10 Less Harmful Ways of Raising Federal Revenues

The next president and Congress face two fiscal challenges in 2025 that may require finding new sources of revenues. First, the debt ceiling must be raised in early 2025, forcing decisions about how to stem the tide of federal red ink now exceeding $35 trillion. Next, lawmakers will have to address expiring portions of the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Cuts and Jobs Act (TCJA) by the end of next year. Extending all the tax cuts could require more than $4 trillion worth of offsets over the next decade to avoid adding to the national debt.

While raising new revenues may be politically necessary to seal either deal, lawmakers must keep in mind that not all revenue raisers are equal. Some methods of raising revenues have far more harmful economic consequences than others.

For example, corporate and individual income taxes are the most harmful taxes for economic growth, so raising those rates should be avoided. Similarly, tax incentives for saving and capital investments are key to increasing productivity and real wages and should be protected.

There are ways of raising new revenues that are less economically harmful. Here are 10 suggestions representing more than $10 trillion of potential new revenue over the next decade. They are presented roughly in order of their political feasibility:

1. Promote economic growth:

This may seem like a no-brainer, but the economy’s ability to generate more revenues for the Treasury is directly dependent upon lawmakers’ choice of tax policies. Based on Congressional Budget Office (CBO) forecasts, boosting productivity growth by just 0.5 percentage points per year could generate some $1.7 trillion in new revenues over a decade. Policies such as a lower corporate tax rate and full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for capital investments are key to raising long-term productivity.

2. Sell government assets:

The federal government owns hundreds of billions worth of assets that it can and should sell off to pay down its debt. This includes millions of acres of public lands, an extensive direct loan portfolio, and state-owned enterprises such as Amtrak, the Power Marketing Administration utilities, and the Tennessee Valley Authority. Selling these assets could generate considerable cash if sold on the open market. For example, CBO estimated that divesting two Western Power Marketing Administrations of their transmission assets could raise $2.3 billion.

Since there are no recent estimates on the value of these assets, lawmakers should establish an independent asset sale commission (similar to the Base Realignment and Closure Commission [BRAC]) to prepare these assets for sale and seek the highest bids, which could conceivably raise upwards of $100 billion.

3. Increase user fees and lease royalties:

Lawmakers could raise billions with minimal harm to the economy by increasing user fees for many of the goods and services the federal government provides, such as flood insurance, inland waterways, national parks, the Smithsonian, and loan originations. President Biden’s 2025 budget proposed nearly $26 billion in higher user fees—a reasonable starting point.

Billions more could be raised by opening up more public lands for oil and mineral leasing. While some organizations have valued federal land, energy, and mineral resources in the tens of trillions, others have conservatively estimated that selling such assets could net $1.5 trillion.

4. Tax certain “untaxed” business income:

For more than a century, lax rules have allowed many tax-exempt nonprofits to engage in business activities that compete directly with private businesses. These include credit unions, rural electric coops, nonprofit hospitals, and insurance firms. These “nonprofit” businesses should be taxed as any for-profit enterprise.

Moreover, a growing number of nonprofit organizations operate what are ostensibly for-profit enterprises. For example, college sports organizations earn billions in tax-free revenues from hosting tournaments and selling their broadcast rights, while other “nonprofit” organizations such as AARP earn hundreds of millions of dollars in income from royalties and other commercial sources tax-free.

A recent Tax Foundation study estimates that subjecting the business-like income of these nonprofits to the 21 percent corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. could raise upwards of $400 billion over a decade.

5. Raise federal employee benefit contributions:

As most private employers are now doing, the federal government should ask federal employees to contribute more to their own health care and retirement costs. Currently, federal employees pay 25 percent of the costs of a basic health plan (some pay more for more expensive plans) and contribute 4.4 percent to their defined benefit retirement annuity (although employees hired before 2014 often contribute much less).

CBO estimates that upwards of $44 billion could be raised over a decade if federal employees were required to contribute more to their own retirement. Billions more could be saved if federal employees were required to contribute more to their health insurance premiums.

Similarly, CBO reports that “more than 9 million people are eligible to receive health care through TRICARE, a program run by the Department of Defense’s (DoD’s) Military Health System.” Many are working-age retirees not yet eligible for Medicare. A reasonable increase in their enrollment fees and cost-sharing could raise new revenues and reduce outlay costs.

6. Raise the federal gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. :

Since 1993, the federal gas tax has stood at 18.4 cents per gallon, and the diesel fuel tax has been stuck at 24.4 cents per gallon. Neither is indexed to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . Meanwhile, the federal highway trust fund is expected to run dry in 2028 because highway spending far exceeds the amount of revenues generated by the taxes. CBO estimates that increasing the federal gas tax by 15 cents and indexing it to inflation could raise $240 billion over a decade and shore up the trust fund. Alternatively, the gas tax could be replaced by a vehicle miles traveled tax that would function as a more accurate user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. for the roads.

7. Eliminate industry subsidies and targeted tax preferences:

The tax code subsidizes many industries and special interests in ways that distort markets and provide unwarranted benefits. These subsidies include the tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for credit unions, tax credits for electric vehicles and green energy projects, tax-exempt bonds, Opportunity Zones, new market tax credits, low-income housing credits, and various higher education credits. Removing these unjustified subsidies could equitably raise substantial revenue while reducing lobbying and influence peddling. Repealing the green energy credits alone would raise upwards of $1 trillion over a decade. Add to that roughly $700 billion by repealing housing credits and other preferences mentioned above.

8. Broaden the income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. :

Not all tax preferences are created equal, but from an economic perspective, eliminating tax preferences produces less harm than increasing marginal tax rates.

Lawmakers can start by eliminating itemized deductions. Only 9 percent of tax filers itemize their deductions thanks to the expanded standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. in the Tax Cuts and Jobs Act. Most itemizers are high-income taxpayers. According to data provided by the Joint Committee on Taxation (JCT), taxpayers earning over $100,000 claim 97 percent of the charitable deduction, roughly 90 percent of the state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. (SALT), and about 92 percent of the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. .

CBO estimates that eliminating all itemized deductions—effectively subjecting all taxpayers to the standard deduction—could raise more than $2.5 trillion over a decade, similar to recent Tax Foundation estimates. More could be raised by also eliminating the SALT deduction for corporations as a means of maintaining parity between individuals and businesses.

9. Increase Medicare premium contributions:

Increasing premiums and co-payments for Medicare benefits is not likely to be politically popular, but asking seniors to contribute more toward this near-bankrupt health insurance program would be far less harmful to the economy than a broad-based income tax. Even if these policies were means-tested, they might actually add a measure of market discipline into a system that has little. According to CBO, increasing the Medicare premium for Part B to 35 percent from 25 percent, and freezing the income-related premiums, could raise $448 billion over 10 years. (Congress’s arcane budget rules count these payments as a reduction in mandatory spending, not new revenues, but the effect is the same.)

10. Tax employer–provided health care benefits:

The exemption from income and payroll taxes for employer-provided health insurance is the single largest tax preference, amounting to roughly $5.2 trillion over 10 years according to the Office of Management and Budget. It is also unique in that it is “double-non-tax income” because the cost of health insurance is deductible for employers and not taxed as income for employees. Thus, this benefit is completely outside of the tax system.

Moreover, the exemption disproportionately benefits high-income workers and those working at large employers, and ties workers to their jobs out of fear of losing health insurance. Taxing this currently untaxed employee compensation would be good policy and would cause employers to shift more compensation to cash. Alternatively, CBO offers various ways to partially tax these benefits.

Conclusion

If lawmakers are convinced that new revenues must be part of any long-term effort to solve the budget crisis or offset the cost of extending the TCJA, they must choose the least harmful ways of raising new revenues or else risk undermining their efforts by slowing economic growth. The above list of revenue measures is hardly complete, but it should give lawmakers some rules of thumb on how to avoid the most economically harmful revenue options.

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