoff between Democrats and Republicans. Republicans will need to raise the debt ceiling again this year.