The US economy is set for an unexpected fiscal boost if lawmakers back a potential deal for $70 billion worth of tax breaks for businesses and families.
Congressional negotiators are locked in talks over renewing expired business tax breaks and boosting the child tax credit, evenly split between both. The proposal will need to pass through a Congress that is deeply divided over the nation’s fiscal trajectory, as some Republican lawmakers push for deep spending cuts as a condition for averting another government shutdown on Jan. 19 and Feb. 2, when temporary funding expires.
If passed, the tax breaks offer a double-edged sword for an economy that appears on course for a soft landing.
While the extra cash would boost consumer spending, it would also risk reigniting inflation pressures — complicating prospects for the Federal Reserve to lower interest rates this year, economists warned. Data for December show that inflation picked up at the end of 2023, fueled by services costs while a decline in goods prices petered out. The consumer price index increased 3.4% in the year through December, the most in three months. Prices for clothing and cars continue to increase.
Mickey Levy, a visiting scholar at the Hoover Institution, said the tax measures would add fuel to an economy that is already growing faster than estimates for its long run potential. The legacy of pandemic-era fiscal stimulus continues to juice growth, he said.
“There’s already substantial fiscal stimulus driving up economic activity,” he said.
Analysts say much will depend on the final details of any agreement and how the tax breaks will be structured. The draft deal would extend breaks through 2025.
The talks were still in flux as lawmakers left for the long weekend Friday. After halting progress earlier in the week, several potential roadblocks to a bipartisan agreement emerged, including differences over the state-and-local tax deduction cap, an expansion to the low-income housing tax credit and a more robust child tax credit.
If a deal does come together, money could start flowing to households as soon as March, said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, which advocates for reducing deficits and debt. He cautions the proposal will do little to encourage additional corporate investment.
Business Breaks
The proposed deal would revive tax breaks for research and development spending, boost the deductibility of investment, such as in equipment, and business loans. Lawmakers are discussing restricting benefits for foreign research investments in order to target the benefits to companies conducting such activities in the US.
“This is going to be a decent amount of fiscal cost with very little of it going to encourage new investment in a time when there are still inflation pressures,” Goldwein said.