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How do JCT and CBO differ in modeling expiring TCJA tax provisions?

Shutterstock / Volodymyr TVERDOKHLIB

Congress relies on the Joint Committee on Taxation (JCT) to estimate the revenue gain or loss for tax bills, and the Congressional Budget Office (CBO) to estimate the impact of spending bills. Both agencies provide “static” scores that assume that changes in taxes and spending don’t affect GDP. But members of Congress and other analysts are often interested in the economic effects of taxes and spending changes, both for their deficit impact and broader implications for economic growth.

Both JCT and CBO provide such dynamic analyses of major legislation, but they use different approaches and sometimes come up with different answers. At a December 2024 Brookings roundtable, hosted by the Hutchins Center on Fiscal and Monetary and the Tax Policy Center, economists from the two agencies described how they analyzed the economic effects of the individual tax cuts in the Tax Cuts and Jobs Act (TCJA), which are set to expire at the end of 2025. (The CBO slides are posted here. The JCT slides are available here.)

This explainer compares JCT’s modeling of the economic effects of extending the provisions to CBO’s analysis of their expiration. We show each agency’s estimates of the effects of extending the expiring provisions (by reversing the sign of CBO’s estimates).

What tax provisions expire at the end of 2025?

Many of the provisions of the TCJA that affect individual income taxes are set to expire at the end of 2025. These include the reductions in marginal income tax rates, doubling of the standard deduction, expansion of the child tax credit, and caps on state and local tax (SALT) deductions. Unless extended by Congress, these provisions will revert to pre-TCJA levels, adjusted for inflation. You can read more on the expiring provisions here.

How does JCT model the economic impact?

JCT’s first step is to run the policy changes through its Individual Tax Model, which provides an estimate of the changes in marginal and average tax rates across various income sources, income groups, and differences in marital status. These estimates are then used as inputs to three different macroeconomic models that JCT maintains. The three models differ in their assumptions about taxpayer behavior, the response of the Federal Reserve, and the level of foresight they attribute to individuals and businesses.

JCT evaluates the strengths and weaknesses of each macro model relative to the policy proposal and assigns weights to their outputs accordingly. For the illustrative analysis JCT demonstrated at the roundtable, JCT applied equal weights to each model. However, weights may vary in official analyses depending on the specific policy context.

What does JCT say about the effects of extending the tax cuts?

JCT’s models predict that extending of the tax cuts will increase GDP during the 10-year budget window, with two models projecting this effect will grow larger throughout this period. When the models’ outputs are equally weighted, JCT projects an average increase of 0.5% in GDP from 2025-2034.

Labor supply effects are positive across all three models, reflecting the reduced impact of the Alternative Minimum Tax (AMT) and the extended benefits of Section 199A, which provides a deduction for qualified business income to owners of certain pass-through entities. On average, JCT projects a 0.7% increase in effective labor supply (weighted by productivity) over the 10-year budget window.

The impact on capital investment, however, shows more variation across models. From 2025 to 2029, all three models project small positive effects. However, in the second half of the budget window (2030 to 2034), two models anticipate large increases in investment, while the third projects small decreases.

JCT’s conventional estimate shows that the tax cut extension would reduce revenue by $3.4 trillion over the 10-year budget window. However, macroeconomic feedback from increased economic activity offsets $372 billion of this loss, resulting in a total net revenue loss of approximately $3 trillion.

How does CBO model the economic impact?

CBO compared its baseline economic forecast with an alternative scenario in which the expiring individual income tax provisions are permanently extended. This analysis involves estimating the increases in labor supply and investment that would result from the changes in marginal tax rates and changes in aggregate demand from extending the tax cuts. It also incorporates the economic effects of higher deficits using CBO’s “rules of thumb” that assume that each dollar increase in the federal budget deficit lowers investment by 33 cents.

What does CBO say about the effects of extending the tax cuts?

CBO finds that extending the provisions boosts the level of GDP by an average of just 0.1% from 2025 to 2034. They estimate that labor supply increases by about 0.45% relative to the scenario where the TCJA expires, mostly from the incentive effect of lower individual income tax rates. (CBO reports the change in labor supply as the change in hours worked—rather than the hours of work weighted by productivity that JCT shows.)

CBO finds that investment declines a bit over the ten-year budget window, as the negative effect of higher deficits more than offsets the effects of higher aggregate demand and lower marginal tax rates.

The negative effects on GDP of higher deficits increase over time. Over the long term, CBO estimates that extending the TCJA provisions decreases the annual rate of potential GDP growth by about 6 basis points.

How do the JCT and CBO estimates differ?

JCT finds that extending the TCJA individual provisions would increase GDP, capital investment, and labor supply, while CBO projects that these stimulative effects would be offset by crowding-out effects. One difference between their analyses is how JCT and CBO model deficits and their impact on private investment. CBO estimates a significant crowding-out effect from the deficit increases resulting from extending these provisions, leading to reduced private investment and long-term GDP growth. Conversely, JCT projects minimal crowding out and instead shows positive capital accumulation over the budget window for two of their models.  

  • Acknowledgements and disclosures

    The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

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