The Tax Foundation’s Options for Reforming America’s Tax Code 3.0 models the revenue, distributional, and macro‑economic effects of 86 policy changes. Five of the revenue‑raising proposals illustrate how different approaches can generate similar fiscal gains while varying widely in economic impact, complexity, and neutrality.
1. Eliminate the income‑tax exclusion for employer‑provided fringe benefits
- Current rule – Benefits such as health insurance, on‑site gym use, employer‑paid student loans and employee discounts are excluded from taxable wages.
- Proposed change – Include the value of all fringe benefits in an employee’s taxable income, broadening the tax base.
- Dynamic fiscal effect – Reduces the primary deficit by $396.8 billion over 2027‑2036.
- Economic trade‑off – Compared with raising the top marginal individual income‑tax rate to 50 %, the base‑broadening approach raises comparable revenue but causes a smaller decline in GDP and labor supply because it does not increase marginal rates.
2. Repeal the Low‑Income Housing Tax Credit (LIHTC) and the New Markets Tax Credit (NMTC)
- Current rule – Both credits provide dollar‑for‑dollar reductions in tax liability to stimulate affordable housing and community development.
- Criticism – High cost per unit of housing built and limited efficiency in delivering affordable units.
- Proposed change – Eliminate the LIHTC and NMTC, expanding the business tax base.
- Dynamic fiscal effect – Cuts the primary deficit by $202.7 billion over 2027‑2036.
- Economic trade‑off – Unlike capping the business SALT deduction, which also broadens the base but depresses GDP more sharply and raises unemployment, the credit repeal achieves revenue with a smaller macro‑economic drag.
3. Eliminate the income‑tax exclusion for municipal‑bond interest
- Current rule – Interest earned on municipal bonds is exempt from federal income tax, a provision dating to the 1913 income‑tax law.
- Proposed change – Tax municipal‑bond interest like other investment income, removing the preferential treatment.
- Dynamic fiscal effect – Lowers the primary deficit by $155.2 billion over 2027‑2036.
- Economic trade‑off – Compared with eliminating the state and local tax (SALT) deduction, the muni‑bond change is less harmful because it does not raise marginal rates on labor, pass‑through business income, or owner‑occupied housing.
4. Tighten the limitation on itemized deductions
- Current rule – The “One Big Beautiful Bill Act” of 2025 caps the value of itemized deductions at 35 % of taxable income for taxpayers in the top 37 % bracket.
- Proposed change – Reduce the cap to 28 %, pushing more high‑income taxpayers toward the standard deduction and expanding the base.
- Dynamic fiscal effect – Reduces the primary deficit by $139.0 billion over 2027‑2036.
- Economic trade‑off – Targeting deductions rather than raising rates (e.g., taxing capital gains and dividends at ordinary income rates) broadens the base with a milder impact on GDP and employment.
5. Introduce a vehicle‑miles‑traveled (VMT) tax and repeal the federal gas and diesel taxes
- Current rule – The Highway Trust Fund is funded primarily by a per‑gallon federal gasoline tax of $0.184, unchanged since 1993 and not indexed to inflation.
- Proposed change – Eliminate the gas and diesel excise taxes and replace them with a mileage‑based charge adjusted for vehicle weight:
- ~0.9 ¢ per mile for average passenger cars
- ~10.6 ¢ per mile for average freight trucks
- Dynamic fiscal effect – Cuts the primary deficit by $133.7 billion over 2027‑2036.
- Economic trade‑off – Raising the gasoline tax to $0.28 per gallon would generate more short‑term revenue but cause larger job losses. The VMT tax is projected to be more sustainable as electric‑vehicle adoption rises, though it imposes higher administrative complexity.
Overall implications
All five proposals demonstrate that broadening the tax base—by removing exclusions, credits, or deduction caps—can raise substantial revenue while generally imposing less distortion on economic activity than raising marginal tax rates. However, each option carries distinct considerations:
- Complexity & administration – Base‑broadening measures that require valuation of fringe benefits or mileage tracking may increase compliance costs.
- Distributional effects – Eliminating credits such as LIHTC could affect low‑income housing supply; policymakers must weigh revenue gains against potential social costs.
- Neutrality – Removing preferential treatment (e.g., muni‑bond interest) aligns with the principle that similar economic activities should be taxed similarly.
- Stability – A VMT tax could provide a more inflation‑adjusted, durable revenue stream for the Highway Trust Fund compared with a static gasoline tax.
When evaluating revenue‑raising strategies, Congress should balance simplicity, neutrality, transparency, and stability with the projected fiscal benefit and macro‑economic impact.
Source article: taxfoundation.org
