Assessing OBBBA’s Provisions

July 7, 2025 by Dan Mitchell @ International Liberty

I gave my overall assessment of the One Big Beautiful Bill Act last week, which can be summarized in two sentences.

• The good news is that “…the bill prevents a massive automatic tax increase starting on January 1 of 2026.”
• The bad news is that “…the legislation will not save the country from a fiscal crisis.”

Today, let’s look at some of the details.

We’ll start with this chart from a recent New York Times column by Steven Rattner. As you can see, I’ve added my two cents on each of the major provisions.

By the way, I can’t resist commenting on the title of the chart. Rattner (who opposes OBBBA) obviously wants readers to think the bill is designed to help only the rich.

That’s a bit silly given the various provisions like child tax credits that are designed for the middle class. But what’s absurd – and utterly inaccurate – is the implication that only the rich have been enjoying income growth.

Rattner also has a sin of omission in that he doesn’t list the most pro-growth part of the bill, which is the reduction of the tax bias against new investment.

Here are some excerpts from the Tax Foundation’s summary.

 

The Senate bill makes permanent the House bill’s provisions allowing expensing for investment in short-lived assets and domestic research and development. Permanent expensing has the most bang-for-the-buck when it comes to economic growth. In the context of the full Senate bill, the two provisions boost long-run GDP by 0.7 percent by providing taxpayers the certainty they need to boost long-run investment. …The House and Senate bills both secure permanent extension of the rates and brackets of the 2017 individual tax cuts, providing certainty for households and stability to the structure of the tax code.

The Tax Foundation also explains some of the bad provisions.

…too much money on political gimmicks and carveouts. They both introduce tax exemptions for overtime pay and tips, a deduction for auto loan interest, and an additional standard deduction available for some seniors, all of which violate basic tax principles of treating taxpayers equally. …No tax on tips, overtime, and car loans comes with various conditions and guardrails that…will likely require hundreds of pages of IRS guidance to interpret. …

Now let’s shift back to Mr. Rattner’s column.

To his credit, he includes this chart that shows that fiscal imbalance in America is caused by a growing burden of government spending.

There’s one final chart I want to share.

Here are the various estimates of potential economic growth from OBBBA.

Rattner’s chart says the economic growth would be trivial.

For what it’s worth, I think the White House estimate is absurdly high.

However, I don’t view the growth estimates from the other groups as being “negligible.” Even small differences in growth, if sustained, can make a big difference in long-run living standards.

P.S. Keep in mind that it’s hard to predict potential growth effects when we don’t know what Trump will do on trade policy. If he is merely bad, maybe the effect of OBBBA will be enough to deliver additional prosperity. But if he is terrible (i.e., Liberation Day-type nonsense), then the net effect of his policies will probably be negative.

OBBBA’s Small Step to Federalism

July 5, 2025 by Dan Mitchell @ International Liberty

Late last year, when there was (unwarranted) optimism that DOGE could deliver big savings for taxpayers, I recommended that Elon Musk and his team promote fiscal federalism.

 

My argument was that it is wasteful and foolish to have Uncle Sam grab about $1.3 trillion from taxpayers at the state and local level and then (using a leaky bucket) send that money back to politicians at the state and local level.

Instead, just let the state and local politicians (and their voters) decide whether to collect and spend money on the various programs funded by federal grants.

The good news is that Trump’s Big Beautiful Budget. takes a modest step in that direction.

Here are some excerpts from a story in the New York Times by David Chen and Pooja Salhotra.

 

…state governments are bracing for impact as Washington shifts much of the burden for health care, food assistance and other programs onto them. …they will be expected to…decide how much they can do to keep their citizens insured and fed once they start losing federal assistance. … 

Mr. Trump’s law includes nearly $1 trillion in cuts to Medicaid by 2034, scaling back the program that pays for the health care of roughly 78 million adults and children. It also sharply curtails federal spending on the Supplemental Nutrition Assistance Program, or SNAP, which provides monthly food assistance payments to about 42 million people. … 

For the 40 states that expanded Medicaid to lower-income workers under the Affordable Care Act, the fate of that extra coverage has loomed particularly large. …Among the states that could lose more than 7.5 percent of their total federal Medicaid funding are Arizona, New Hampshire, Nevada, Iowa, Vermont, Michigan and Oregon… In California, state officials said the law would most likely cause 3.4 million people to lose health insurance and at least 735,000 people to lose food benefits.

I have three incidental comments and one big response to the NYT story.

The three small comments are:

1. There are not “$1 trillion in cuts to Medicaid.” Instead, the legislation merely takes the long-overdue step of slowing the growth of Medicaid funding.
2. The Medicaid expansions from the so-called Affordable Care Act (Obamacare) basically bribed states to expand the program.
3. The OBBBA curtails the ability of state governments to use odious budget gimmicks to fleece federal taxpayers for more Medicaid funding.

My main response to the story deals with the part about states having to “decide how much they can do to keep their citizens insured and fed.”

Exactly. That’s what should be happening. We have a massive and unaffordable federal government that is squandering well above $1 trillion per year on programs that should be entirely the responsibility of state or local governments.

Indeed, my complaint with Trump’s budget bill is that it only takes a small step in the right direction.

The entire Medicaid program should be turned into a block grant that is gradually phased out. The same is true for food stamps and many other programs.

If states like California want to waste money on various programs, it should not be the responsibility of taxpayers in other states to pick up the tab.