On Monday, the Senate Finance Committee released legislative text for the most contentious parts of the Republican reconciliation package: changes to Medicaid and to the tax code. The Senate proposal makes some welcome improvements relative to the House-passed version, particularly by improving the tax treatment of pro-growth investments. But it doubles down on the biggest flaws of the bill by deepening cuts to Medicaid and saddling young Americans with trillions of dollars of debt.
As PPI noted in last week’s Budget Breakdown, the Senate GOP’s top priority for budget reconciliation was making business tax changes permanent. One such provision, which the House approved on a temporary basis, is allowing businesses to immediately deduct the full value of their research and development expenses. This change reverses a damaging provision of the Tax Cuts and Jobs Act, which discouraged research and development by forcing businesses to delay their tax deductions over several years. By fixing this mistake, the Senate budget proposal eliminates a backward tax penalty for research and development that almost no other developed countries have in their tax codes.
Senate Republicans made another pro-growth improvement to the reconciliation bill by modifying the House’s plan to phase out subsidies for producers of clean energy. The House-passed bill terminated these tax credits almost immediately, requiring that most new power plants begin construction within 60 days to be eligible for support. This approach would have devastated ongoing clean-energy projects, which can require years of planning before construction begins. In addition to worsening climate change, which imposes significant costs on our economy every year, this move would also hamper the nation’s ability to expand affordable energy sources. Senate Republicans partially — but not completely — mitigated this issue by phasing out these credits over multiple years, allowing businesses to continue ongoing clean energy investments without short-term disruption.
In order to offset changes to the business tax code, the Senate Finance Committee scaled back two of President Trump’s misguided campaign promises — ending taxes on overtime and tips — by capping the value of above-the-line deductions for both categories of income. Senate Republicans also pushed back against the House’s regressive change to quadruple the size of the state and local tax deduction, while the two chambers continue to negotiate. All of these policy changes are substantial improvements to the House’s budget plan because they save revenue by eliminating tax exceptions for special groups.
The Senate GOP also improved upon the House bill by tightening the limit on health-care provider taxes. States often increase Medicaid’s reimbursements to health-care providers to gain federal matching funds, but then raise taxes on these same providers to reclaim their lost revenue, effectively masking the true cost of providing benefits. Senate Republicans are right to crack down on this shell game in the interest of making Medicaid financing more efficient and more transparent — a move PPI has previously encouraged.
But redirecting the savings from this policy change to fund tax cuts for the rich instead of improving Medicaid would shutter many providers that operate on meager margins and deny care to millions of vulnerable beneficiaries as a result. According to an analysis from the Congressional Budget Office published this week, the House-passed bill would reduce incomes for the poorest tenth of Americans by 3.9% while increasing incomes for the richest tenth by 2.3%. The Senate’s decision to cut even more funding for Medicaid would undoubtedly make the bill even more regressive.
On top of redistributing resources from the poor to the rich, the Senate’s changes would redistribute from the young to the old. The Senate bill increases the size of a bonus standard deduction available to seniors, which is a tax policy that PPI has previously called to eliminate because today’s seniors are generally more financially secure than younger Americans, by even more than the House would. At the same time, it cuts back on the expanded Child Tax Credit passed by the House — even as child poverty remains higher than poverty rates for seniors.
But the biggest way the Senate proposal harms younger generations is by forcing future generations to pay for the deficits that the legislation would cause. The exact cost of the Senate legislation is still unknown, but it’s no doubt in the same ballpark as the House-passed bill that would add roughly $3 trillion to the debt over the coming decade — swelling to nearly $5 trillion if all the temporary policies included in it are made permanent. As PPI has previously warned, this increased debt burden will both reduce incomes for future taxpayers and put them on the hook for higher interest costs — all to finance a shortsighted tax cut today.
Senate Republicans have produced a tax plan that is more thoughtful and pro-growth than the one produced by their House counterparts. But their revised bill doubles down on regressive redistribution and deficit-financed giveaways that move American fiscal policy in the wrong direction, leaving low-income households and young Americans to pick up the tab.
According to new reports from the Social Security and Medicare trustees, trust funds for both programs will be insolvent by 2033 — just eight years from now. If no action is taken before then, Social Security benefits will automatically be cut by 23%, and Medicare payments to hospitals will be cut by 11%.
