Republicans float new tax breaks for tips, local taxes in Trump budget package

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By Bo Erickson, David Morgan and Andy Sullivan

WASHINGTON (Reuters) – Republicans in the U.S. Congress proposed new tax breaks for tipped income, overtime pay, private school tuition, seniors, and state and local taxes on Monday as they fleshed out a sweeping budget package that would also cut taxes and tighten healthcare benefits for the poor.

The legislation introduced by the tax-writing committee in the House of Representatives incorporated many of President Donald Trump’s campaign promises, though it would not raise taxes on the wealthiest Americans, as he had suggested last week.

The package would also make permanent tax cuts from Trump’s first White House term that are due to expire this year. 

The legislation would reduce government revenue by trillions of dollars, adding to a national debt that currently totals $36.2 trillion, equal to 127% of GDP. 

That lost revenue would be partially offset by new restrictions on the Medicaid health plan, which covers 71 million low-income people, and other spending cuts that would total $912 billion over the coming decade. Republicans also would dramatically increase a tax on some university endowments, taking aim at a favorite Trump target.

Those cuts would not nearly make up for the lost revenue. The package clears the way for further borrowing by raising the debt limit by $4 trillion. 

A precise estimate of the cost of the new bill was not immediately available, though it would likely be more costly than a previous version that was estimated to cost $4.9 trillion by a congressional committee.

Republicans, who hold narrow majorities in both chambers of Congress, aim to pass the bill using a legislative maneuver to bypass the objections of Senate Democrats. But they are struggling to overcome intra-party divisions, with hardliners demanding sharp spending cuts and moderates wary of slashing programs their constituents rely on.

House Speaker Mike Johnson has said that he wants his chamber to pass the bill before the U.S. Memorial Day holiday on May 26. Lawmakers face a harder deadline of mid-July, as Treasury Secretary Scott Bessent has urged lawmakers to raise the government’s debt ceiling by that point to avoid a default that would upend global markets.

The bill would allow taxpayers to deduct up to $30,000 for the state and local taxes they pay, up from the $10,000 limit now. That is a crucial issue for moderate Republicans from high-tax coastal states including New York, New Jersey and California, though they may not be satisfied by the higher figure.

It would allow up to $5 billion annually to be donated tax-free to scholarship funds for private and religious schools, which would make it easier for families to opt out of the public school system.

It also would exempt some tipped income and overtime pay from taxes, as well as interest payments on loans for domestically produced automobiles.

It would create an additional $4,000 deduction for seniors, and set up new trust funds for children called “MAGA accounts” that would allow families to save up to $5,000 per year tax-free for college tuition, home payments or other costs. 

The tax plan would increase deductions for families with children, some multinational corporations and unincorporated businesses. 

Universities would see taxes on their endowments rise from 1.4% to 21%, adding further pressure to schools such as Harvard University and the University of Pennsylvania that are being pressured by the Trump administration over liberal social policies. 

It would also terminate a free tax-filing service set up by Democratic former President Biden’s administration, and enlist artificial intelligence to chase down tax cheats. 

TIGHTENING MEDICAID

A separate outline released on Sunday aims to save hundreds of millions of dollars on Medicaid, in part by tightening eligibility and requiring recipients to work.

That stops short of the more dramatic cuts advocated by the party’s right flank, but would still kick 7.7 million people off the program, according to the nonpartisan Congressional Budget Office.

Those cuts are not likely to satisfy fiscal hawks, who are pushing for deeper spending reductions, and could also upset moderates who represent low-income areas where Medicaid is especially important.

Trump has repeatedly vowed not to cut Medicaid benefits, though it is not clear whether he would approve these proposed changes.

The plan also would cut green-energy subsidies created by Biden’s 2022 Inflation Reduction Act.

(Reporting by Bo Erickson, Susan Heavey, David Morgan, Richard Cowan, Andy Sullivan and Jeff Mason; Writing by Andy Sullivan; Editing by Scott Malone, Mark Porter and Alistair Bell)