What the Reconciliation Bill Means for U.S. Households

Dan Loney: The reconciliation bill passed through the Senate and the House, and it helps extend the 2017 Tax Cuts and Jobs Act. But there are concerns about what the bill might do to the national debt, how it will impact jobs, and the impact it will have on the labor force. What are the impacts the Penn Wharton Budget Model expects to occur?

Kent Smetters: We’re expecting about $3.2 trillion in additional debt over the next 10 years. On what’s called a dynamic basis, when you take into account economic feedback, the debt goes up to $3.6 trillion. The main reason is some dynamics associated with who’s paying taxes, as well as how some people can re-qualify for certain benefits like Medicaid and so forth.

We show that the impact on the economy is basically zero over the first 10 years – technically a slight negative by about a third of 1% of GDP. But over 30 years, [we will see] a bigger negative impact; this will reduce the economy, or GDP, by roughly about 4.5%. The main drivers there are continued increases in debt even beyond the 10-year budget window.

Loney: There is a lot of conversation about the potential issues with health care, such as SNAP (Supplemental Nutrition Assistance Program) benefits. Give us a sense of the impact we will see there.

Smetters: Our numbers are probably not quite as pessimistic as the CBO (Congressional Budget Office) estimates in terms of how many people are going to lose health care – around 12 million. [Our estimates are] a bit less than that. But still, there will be some people who will have a harder time qualifying for Medicaid.

This is in large part undoing some of the expansions that happened under Biden, as well as Obama on the Medicaid side. In terms of the impact by income group, the Senate [version of the bill] purposely delayed some of the hit until after the midterm elections [in November]. Households in the bottom 20% [of the income distribution] will have very little impact in 2027, but they will still be net losers, by about $165 per household.

But by 2030, the bill would reduce resources for the bottom 40% of households, if you take into account both taxes saved as well as transfers reduced. Principally in the form of Medicaid and SNAP, the bottom 40% will lose about $1,000 a year. That’s mostly because some of the tax benefits that they otherwise would have enjoyed before 2030 – such as no tax on tips and overtime – pretty much wear off by that point.

Loney: There is a lot of discussion about the extension of the Tax Cut and Jobs Act and its potential benefits that the Trump administration has listed. But many people say that while there may be some benefit, it may not be as strong a benefit as what maybe people would like to see.

Smetters: The administration has greatly embellished the economic benefits of this bill. In particular, they went as far as to say that it would grow the economy and the tax base so much that the bill would pay for itself. [They said] the economy would grow so much that it would then bring down the debt-to-GDP ratio, which without this bill is already increasing. Even before this became current law, we had an exploding debt-to-GDP ratio over time. They’re saying this bill will create so much revenue that it will even turn that around – it was just over the top. There’s really no rational economic model that can justify that type of conclusion. Most groups, including us, concluded that the economic impacts [of the bill] are pretty modest. You could go plus or negative in the first 10 years, but it’s roughly around zero.

Loney: Part of the conversation also is the revenues that will be coming in from tariffs. But that has a small impact on the overall revenues over the next several years – correct?

Smetters: Right. For this particular bill, they can’t count that money in any way, because that money would have been attributed to what’s called an executive action or executive order. So, for the purpose of this bill, [the additional revenues from tariffs] would be excluded. It’s already part of what we call the baseline. But who knows where that money would come down to?

The April 2 [proposed tariff] rates almost created a meltdown of the financial markets. That would have raised potentially $4 billion to $5 trillion over 10 years, but at the same time crushed the economy. If we look at more modest rates, they’re potentially looking at about a couple of trillion dollars over 10 years.

But the problem with that is that even if you use all that money to try to pay down debt, that is to reduce the budgetary impact of this bill, you’re also really playing with the capital markets. You’re narrowing the base of capital markets over time, by which you are trying to sell all this debt into.

And so on one hand, you get some revenue you can use to reduce debt. But [on the other hand], we need an open worldwide capital market to be demanding our debt. To the extent that a reduction in trade reduces the demand for our debt, that will be much more negative than any positive income that comes from the tariff revenue.

Loney: Longer term, as you said, there will be downsides over the next several decades with this bill in place, including a negative impact on GDP.

Smetters: Even putting the tariffs issues aside, we’re projecting that this law would reduce GDP by over 4.5% in about 30 years. So it does add a fair amount to debt, because it’s not only that [the Senate version is] bigger than the House version; the Senate also said it would make a lot of these provisions permanent.

For what’s called Byrd Rule compliance, we’ll pretend that anything that’s already in the Tax Cuts and Jobs Act will not cost us anything. (The Byrd Rule prevents “extraneous” matter from being included in reconciliation legislation.) But the actual debt that has to be sold by the U.S. Treasury will remain the same. It’s just more things that we have to finance using debt. There are options out there to deal with this growing debt problem. It’s just that they’re not being discussed right now in this day.