The fiscal, political, and moral case for another round of tax reform.
R ecent reports suggest House Republicans are thinking of passing a second reconciliation package this fall. They should: There’s a lot of low-hanging fruit that can be used to reduce the deficit without hurting core Republican voters.
The Democrats’ biggest selling point for the midterms is the charge that the GOP’s first bill, the Big Beautiful Bill Act, cuts Medicaid and food stamps to fund tax cuts for the rich. That’s vastly oversold, but the core truth is that spending on those programs is projected to decline compared with projections, while the 2017 tax cuts for everyone, including the rich, were made permanent.
Politics 101 suggests the GOP should try to take that argument away — or at least provide a counter-narrative that swing voters can find persuasive. Enter the second reconciliation bill.
Reconciliation rules permit the majority to make significant changes to tax and spending laws without being filibustered. It’s the only lever the congressional GOP has to push some of its priorities through as long as the Democrats remain united.
A second bill can thus be used to make changes that affect only those most people would consider well off. Republican candidates can then tout their support for those measures to show they heard the voters and are making sure that budgetary belt-tightening affects everybody.
Tax preferences that go almost exclusively to the people in the top two tax brackets are the first place to look. By definition, the mass of voters cannot benefit from them, and the people receiving them are so well off that they really do not need them.
Republicans can thus argue that the changes serve a fiscal and a moral purpose. They would reduce the deficit, something we need to do as debt piles up to historic levels. They would also show that the same principles used to reduce projected spending on low-income entitlements apply to the wealthy: you don’t get it if you don’t need it.
Two housing-related tax breaks stand out: the mortgage interest deduction and the exemption of $500,000 in capital gains for sales of primary residences.
Both provisions are intended to help people purchase and benefit from the sale of their home. That’s a laudable goal — but what about households that are also earning $500,000 a year or more in total income? They simply do not need public subsidies to help them achieve those goals.
Preventing people from making that much from taking either break would increase revenues by a lot. The Joint Committee on Taxation estimates the mortgage interest deduction for households in that income class reduced the Treasury’s intake by $8.4 billion in 2024. The capital gains exemption on the sale of a primary home is estimated to cost about $56 billion in 2026, with about 16 percent of that going to taxpayers in the top 5 percent of income distribution. Eliminating that for those earning $500,000 or more would produce up to $8 billion more in revenue.
The exemption from income and payroll taxes for employer-paid health insurance is another tax break that should be on the chopping block for the rich.
That break is intended to ensure that people have access to health insurance. That, too, is a laudable goal, and keeping it for most people is simply sensible policy.
But why do the rich need that? Again, someone earning $500,000 or more each year will not have trouble paying for health insurance. They do not need to get a tax break in order to pay for it.
Eliminating this giveaway for the rich raises a lot of money. The Treasury Department estimates the income tax exclusion will cost $262 billion in fiscal year 2025, while the payroll tax exclusion costs an additional $160 billion.
The top 5 percent of earners eat up a lot of that total. The Congressional Budget Office estimates that 14 percent of the income tax break and about 5 percent of the payroll tax break accrue to those people. Doing the math implies that eliminating these exclusions for those households would bring in about $44 billion a year.
These three tax changes alone would thus add $60 billion a year in revenue, or $600 billion over a ten-year period before accounting for inflation. That’s a lot of deficit reduction, and it would occur without anyone losing health insurance or their home.
Scouring spending would yield even more deficit reduction. Rich senior citizens get massively subsidized Medicare premiums and the same Social Security cost-of-living hikes as people who depend on those checks. Curtailing those breaks could bring in tens of billions a year more in revenue without threatening their lives or health.
Republicans understandably do not want to cut programs that average Americans depend on. There’s a lot of money to be saved, however, by taking away benefits that the comfortable among us don’t need. A second reconciliation bill that does that would be good politics and good policy.