The Tax Foundation’s Options for Reforming America’s Tax Code 3.0 models the fiscal and economic impact of four “no‑tax‑on” deductions that the Trump administration and bipartisan members of Congress support extending beyond their 2028 expiration. Together, making these provisions permanent would reduce federal revenue by roughly $577 billion over a ten‑year horizon, increase the primary deficit, and add complexity to the tax code.
Overtime‑pay deduction (Option 34)
- Benefit: Up to $12,500 of qualified overtime pay (or $25,000 for married couples filing jointly) can be deducted from taxable income.
- Eligibility: Applies only to the “half” portion of time‑and‑a‑half overtime required under the Fair Labor Standards Act.
- Phase‑out thresholds: Begins to phase out when modified adjusted gross income (MAGI) exceeds $150,000 (single) or $300,000 (joint).
- Deficit impact: Permanent extension would add $372.4 billion to the primary deficit over ten years (conventional basis).
- Economic effect: Raises the long‑run size of the economy by about 0.1 % for taxpayers not subject to the phase‑out.
- Complexity: Confusion has arisen among workers and employers about which overtime qualifies, and the deduction creates a tax‑rate disparity between workers with identical total compensation but different overtime composition.
Auto‑loan‑interest deduction (Option 36)
- Benefit: Up to $10,000 of interest on qualifying auto loans is deductible.
- Eligibility: Loan must be for a new vehicle whose final assembly occurs in the United States.
- Phase‑out thresholds: Begins to phase out when MAGI exceeds $100,000 (single) or $200,000 (joint).
- Deficit impact: Permanent extension would increase the primary deficit by $33.7 billion over ten years.
- Economic effect: Net effect on the long‑run economy is a < 0.05 % decrease, as marginal tax reductions for eligible borrowers are offset by higher rates for those in the phase‑out range.
- Complexity: Lenders report difficulty complying with reporting requirements, and taxpayers are uncertain which vehicles qualify. The deduction adds to an uneven patchwork where mortgage, auto‑loan, and student‑loan interest are deductible, but credit‑card interest is not.
Enhanced senior deduction (Option 33)
- Benefit: An additional $6,000 deduction for taxpayers 65 years or older.
- Phase‑out thresholds: Begins to phase out when MAGI exceeds $75,000 (single) or $150,000 (joint).
- Deficit impact: Permanent extension would add $137.9 billion to the primary deficit over ten years.
- Economic effect: Increases the long‑run economy by < 0.05 % for seniors outside the phase‑out range; raises marginal rates for those subject to the phase‑out.
- Distributional note: Primarily benefits lower‑middle and middle‑income seniors; higher‑income seniors receive limited benefit due to the phase‑out and the standard deduction already offsetting most of their liability.
- Complexity: Often confused with the existing additional standard deduction for seniors, and it reduces Social Security tax contributions, weakening the trust fund.
Tip‑income deduction (Option 35)
- Benefit: Workers can deduct up to $25,000 of qualified tip income.
- Phase‑out thresholds: Begins to phase out when MAGI exceeds $150,000 (single) or $300,000 (joint).
- Deficit impact: Permanent extension would increase the primary deficit by $45.9 billion over ten years.
- Economic effect: Raises the long‑run economy by < 0.05 % by lowering marginal rates for some tipped workers.
- Complexity & equity: Requires detailed rules to define eligible occupations and guard against reclassification of wages as tips. Two workers with identical total compensation could face different tax liabilities depending on the proportion classified as tips. The deduction offers little benefit to the bottom 20 % of earners, whose tax liability is already largely offset by the standard deduction.
Overall assessment
- Revenue loss: The four targeted deductions together would cut federal revenue by about $577 billion over a decade.
- Economic impact: Combined, they would modestly increase the long‑run size of the economy (well under 0.2 % total), but the benefits are uneven and offset by higher marginal rates for taxpayers in the phase‑out ranges.
- Code complexity: Each provision adds a narrow carve‑out, creating eligibility disputes, administrative burdens for taxpayers and lenders, and inconsistencies in how similar income is taxed.
- Policy implication: Rather than extending these temporary, narrowly tailored deductions, a shift toward broader, more neutral tax reforms would simplify compliance, reduce opportunities for tax planning, and provide a more durable foundation for pro‑growth fiscal policy.
Source article: taxfoundation.org
