Here are the major dilemmas facing the GOP as it writes tax overhaul

Republicans will be torn between fulfilling their tax cut dreams on the one hand and preserving spending programs popular with constituents on the other as they begin marking up what will be the biggest piece of tax legislation in years.

SALT

The 2017 bill imposed a $10,000 cap on federal deductions for state and local taxes. Several centrist Republicans in high-tax states have demanded that the $10,000 cap be raised. Additionally, President Donald Trump has promised that a cap increase will be part of the bill.

But raising the cap is unpopular among most rank-and-file Republicans. They argue that it largely benefits wealthy taxpayers in Democrat-led states, and that it should be eliminated to help offset other tax reductions. The Tax Policy Center found that the highest-income 20% of households would receive more than 96% of the tax cut if the cap were fully repealed.

“I think it’s going to be a big issue,” Alex Conant, a GOP strategist and a partner at Firehouse Strategies, told the Washington Examiner. “I think it’s likely that they will raise the cap, but how you pay for that is very sensitive.”

For instance, the Tax Foundation found that raising the cap to $30,000 for single filers and $60,000 for couples would reduce revenue by a whopping $820 billion over the next decade. That revenue would presumably have to be made up somewhere else, a prospect that could then endanger the votes of other Republican lawmakers.

“You know, you can’t ask business owners to subsidize high-income earners,” Conant said.

Medicaid and SNAP cuts

Another touchy subject is the idea of reducing spending through Medicaid.

Medicaid, a federal-state joint program that provides health insurance coverage for low-income adults, pregnant women, and children, is one of the largest federal programs, accounting for $584 billion in federal dollars alone in 2024. 

As of October, there were more than 72 million adults enrolled in the Medicaid program and nearly 7.3 million minors covered by the Children’s Health Insurance Program, or CHIP, according to the Centers for Medicare and Medicaid Services. 

The budget resolution approved by Republicans suggests that Medicaid spending could be reduced significantly to offset tax cuts.

But cuts to Medicaid are also a line in the sand for some centrist Republicans. On Wednesday, a dozen House Republicans sent a letter to Johnson vowing not to vote for legislation that includes big cuts to the program, although they acknowledged the need for “targeted reforms.”

“We cannot and will not support a final reconciliation bill that includes any reduction in Medicaid coverage for vulnerable populations,” the lawmakers said.

Republicans do have options to reduce Medicaid spending in ways that they could argue do not reduce benefits for core, vulnerable recipients. For instance, one option is to boost work requirements. According to the Committee for a Responsible Federal Budget, imposing federal work requirements for Medicaid would save the government approximately $140 billion over 10 years. Republicans have suggested the requirements would apply only to able-bodied adults without children.

In a similar vein, spending reductions to the Supplemental Nutrition Assistance Program, often referred to as food stamps, could be on the table as pay-fors.

SNAP is designed to help low-income individuals afford food and is administered through the Agriculture Department. SNAP is designed to supplement the grocery budgets of households.

Deep cuts to the food stamps program could also be problematic, especially for Republican lawmakers whose districts have a large number of beneficiaries.

Green tax credits

Republicans are desperate to find revenues anywhere they can to offset the cost of tax cuts. One possibility would be to repeal the hundreds of billions of dollars in green tax credits enacted by Democrats in the 2022 Inflation Reduction Act.

But doing so could endanger the votes of some in the party. Recently, Sen. Lisa Murkowski (R-AK), along with Sens. John Curtis (R-UT), Thom Tillis (R-NC), and Jerry Moran (R-KS), sent a letter to Thune arguing that the full repeal could threaten jobs and capital allocation.

They asked Thune to consider a variety of factors before choosing to scrap a tax credit.

“While we support fiscal responsibility and prudent efforts to streamline the tax code, we caution against the full-scale repeal of current credits, which could lead to significant disruptions for the American people and weaken our position as a global leader,” the lawmakers said.

Spending cuts

More broadly, the overall level of spending cuts included in reconciliation will get a lot of attention.

In passing the budget resolution for reconciliation, which Republicans in the House narrowly approved, Johnson and Thune indicated that some $1.5 trillion in spending cuts might be included to appease those fiscal conservatives.

However, that $1.5 trillion floor is not set in stone. Some Republicans, worried about the long-term economic consequences of adding to the country’s deficits, want larger cuts. On the flipside, it will be difficult to find greater savings without affecting programs that other Republicans are adamant should not be cut.

Thune has acknowledged the challenges the Senate will face and has noted that some in his conference might see $1.5 trillion in cuts as too much.

“We got folks on both sides of that issue. We’ll have to sort it out,” Thune said, according to the Hill.

Current policy baseline

Republicans are weighing an accounting method that would massively slash the cost to the treasury of extending the tax cuts, a move that is seen as a gimmick by many budget hawks.

At question is whether to use typical “current law” baseline scoring or switch to scoring using a “current policy” baseline for reconciliation.

When the 2017 tax cuts were crafted, sunsets were placed on many of the provisions in order to reduce the overall deficit impact, on paper. Based on current law baseline, renewing the expiring provisions would cost the treasury $4 trillion to $5 trillion over the next decade. To avoid incurring that much in debt, Congress would have to cut spending elsewhere or eliminate more tax breaks.

But if Republicans use a current policy baseline, it would essentially view the tax cuts as not expiring and wouldn’t count that $4 to $5 trillion deficit hit in scoring.

Many Senate Republicans, including Finance Committee Chairman Mike Crapo (R-ID), argue that current policy should be used.

“If you’re not changing the tax code, you’re simply extending current policy — you are not increasing the deficit,” Crapo said during an interview. “The bottom line here is that it’s a $4.3 trillion tax increase, not a $4.3 trillion deficit increase.”

But some budget hawks, including Republicans in the House, balk at the idea of using such a method.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told the Washington Examiner earlier this year that using current policy baseline would be “a total gimmick.

“You can hide something with accounting, but all the reasons you worry about the debt in the first place still remain,” she said.

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Conant also pointed out that if Republicans set the precedent of using current policy baselines, it might end up benefiting Democrats if they come back into power down the road.

“I think it’s going to make a lot of members uncomfortable, because it’s a precedent that ultimately could help Democrats,” he said. “I think whenever you change the rules, you have to expect the other party to keep them.”