What Five Revenue Raisers in the Options Guide Tell Us About Sound Tax Reform

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. Foundation’s new resource, Options for Reforming America’s Tax Code 3.0: A Policymaker’s Guide to Tax Reform Trade-Offs, models the economic, distributional, and revenue effects of 86 different changes to the tax code. Within the book are 52 options that would decrease federal budget deficits on a dynamic basis over 10 years. As annual deficits approach $2 trillion per year, policymakers in both parties may look to the tax code for revenue.

Two tax increases may raise similar amounts of revenue on a conventional basis, but one may harm the nation’s economy more. Some may make the tax code more complex or inefficient, while others make the tax code simpler and more neutral.

Below are five revenue-raising options from the guide that illustrate the trade-offs Congress should consider when looking to the tax code to reduce federal debt and deficits.

1. Eliminate the Income Tax Exclusion for Other Employer Fringe Benefits (Option 32)

Unlike most wage and salary income, many employer-provided benefits are excluded from federal income taxes. Common examples include health insurance and retirement plan contributions, though many other so-called “fringe” benefits are also tax-free, including items like the use of on-site gyms, employer payments of student loans, or employee discounts.

While these benefits are popular with employees and employers, they make the tax code less neutral by favoring some types of compensation over others. Consider two workers with the same $50,000 in total compensation—one earns it all in wages, and the other takes $2,000 of it in tax-free fringe benefits. Although the two workers receive the same amount of compensation, the worker with fringe benefits pays less in taxes.

This option would eliminate the income tax exclusion for fringe benefits, meaning the value of these benefits would be included in an employee’s taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. Taxable income differs from—and is less than—gross income.  . It would broaden the 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., putting these benefits on more equal footing with wages and salaries.

On a dynamic basis, this option would decrease the primary deficit by $396.8 billion from 2027 through 2036.

Compare this option to raising the top marginal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source rate to 50 percent. The top marginal rate increase results in a much larger decrease in gross domestic product (GDP) and a much greater reduction in work. Broadening the tax base leads to a more neutral and transparent tax code and can raise similar amounts of revenue to marginal rate increases while doing much less damage to the nation’s economy.

Table 1. Eliminating the Income Tax Exclusion for Fringe Benefits vs. Raising the Top Marginal Individual Income Tax Rate to 50 Percent, Revenue and Economic Effects

Source: Tax Foundation General Equilibrium Model, August 2026.

2. Repeal the Low-Income Housing Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income rather than the taxpayer’s tax bill directly. and the New Markets Tax Credit (Option 76)

 The low-income housing tax credit (LIHTC) and new markets tax credit (NMTC) have earned bipartisan support and generally incentivize housing and economic development.

Nonpartisan policy experts have scrutinized both credits for their complexity, and the LIHTC has attracted criticism for its high cost per unit built and its relative inefficiency in delivering affordable housing to those who need it most.

This option would repeal the LIHTC and NMTC, broadening the business tax base in the process. On a dynamic basis, it would decrease the primary deficit by $202.7 billion from 2027 through 2036.

Compare this option to capping the business state and local tax (SALT) deductionThe state and local tax (SALT) deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act (TCJA) capped it at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both.. Capping the business SALT deduction also broadens the tax base, but results in a much larger decrease in GDP and a much greater loss of jobs. Targeting narrow and inefficient business tax credits raises more revenue on a dynamic basis than denying all businesses a widely claimed deduction for taxes paid, even though both reforms broaden the business tax base.

Table 2. Repealing LIHTC and NMTC vs. Capping the Business SALT Deduction, Revenue and Economic Effects

Source: Tax Foundation General Equilibrium Model, August 2026.

3. Eliminate the Income Tax Exclusion for Municipal Bond Interest (Option 29)

When investors earn interest on their savings, that interest is usually taxable. One notable exception is the tax exclusion for municipal bond (muni bond) interest, which has been around since Congress first installed a permanent income tax in 1913.

The muni bond interest exclusion has earned bipartisan support over many decades in Congress. But it violates the principle of a neutral tax code by favoring one type of savings vehicle over others. Towns and cities can offer investors a lower interest rate than corporations or the US government while providing the same return on investment.

This option would eliminate the muni bond income tax exclusion. On a dynamic basis, it would decrease the primary deficit by $155.2 billion from 2027 through 2036.

Compare this option to eliminating the SALT deduction. Both the SALT deduction and the muni bond interest exclusion indirectly subsidize state and local government spending. Eliminating SALT causes more economic harm because it would increase marginal tax rates on labor income, pass-through business income, and investment in owner-occupied housing.

Table 3. Eliminating the Income Tax Exclusion for Muni Bond Interest vs. Eliminating the SALT Deduction, Revenue and Economic Effects

Source: Tax Foundation General Equilibrium Model, August 2026.

4. Tighten the Limitation on Itemized Deductions (Option 24)

The One Big Beautiful Bill Act of 2025 established a new limit on itemized deductions, effective from 2026 onwards. This new limit caps the value of itemized deductions at 35 percent for taxpayers in the top (37 percent) tax bracket.

That means a $10,000 deduction for a taxpayer in the 37 percent bracket equals a $3,500 tax cut instead of a $3,700 tax cut. This broadens the tax base and, on the margin, may push some taxpayers toward the simpler standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative. over itemizing their deductions.

This option would tighten the cap to 28 percent. On a dynamic basis, it would decrease the primary deficit by $139.0 billion from 2027 through 2036.

Compare this option to taxing capital gains and dividends at ordinary income tax rates. While both options are targeted at high-income taxpayers, tightening the overall cap on itemized deductions broadens the tax base rather than raising rates and is less damaging to the economy.

Table 4. Tightening the Limit on Itemized Deductions vs. Taxing Capital Gains and Dividends at Ordinary Income Rates, Revenue and Economic Effects

Source: Tax Foundation General Equilibrium Model, August 2026.

5. Introduce a Vehicle Miles Traveled Tax (Option 79)

Congress created the Highway Trust Fund (HTF) in 1956, and 70 years later it remains the main way the federal government funds interstate roads, bridges, and highways. 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. is the main funding source for the HTF, but it has not been adjusted for 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 spendin since 1993. As the cost of road maintenance and the nation’s infrastructure needs have risen, the HTF has run persistent deficits and—absent reforms—faces long-run shortfalls.

A related funding challenge surrounds the rising adoption of electric, hybrid, and other clean energy vehicles in the US, which pay little to nothing in gas taxes despite contributing to the degradation of the nation’s road infrastructure. Heavy vehicles, such as tractor-trailers, also pay less into the system than their wear and tear suggests they should.

This option would repeal the federal gas and diesel taxes and institute a vehicle miles traveled (VMT) tax, adjusted by vehicle weight. Under this option, the average passenger vehicle would pay about 0.9 cents per mile, while the average freight vehicle would pay approximately 10.6 cents per mile. On a dynamic basis, this option would decrease the primary deficit by $133.7 billion from 2027 through 2036.

Compare this option to increasing the federal gas tax from $0.184 per gallon to $0.28 per gallon. The federal gas tax increase raises more revenue than the VMT over the 10-year window but also leads to more significant job losses. Over a longer budget window, the VMT may prove a more sustainable solution to HTF solvency concerns—especially as electric vehicle adoption increases.

Table 5. Introducing a Vehicle Miles Traveled Tax vs. Increasing the Federal Gasoline Tax, Revenue and Economic Effects

Source: Tax Foundation General Equilibrium Model, August 2026.

Big Picture

All tax policies involve trade-offs, and those trade-offs may become more difficult for policymakers as federal debt and deficits rise beyond historic norms.

Not all revenue raisers are created equal, though, and Congress must weigh core tax principles—simplicity, neutrality, transparency, and stability—along with the economic effects of reform options as it considers future legislation.

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