Republican Sweep Strengthens Trump's Tax Cut Dreams

The 2017 tax cuts did produce some positive economic effects, but they were far more modest than the Trump administration and some Republicans forecast, said Kyle Pomerleau, a senior fellow with the American Enterprise Institute.

“It will be important to watch to see if markets start to panic if enough deficit spending is being contemplated, or if they’ll decide to look through it,” said Martha Gimbel, executive director of The Budget Lab at Yale and a former White House economist under Biden.

Tariff Issues

Trump has vowed to impose a tariff of 10% to 20% on all imported goods plus 60% on Chinese products and promoted that as an offset for tax cuts.

But lawmakers will have to decide whether to enact those tariffs in the tax bill so the revenue can be officially counted — a difficult vote for Republicans, especially those who want free trade. They could also just assume revenue would continue from presidentially imposed duties, even though Trump might later strike a trade deal that drops them.

“There’s always a way to make things work,” said Dave Camp a senior policy advisor at PwC and a former Republican chairman of the House Ways and Means Committee.

The Peterson Institute for International Economics estimates the tariffs could raise only about $225 billion a year. Kimberly Clausing, a former Treasury Department official in the Biden administration and a UCLA professor of tax law, said the GOP will probably overestimate the revenue from tariffs and ignore the negative economic impact of the duties.

Republicans have said they want to enact a tax bill within the first 100 days of Trump’s second term, though it’ll probably take longer to negotiate the details, Kumar said.

Political Dynamics at Play

The narrow GOP margin in the House gives small bands of Republican lawmakers leverage to demand specific tax breaks, and the Democratic strategy will be to focus on vulnerable Republican members in swing districts to push them to support or oppose individual provisions, said Scott Mulhauser, a Democratic strategist and veteran of legislative policy battles.

“Any small coalition within the Republican Party can have a disproportionate influence on any sort of tax bill,” Eastman said.

The Republican “trifecta” also sets up a lobbying free-for-all among business groups to persuade lawmakers and the White House to create new tax breaks to boost their industries. That intensifies the internecine struggle among Republicans over what to include in the package and how to contain the cost.

Skeptics said they doubt all of the tax cuts Trump proposed during the campaign — which grew so numerous that even some of his advisers are unclear about which proposals he’s most committed to — would be enacted because of the cost and difficulty of instituting the entire list.

Trump promised he would restore the full value of the state and local tax deduction, or SALT, a popular break in high-tax states including New York, New Jersey and California. Trump’s signature tax law capped the value of that deduction at $10,000, regardless of marital status.

While some changes to SALT, such as raising the cap or doubling the deduction for married couples filing jointly are possible, eliminating the limit entirely isn’t likely because of the revenue loss: $1.2 trillion over 10 years, according to the Committee for a Responsible Federal Budget.