Navigating Trump’s Federal Tax Plan
Summary
Of Donald Trump’s reelection platforms, the economy was perhaps the most intensely discussed, with Trump pledging to reduce the cost of everything during this second term: everyday items, utilities, and government spending itself, all while extending the tax cuts that his first Administration implemented under the 2017 Tax Cuts and Jobs Act (TCJA). Although the Republicans control both the House and Senate, their majority is slim. Combined with the cost associated with the plan, it’s far from a done deal. Proponents of the Trump tax plan argue that it will grow the economy by reducing taxes on industry and corporations—all the same, opponents claim that the plan is simply shifting the financial burden to low and moderate-income households, further widening an arguably already egregious economic gap in the country.
When TCJA passed, the Congressional Budget Office (CBO) estimated that the tax package would cost $1.9 trillion over ten years. If we go back to 2017, we can see that the TCJA did in fact lower tax rates for some, doubled the standard deduction for taxpayers, and expanded the federal child tax credit, but it also cut personal exemptions and the amount of state and local taxes (SALT) that could be deducted from federal returns. Many of the provisions of the TCJA are permanent—such as the reduction in the corporate income tax rate—but other features of the TCJA will expire this year if Congress does not act to continue the benefits of the Act.
As Trump embarks on his second term, he’s vowed to go further by eliminating taxes on tips, Social Security benefits, and overtime pay. He’s pledged to adjust the federal dedication for state and local taxes, close the carried interest tax loophole, cut taxes on products made in America, and eliminate tax incentives for clean energy.
The desire among Republicans to enact this ambitious tax plan is being used to justify the drastic cuts to government agencies and programs—though many say that the cuts have only targeted agencies and programs that Republicans have long since had their eyes on. The imposition of tariffs on the United States’ largest trading partners has also been hailed as a way to level the playing field and pay for the proposed tax cut plan, though this increases costs for everyday Americans.
The call for these cuts to be viewed through a lens of fiscal responsibility also grows. It is estimated by experts that the tax cuts currently proposed by the Trump Administration will cost $4.2 trillion over the next decade, with its major benefits going only to wealthier Americans and people making over roughly $320,000—or the top 5% of income earners. Concurrently, Elon Musk has pledged to cut $1 trillion from the federal government. The imbalance between the cost of tax cuts and the potential savings from the program cuts at the federal level does very little to reduce the overall national debt, which Trump has heralded as one of his goals during his Administration. It’s important to note that the reduction of the national debt has bipartisan support—it’s the method that’s up for debate.
What Could Change
As important as it is to understand the proposed tax cuts—and how the burden of those cuts will shift—it is equally important to understand how paying for these tax cuts will affect federal government spending and its workforce, and those impacts on state and local governments. Combined, the most vulnerable of our residents could potentially be impacted by higher taxes and reduced programs and federal support, requiring them to further rely on state and local assistance.
According to an analysis by the Center for American Progress, the Project 2025 tax plan—which calls for a “simplification” of tax brackets, reductions in the corporate tax rates, and a gradual move from income tax to consumption tax—will ultimately shift the tax burdens onto the middle class, immediately increasing taxes for families, while favoring millionaires and businesses. The impact of a consumption tax would also trigger a rise in inflation, disproportionately affecting the lower and middle classes. Based on CAP’s assessment, a family in Pennsylvania (married, 2 children, earning a median income of $119,000) would see an increase of over $3,000 to their federal income taxes.
Congressional negotiations with the Trump Administration are on-going. As of late last week, Republicans say that they are nearing a deal, but not all of their caucus will support these tax reforms if they do not go far enough or if they are too expensive. With slim Republican majorities in both chambers, leadership can not afford many defections on this cornerpiece of the Trump agenda. Adding pressure to this is a looming budget deadline on Mar 14, 2025 to reach an agreement on a spending bill before the government shuts down.
In Context
Any cuts to federal programs will put the onus on state and local governments to replace those supports, all the while having less and less resources with which to fill the gap. Ultimately, it’s worth noting that while Trump’s tax plans are, as they stand, to the benefit of fewer Americans than he promised on his campaign trail, they will still be subject to Congressional approval before becoming law.
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While tax cuts on the surface are an idea anyone would welcome, who benefits from those tax cuts, who shoulders the burden of the cuts, and at what cost, is a growing concern. Perhaps in a case of buyer’s remorse, recent surveys show that while voters were in support of what Trump was proposing on the campaign trail, those same people are now concerned that the cuts being put forward will have a detrimental impact on their own benefits and daily life.
An analysis by the U.S. Treasury regarding how this plan—based on data from the 2017 overhaul—would impact tax payers concludes that it would benefit America’s highest earners, with the “top 0.1% of earners getting a potential tax cut of roughly $314,000 under a full extension of the provision”.
It is important to examine the potential upside of Trump’s proposed cuts to overtime taxes and tipped wages, which the majority of Americans favor. Cutting taxes on overtime pay and tips, on the surface, puts more money back into the pockets of tipped workers. According to The Budget Lab at Yale, the average tax cut for families who benefit would be roughly $1,700, while the bottom fifth of earners would save $200.
A major selling point for older Americans on Trump’s tax plan is the promise to eliminate taxes on social security. According to the Penn Wharton Budget Model, if taxes on Social Security benefits are eliminated, those at the top of household income levels would see the largest reductions, ranging from annual gains of $1,625 to $2,450 in 2026, and it would increase to $4,075 to $5,080 by 2054.
While these tax cuts would benefit the group that Trump targeted during his campaign, the age-old question remains: if taxes are cut, who ultimately pays them?
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With Republicans holding a majority in both the House and Senate, the Administration's tax plan faces a steep climb—especially as internal party factions continue to disagree on whether or not the proposed cuts go too far, or not far enough. Despite the majority, Republicans still face a narrow path through Congress as some moderate members remain wary about adding trillions to the deficit. NPR speculates that party leaders are pushing to use budget reconciliation to pass the measure with a simple majority, while the looming March 14th budget deadline leaves room for negotiations to take place, but the timeline shrinks daily. Given all the factors at play, the feasibility of Trump’s tax bill depends on how well Republican leadership can reconcile internal policy divides before time runs out. As the Administration continues to make promises on all fronts, much needs to come to fruition before any bills are signed, indicating that compromise will be essential.
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Of the major sectors impacted by the proposed cuts, large corporations are the ones positioned to benefit most from reduced corporate rates, which proponents argue will drive growth and job creation, while critics warn that the gain may end up primarily benefitting the shareholders rather than workers. Small businesses filing taxes as pass-through entities may see simplifications or deductions, but they risk losing out if the biggest breaks swing in the favor of larger firms. Retirees stand to gain from eliminating taxes on Social Security benefits.
Energy producers will face major changes as the plan looks to roll back clean energy tax incentives and prioritize fossil fuel ventures, but Trump faces backlash from major automotive manufacturers. In November 2024, the Alliance for Automotive Innovation made up of major automakers, urged President Trump to maintain EV tax credits. Domestic manufacturing could benefit from Trump’s “Made in America” production incentives, but tariffs on imported goods could inflate the price for companies relying on global supply chains.
Opportunities for Philadelphia and Pennsylvania
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One bright light for Pennsylvania residents is the proposal to remove the cap on the State and Local Tax (SALT) deduction, and the bi-partisan support in Congress for this. The previous cap had the greatest impact on higher tax states traditionally “blue” states, like California, New York, New Jersey and Pennsylvania.
Pennsylvania businesses may also benefit from corporate tax cuts at the federal level. However, tax cuts at the state and local levels will need to continue in order to give Pennsylvania businesses a competitive advantage. Tax cuts are a cornerstone of Governor Shapiro's push to modernize and simplify Pennsylvania’s tax structure by cutting the corporate net income tax, and eliminating the “Delaware Loophole”.
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As is true for all Pennsylvania residents, removing the SALT deduction cap at the federal level would be a boost for everyone in the City who pays property and wage taxes. As at the state level, a priority of the Mayor, City Council, the Greater Philadelphia Chamber of Commerce and the diverse chambers is to reduce the tax burden on businesses and residents alike. However, the sobering reality of budget cuts coming from Washington D.C. will require the City to be creative in how it compensates for the loss of federal dollars, while continuing to make Philadelphia a desirable place to live and do business.
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