Trump win sets up GOP battle between deficit hawks, tax cutters

President-elect Trump’s election win is setting up a fight among Republicans over cutting taxes and reining in the deficit as the party inches toward control of both chambers of Congress.

Republicans are on track to kick off the second Trump administration with majorities in both chambers, giving the GOP a chance to pass a major tax policy bill along party lines.

Trump and many top Republicans are eager to extend his 2017 cut law, which could cost $4.6 trillion, according to a projection by the Congressional Budget Office (CBO).

The president-elect also proposed a host of specific tax cuts, such as getting rid of taxes on tips, overtime, and Social Security; creating deductions for auto loan interest payments; and even getting rid of income taxes, which could cost as much as $15.5 trillion, according to the Committee for a Responsible Federal Budget (CRFB), a deficit watchdog group.

Now Republicans are jockeying for position in how far they want to go with additional tax cuts after national debt levels ratcheted up to a new plateau of around 120 percent of gross domestic product following the pandemic.

“If you have a Republican sweep, they’re going to very quickly agree that $3.5 trillion of deficit-financed tax relief is the way to go … but I don’t think it’s going to be quick,” Todd Metcalf, tax policy principal at PwC, said in an interview. “There’s been a lot of complaining about debts and deficits, and all of those people are just going to vanish?”

“It’s going to take a while to figure that number out.”

The Trump tax cut push could easily run into obstacles in the House, where the GOP may have a narrow majority and must contend with party fiscal hawks unwilling to sign off on steep tax cuts without additional spending reductions.

“Not all tax cuts pay for themselves, and we should remember we are in most tax policy areas irrefutably on the left side of the Laffer curve,” Rep. Chip Roy (R-Texas) said in a statement to The Hill.

The Laffer curve is a model of taxation that became popular among Republicans during the Reagan administration, and being on the left side of it means taxes are too low relative to an optimum revenue level.

Roy was among several House Republicans who pushed the GOP to take a harder stance in debt limit negotiations with the Biden White House and Democratic Senate majority. The fight even led to a downgrade of U.S. creditworthiness by Fitch Ratings.

But Roy and fiscal hawks are likely to face serious pushback from other Republican lawmakers who are eager to double down on Trump's biggest legislative achievement. GOP leaders expect a tax cut bill to be the party's first legislative priority and defended Trump's 2017 bill despite its steep price tag.

"We thought it was a huge success. It produced more revenue than less, and I’m sure virtually all of us would like to see most of that extended," said Senate Minority Leader Mitch McConnell (R-Ky.) as press conference last week.

Some are laying the groundwork for a broad-based inclusion of additional cuts and potentially other measures on taxes.

Speaker Mike Johnson (R-La.) said in September that in addition to the Trump tax cuts, he wants to see a “strong” child tax credit as well as several business tax breaks that have support among both Democrats and Republicans.

These include research and development expensing and bonus depreciation for capital investments that were at the center of a tax deal that failed to make it through the Senate over the summer.

The tax breaks in that bill, which included provisions for companies doing business in Taiwan, totaled $78 billion and were almost entirely paid for by the cancellation of the employee retention credit, a pandemic-era support measure that the IRS has said is now riddled with fraud.

As a way to increase federal revenues, Trump has only talked explicitly about tariffs on foreign goods. Even applied as a general tariff on imports at a range of 10 or 20 percent, economists have doubts about the extent to which revenues from tariffs could replace other methods of taxation.

Republicans have also talked about getting rid of various tax breaks and incentives within the Democrats’ climate-focused Inflation Reduction Act as a way of generating revenue. 

“I think a broad discussion on taxation is good. I think that brings out more data and information,” Rep. Adrian Smith (R-Neb.), a member of the top tax-writing Ways and Means Committee, told reporters Friday.

“We haven’t had enough discussions about the granular proposals that [Trump] has talked about,” he said. “I didn’t enter this job, or even my time in the Nebraska Legislature, as interested in tax policy as I’ve become, but I’ve seen cause and effects along the way.”

Perhaps no Republican feels the tension between tax cuts and deficit expansion like Rep. Jodey Arrington (R-Texas), who is both a member of the Republican-led Ways and Means Committee and chair of the House Budget Committee.

“The numbers don’t lie — the American people are concerned about our country’s unsustainable fiscal path, and rightfully so,” Arrington said in an October statement. “Instead of reducing the size of government and living within our means, we borrow from the future — placing a deferred tax on our children.”

While fretting over the debt, Arrington is also encouraging fellow Republicans to take Trump’s additional proposals on taxes seriously.

“We have a number of objectives to achieve, and I think President Trump's putting a lot of things on the table for our consideration, and they're all important, and they all have a constituency, and they all deserve, you know, serious consideration,” he said in September.

Emily Brooks contributed