All About That Base(line)

If Congress does not act, taxes will rise for millions of Americans on January 1, 2026, as the individual provisions of the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
Cuts and Jobs Act (TCJA) expire. Lawmakers are currently discussing ways to address this coming cliff, but one seemingly insignificant issue could shape the debate in important ways: how one measures the budgetary impact of extending the tax cuts.

The soon-to-be Chairman of the Senate Finance Committee, Sen. Mike Crapo (R-ID), has argued that policymakers should extend the current tax code as if it creates no additional budgetary impact. Specifically, he has called for using a current policy baseline to measure the impact of extending the tax cuts rather than the current law baseline.

Let’s break that down. When Congress passes spending or tax legislation, the Congressional Budget Office (CBO) and the Joint Committee on Tax (JCT) measure legislative changes against a projection based on assumptions about the future path of revenues and spending. That projection is called a baseline.

Spending and revenues are not treated the same in the baseline. Most spending is assumed to continue onward even if legislation supporting the spending is temporary. This approach takes current spending policy as a given for future years. However, tax legislation is measured as it is written into law. If a bill that reduces tax rates for seven years is signed into law, the JCT will assume that revenues will be changed for those seven years. In the years after the tax cuts expire, revenues are projected to adjust based on the tax rules prior to the temporary tax cut.

The upshot is that most spending is evaluated on a current policy baseline while taxes are measured against current law.

Using the current law baseline, Tax Foundation estimates that permanently extending the TCJA beyond 2025 would reduce revenue by $4.2 trillion ($3.5 trillion on a dynamic basis) over 10 years.

If the TCJA is allowed to expire as current law provides, it would result in a significant, immediate tax hike for 62 percent of tax filers from the individual provisions alone. Across all congressional districts, Tax Foundation estimates that the average tax hike per taxpayer would be $2,853 compared to a scenario where the entire TCJA is extended.

But taxpayers probably don’t expect a massive tax hike on January 1, 2026. In fact, most taxpayers say they haven’t heard much, if anything, about those coming expirations. You could say that the average taxpayer has a current policy baseline in their head when they think about their future taxes.

While taxpayers may operate under a current policy baseline, if lawmakers do the same when evaluating legislation to extend the TCJA, it will have significant implications.

First, future deficits are higher under a current policy baseline because it includes lower revenues from extending the expiring parts of the TCJA. Because lower revenues from TCJA extension are baked into a current policy baseline, enacting legislation to continue the TCJA would score as having zero additional budget impact. Many lawmakers would likely appreciate the opportunity to extend the tax cuts in legislation that doesn’t score as having any additional costs, but, really, that would just mean that higher deficits, interest costs, and long-term debt would already be baked into the projections for future years. Changing the baseline for scoring purposes doesn’t change the actual trajectory of revenues, deficits, and debt under a continuation of the TCJA’s expiring provisions.

The CBO helpfully keeps track of alternative policy scenarios and their impact on budgetary measures. It provides analysis that shows extending the 2017 tax cuts would result in annual deficits exceeding $2 trillion (6.6 percent of GDP) starting in 2027 and rising from there. The budget deficit for fiscal year 2024 (which ended on September 30, 2024) was $1.8 trillion (6.4 percent of GDP). Additionally, the current policy baseline for TCJA adds $605 billion in net interest costs over 10 years.

President-elect Trump’s nominee for Treasury Secretary, Scott Bessent, has argued that annual deficits below 3 percent of gross domestic product (GDP) by 2028 should be a priority. Bessent’s target is a laudable approach to fiscal discipline, but, in a current policy baseline context, Congress would need to achieve nearly $1.5 trillion in annual deficit reduction to meet it. This would likely require serious cuts to mandatory spending programs like Social Security, Medicare, and Medicaid, something that Congress has been unwilling to do for decades.

The bottom line is that using the current policy baseline inflates deficits even if it gives lawmakers the rhetorical opportunity to say that legislation extending the Tax Cuts and Jobs Act has no additional cost.

Second, if policymakers use the current policy baseline, it will raise questions about what Congress is achieving if the TCJA is extended. When extending tax cuts, you’re not really cutting taxes. You’re avoiding a tax increase. There may be additional tax cuts that lawmakers want to introduce, but if the legislation just extends current policy, then it’s not really a tax cut under that baseline.

Third, if policymakers use the current policy baseline, then the growth impact of the tax policy will be included in future projections. Republican lawmakers like to talk about how tax cuts can boost the economy and some policy levers would certainly do that. The current policy baseline would show that lawmakers could avoid a drag on growth (which would occur if the tax cuts do expire), but that baseline would not give them a growth benefit for extending those policies.

The current law baseline would allow lawmakers to make a different argument. They could say that extending the TCJA would boost growth after 2025. Not extending the tax cuts does nothing to current growth projections.

Tax Foundation has found that, relative to current law, a permanent extension of the TCJA would boost GDP by 1.2 percent over the long run and support an additional 829,000 full-time equivalent jobs.

Finally, there is another procedural layer to consider. Lawmakers will likely use budget reconciliation to extend the TCJA, which can allow a bill to pass the Senate with a simple majority. The rules of reconciliation require legislation to make changes to revenue or spending; otherwise, it will not qualify for privileged consideration in the Senate. If the current policy baseline is used, extending the TCJA would not change revenues relative to that baseline and the reconciliation rules would be violated.

Lawmakers may choose to use the current law baseline to avoid creating additional procedural hurdles while focusing their rhetoric on logic that uses the current policy baseline.

Doing so would be similar to the fiscal cliff of 2012 (resolved in the early morning of Jan. 1, 2013). Congress passed bipartisan legislation to extend the majority of tax cuts adopted during the Bush administration. CBO and JCT used the current law baseline in their respective analyses, but the Obama White House focused its analysis on the current policy baseline, claiming $737 billion in deficit reduction for a bill that CBO estimated increased deficits by nearly $4 trillion over 10 years relative to the current law baseline.

We mention the 2012 fiscal cliff policy scenario specifically because Sen. Crapo himself referenced it when arguing for the current policy baseline.

Any way you look at it, policymakers should be motivated to reduce deficits, and they have numerous ways to do that. Earlier this year, Tax Foundation examined ways to extend the majority of the TCJA’s individual provisions with additional revenue offsets using a current law baseline. Lawmakers could find plenty of savings on the spending side as well, and even ways to increase revenues with a substantial pro-growth overhaul of the tax code.

If lawmakers are serious about pro-growth policies and fiscal responsibility, they will need to put policies forward that achieve those goals. Simply adjusting the baseline doesn’t reduce actual deficits in the coming years. Additional reforms will be needed to achieve deficit reduction.

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