Breaking down the budget baseline: what it means for the TCJA extension debate

Assumptions could put trillions of dollars of policy changes on the table, or not

Photo by Ray Reyes on Unsplash

At the end of 2025, the historic tax cuts enacted by the 2017 Tax Cuts and Jobs Act (TCJA) are scheduled to expire. With the U.S. facing large and growing federal deficits and debt, the political feasibility of extending some or all of these tax cuts will largely depend on the estimated cost. These projections depend on a critical yet often overlooked element of the legislative process: federal budgeting and scorekeeping. Notably, the definition of the baseline—a seemingly technical detail—can make the cost of fully extending the TCJA appear to range from $0 to as much as $5 trillion dollars. These budget maneuvers do not, however, change the fundamental economic or fiscal effects of an extension, which will reduce federal revenues in the face of a bleak fiscal outlook. Understanding baseline concepts can help clarify the true fiscal implications of extending the TCJA and provide a more transparent foundation for policy decisions.

Federal budgeting and scorekeeping: the basic mechanism

The federal budget encompasses the receipts, spending, borrowing, and debt of the federal government. Because the “power of the purse” is delegated to the U.S. Congress under Article I, Section 8 of the U.S. Constitution, establishing and managing the budget is one of the primary functions of Congress and is jointly managed by the House and Senate.

The federal budget follows an annual cycle that starts with the executive branch submitting a consolidated budget proposal to Congress, typically by the first Monday in February. While this proposal provides guidance, it is purely advisory, as the President lacks constitutional authority to set spending or revenue levels. Following the submission of the President's budget, Congress crafts its own budget plan, known as a “budget resolution,” which may align with or diverge from the President’s recommendations.

The budget resolution sets aggregate budget policies and functional priorities for the upcoming and (at least) the next four fiscal years. Because a budget resolution is not an ordinary bill, it does not go to the President for signature or veto, it only requires a majority vote in the Senate, and it does not authorize new monies or spending. Instead, it establishes a framework with specific targets directing committees to propose legislation that appropriates funds or makes changes to taxes and spending.

The Congressional Budget Office (CBO) plays a central role by providing nonpartisan analysis and projections that guide budgetary decisions and legislation development. To help inform the budgeting process, the CBO produces an annual report that details federal spending and projects all major revenue sources, federal budget accounts, and annual deficits or surpluses for the next ten years. These projections are made under the assumption that the current laws that govern tax and spending will remain in place; this is referred to as the “current law baseline.” This baseline provides Congress information about the coming budgetary outlook to inform the budgeting process within the context of the budget resolution.

In addition to its forecasting role, the CBO—together with the Joint Committee on Taxation (JCT) —acts as the official scorekeeper for Congress by estimating the fiscal impact of proposed legislation. Using the current law baseline as a benchmark, the CBO evaluates how proposed policies would affect federal revenues, spending, and deficits over the budget window, which typically includes the current and the next nine fiscal years. This interconnected relationship ensures that lawmakers receive a comprehensive and consistent understanding of how legislative proposals—from appropriations to tax and spending bills—compare to the baseline budget outlook. Furthermore, these scores enable Congress to assess whether proposed policies align with the fiscal targets set by the budget resolution.

Reconciliation: a key player in tax policy

To implement the budget resolution, lawmakers must draft bills that must pass the House and the Senate before reaching the President for signature or veto. In the Senate, most bills require 60 votes to overcome the threat of a filibuster—a challenging threshold in today’s divided political climate. However, certain tax and spending measures can bypass this by including a reconciliation bill with the budget resolution.

In the context of tax policy, a reconciliation bill directs certain committees to draft legislation that either reduces revenue by no more than a specified amount or increases revenue by at least a certain threshold. For example, in the lead-up to the enactment of the TCJA, the budget resolution directed the House Ways and Means Committee to draft legislation that would reduce revenue by up to $1.5 trillion over 10 years. This reconciliation directive did not detail what specific legislative changes the committee should adopt to achieve this goal. Instead, the budget committees crafted a tax bill to meet this revenue target.

While implementing tax policy via reconciliation ensures that these bills are not subject to filibuster, this process comes with certain limitations. Chief among these is the Byrd Rule (Section 313 of the Congressional Budget Act of 1974). The Byrd Rule prohibits the inclusion of provisions that are “extraneous” to the reconciliation’s basic purpose. One consequence of this is that reconciliation bills may not raise deficits in any year after the period covered by the reconciliation instruction. This restriction forces legislators to draft tax legislation with sunset dates so that any deficit-inducing provision expires after ten years. Like the TCJA, the Bush-era tax cuts of 2001 and 2003 were also passed via a reconciliation bill, and as a result, these tax cuts also expired at the end of their budget window.

The impact of the budget baseline

The choice of baseline can profoundly affect how the costs of proposed legislation are perceived. This can become especially salient in the context of tax policy passed via reconciliation, when lawmakers are instructed to draft legislation that meets a particular revenue target. In this case, the contours of the legislative package live and die by the official score. Two commonly understood baselines in this context are the current law baseline and the “current policy” baseline.

As previously described, the current law baseline budget outlook assumes that all existing laws, including any expiration dates or scheduled changes, are followed as written. In fact, the Balanced Budget and Emergency Deficit Control Act of 1985 requires that the CBO project spending and revenue under this assumption. Under the current law baseline—which assumes that the TCJA will expire in 2025—the CBO projects that the federal debt will grow from 99% of GDP in 2024 to 122% in 2034, significantly higher than its previous high of 106% in 1946. When scored against this baseline, a full extension of the TCJA is projected to reduce federal revenues by nearly $5 trillion over ten years.

A current policy baseline, by comparison, would project the budget outlook if existing policies continue indefinitely, regardless of whether they are set to expire under current law. In the context of the TCJA, the current policy baseline would bake the $5 trillion revenue reduction associated with full TCJA extension into forecasting baseline deficits. Against this current policy baseline, a full extension of the TCJA would be scored to cost $0, and anything short of a full extension would be scored as a policy that raises revenue over ten years.

Estimating a current policy baseline can be beneficial in certain contexts. For example, certain programs or tax provisions are routinely extended, and the current policy baseline reflects the continuity that individuals and the market expect. In the 2010s, these tax policies included business tax incentives like the R&D Tax Credit and Bonus Depreciation, renewable energy and environmental provisions like the Production Tax Credit and the Investment Tax Credit, and individual incentives like the State and Local Sales Tax Deduction. In the context of routine tax extender bills, the current policy baseline can provide a practical view of future deficits or debt under more realistic policy scenarios.

On the other hand, the current policy baseline requires subjective judgments that can introduce biases and depend on political assumptions, undermining the value of these forecasts. Deciding which policies are “likely” to continue involves determining what to include in the baseline, which can shape the perceived fiscal trajectory and subsequent policy scores. Moreover, reflecting current policy accurately requires detailed assumptions about the parameters for a wide range of programs, which can reduce the transparency of these estimates. For these and other reasons, most scorekeepers, both internal and external to the federal government, rely on the current law baseline.

Given these challenges, requesting a current policy baseline or legislative score is not a routine part of the budgeting process. Such a request would likely be made to the CBO and JCT from the chair or ranking member of the House or Senate budget committee. However, because a current policy baseline is a departure from the usual framework and statutory requirements, its use could raise procedural questions, particularly if the projections are tied to reconciliation language. In such cases, the Senate or House parliamentarian—nonpartisan experts at interpreting each chamber’s legislative rules, precedents and procedures—would likely need to weigh in on whether incorporating a current policy baseline complies with budget procedures.

These challenges extend beyond assumptions surrounding the TCJA expiration. For example, IRA, like the TCJA, was passed via reconciliation and includes tax credits that expire by 2031. The 2023 Build It in America Act proposed to modify or eliminate certain clean energy tax credits that were introduced by the Inflation Reduction Act (IRA) and was estimated to raise $200 billion in revenue over ten years using, as is usual, a current law baseline. The score of such a proposal would be even larger based on a current policy baseline that assumes IRA extension because this would leave more revenue on the table to be raised via repeal. Ultimately, the choice of what to include in the current policy baseline can result in dramatically different fiscal projections, highlighting the significant impact of these baseline assumptions on long-term policy debates.

Conclusion

The TCJA is one of the most significant tax reforms in recent history and faces a critical moment as many of its provisions, including all individual tax cuts, are set to expire at the end of 2025. There is little disagreement across many scorekeepers that a full extension of the TCJA will reduce federal revenues by $4 - $5 trillion over ten years. The choice of baseline not only shapes the budgetary debate but also has significant political implications for the feasibility of extending the TCJA. A current law baseline frames any extension as a new expense, whereas a current policy baseline frames any extension as a foregone cost. This technical yet critical distinction highlights how budget scorekeeping can influence legislative priorities and debates, particularly as policymakers weigh the economic and fiscal consequences of extending the TCJA in the context of large and growing deficits and debt levels.