Effects of Extending Lapsing Measures from the Tax Cuts and Jobs Act on the Economy
The One Big Beautiful Bill Act (OBBBA) proposes to extend the provisions of the 2017 Tax Cuts and Jobs Act (TCJA) beyond 2025, a move that is expected to significantly impact the economy and federal finances.
The extension is estimated to reduce federal tax revenues by approximately $4.5 trillion over ten years, leading to a substantial increase in federal deficits and debt. However, the resulting economic growth will partially offset some revenue losses.
One of the key economic impacts of the extended TCJA provisions is a modest boost to economic growth. According to estimates, the extension is projected to increase economic output by about 0.6 percent on average over the 2035–2054 period, primarily due to investment incentives made permanent in this legislation.
Economic growth is expected to boost taxable incomes, offsetting approximately 6 percent of the $4.5 trillion revenue loss from the act over the first ten years after extension through 2034. Despite these modest short-term economic gains, higher deficits and debt will increase debt service costs, worsening the nation’s long-term budget imbalance.
The TCJA has several significant cost drivers. Making seven key TCJA provisions permanent, including lower individual income tax rates, a doubled standard deduction, and the doubled Child Tax Credit, accounts for roughly 110% of the net cost of the OBBBA extensions.
The TCJA nearly doubled the standard deduction and lowered taxes for workers, families, and American businesses. It reduced the statutory corporate tax rate from 35% to 21%. The act also created Opportunity Zone (OZ) tax incentives and enacted a 20% deduction for pass-through entities, reducing their marginal tax rates.
If the TCJA provisions expire in 2025, individual marginal tax rates will increase, the standard deduction will fall, the child tax credit will be cut in half, small businesses will lose the 20% pass-through deduction, businesses will have to deduct investment slowly over time, and distressed communities will see decreased investment from the disappearance of OZs.
On the positive side, studies suggest that the TCJA induced an investment boom, with effects varying by how much a firm's effective tax rate fell. A study by Chodorow-Reich, Smith, Zidar, and Zwick (2024) finds this to be the case. Another study by Hartley, Hassett, and Rauh (2025) concludes that TCJA-induced declines in the user cost of capital led to a strong positive investment response.
The extension could facilitate $100 billion of investment in distressed communities and save over 4 million full-time equivalent jobs from being destroyed, according to predictions by the Council of Economic Advisers (CEA). Moreover, according to EY, one of the world's largest consulting firms, extending TCJA provisions could save almost 6 million jobs, boost aggregate wages by $540 billion, and increase GDP by $1.1 trillion compared to if TCJA expires.
In summary, while extending TCJA provisions beyond 2025 supports some economic growth and planning clarity, it results in a very large increase in federal deficits and debt, with only a small fraction of that cost offset by growth-enhanced revenues. The TCJA, as the largest tax cut in history, has had a significant impact on the economy, but its long-term effects on the budget remain a concern.
- The TCJA's extension, as proposed in the OBBBA, could potentially lead to a $100 billion investment in environmentally distressed communities.
- The financial impact of the TCJA on businesses includes a reduction in the corporate tax rate from 35% to 21%, as well as the creation of Opportunity Zone tax incentives and a 20% deduction for pass-through entities.
- The TCJA's provisions, if allowed to expire in 2025, could result in significant job losses in the health sector due to the disappearance of economic stimulus measures.
