As lawmakers prepare for future fiscal battles over expiring legislation, a comprehensive new policy analysis from the Tax Foundation sheds light on the sweeping economic, revenue, and distributional consequences of federal tax policy. The newly released book, Options for Reforming America’s Tax Code 3.0: A Policymaker’s Guide to Tax Reform Trade-Offs, models the effects of 86 distinct modifications to the federal tax code. Among its primary findings, the publication evaluates four prominent temporary tax cuts enacted under the One Big Beautiful Bill Act (OBBBA) that are currently scheduled to sunset after 2028: the enhanced senior deduction, the overtime pay deduction, the tips deduction, and the auto loan interest deduction.
Often colloquially championed by President Trump and bipartisan members of Congress under the broad banner of "no tax on" provisions, these targeted carveouts command widespread political appeal. However, the Tax Foundation’s econometric modeling reveals that extending these provisions permanently would add $577.3 billion to the primary federal deficit between 2027 and 2036. While the combined price tag is slightly lower than the sum of their individual estimates due to overlapping interactions between the provisions, the fiscal reality is accompanied by structural complications. Critics and fiscal analysts note that such narrowly tailored incentives introduce substantial complexity, diminish the overall neutrality of the tax code, and frequently inspire a wave of additional lobbying and carveout proposals.
Make Permanent the Deduction of Overtime Pay from Taxable Income
Under current law governing the 2025 through 2028 tax years, eligible individual taxpayers can deduct up to $12,500 of qualified overtime pay, with the limit doubled to $25,000 for married couples filing joint returns. Crucially, this deduction applies specifically to the "half" portion of time-and-a-half overtime compensation mandated under the Fair Labor Standards Act (FLSA). Available to both itemizers and non-itemizers alike, the provision begins to phase out when a taxpayer’s modified adjusted gross income surpasses $150,000 for single filers and $300,000 for joint filers.
According to the Tax Foundation’s analysis, translating this temporary measure into permanent law would conventionally expand the primary deficit by $372.4 billion over a ten-year window. On the macroeconomic front, a permanent overtime deduction would theoretically expand the long-run size of the economy by a modest 0.1 percent, driven by lower marginal tax rates for eligible workers whose earnings fall outside the phaseout thresholds.
Despite these marginal economic gains, the overtime deduction has generated significant administrative confusion for both workers and employers attempting to navigate complex eligibility rules regarding qualifying overtime compensation. Furthermore, tax economists point out that the policy compromises the fundamental neutrality of the tax code. For example, two separate workers earning identical total annual compensation of $50,000 could face vastly different tax liabilities simply because one received a portion of that earnings through qualifying overtime pay, creating an uneven playing field among similarly situated wage earners.
Make Permanent the Deduction for Auto Loan Interest Paid
Another major temporary provision enacted for the 2025 through 2028 period permits taxpayers to deduct up to $10,000 in interest paid on qualifying personal automobile loans. To qualify under current rules, the underlying loan must finance a newly manufactured vehicle for which the final assembly occurred within the United States.
Like its counterpart for overtime, this deduction is accessible to taxpayers regardless of whether they choose to itemize or take the standard deduction. It features income thresholds, beginning to phase out when a taxpayer’s modified adjusted gross income exceeds $100,000 for single filers and $200,000 for joint filers. Making the auto loan interest deduction a permanent fixture of the federal tax code would conventionally increase the primary deficit by $33.7 billion over a decade.
While the extension would theoretically reduce marginal tax rates for certain eligible borrowers, the positive economic stimulus would be largely canceled out by the marginal tax increases imposed on taxpayers caught within the income phaseout ranges. Consequently, the Tax Foundation estimates that a permanent auto loan interest deduction would actually decrease the long-run size of the economy by a nominal margin of less than 0.05 percent.
Automotive lenders and financial institutions have repeatedly emphasized that complying with the stringent reporting mandates associated with the provision is operationally challenging. Meanwhile, everyday consumers frequently express confusion regarding vehicle eligibility. Beyond implementation hurdles, the deduction contributes to an increasingly fragmented consumer credit landscape within the tax code. While certain forms of mortgage interest, educational debt interest, and now specific auto loans can qualify for special tax treatment, other common forms of consumer borrowing, such as credit card interest, remain entirely non-deductible.
Make Permanent the Enhanced Senior Deduction
Designed to target older Americans, the enhanced senior deduction provides taxpayers aged 65 and older with an additional $6,000 deduction from 2025 through 2028. Available to itemizers and non-itemizers alike, the provision begins to phase out when modified adjusted gross income exceeds $75,000 for single filers and $150,000 for joint filers, with a formal expiration date set for the end of the decade.
Permanently extending this enhanced senior deduction would add an estimated $137.9 billion to the primary deficit over ten years on a conventional basis. Similar to the auto loan provision, a permanent senior deduction would alter the long-run size of the economy by less than 0.05 percent. While it lowers marginal tax rates for senior citizens outside the phaseout bracket, it simultaneously increases marginal rates for those caught within the phaseout zones. Because the policy primarily benefits retired individuals rather than active labor market participants, its overall macroeconomic impact is relatively subdued.
Distributional analysis indicates that the deduction tends to provide the greatest relative benefit to households positioned within the lower-middle and middle-income quintiles. Lower-income seniors generally experience little to no federal tax liability thanks to the existing standard deduction, while higher-income seniors are effectively barred from claiming the benefit due to the income phaseouts.
Critics note that the enhanced senior deduction adds unnecessary clutter to the tax code, frequently causing confusion with the long-standing additional standard deduction already available to older Americans. Additionally, analysts point out that the provision exerts downward pressure on the solvency of the Social Security trust fund by curtailing the overall volume of taxes collected on Social Security benefits that are normally remitted back into the fund.
Make Permanent the Deduction of Tip Income from Taxable Income
The fourth major temporary provision allows workers who earn wage income supplemented by tips to deduct up to $25,000 of their gratuities from taxable income between 2025 and 2028. This deduction is similarly subject to income guardrails, beginning to phase out when modified adjusted gross income surpasses $150,000 for single filers and $300,000 for joint filers.
Making the tipped income deduction permanent would conventionally expand the primary deficit by $45.9 billion over a ten-year period while generating a negligible boost of less than 0.05 percent to the long-run size of the economy through minor reductions in marginal rates for qualifying workers.
The policy highlights the inherent difficulties of carving out specific, arbitrary subsets of labor compensation for preferential tax treatment. Implementing the deduction requires highly detailed regulatory definitions to determine which specific occupations qualify, alongside strict guardrails designed to prevent workers and businesses from artificially recategorizing traditional wage income as tips to exploit the tax break. For instance, two service workers performing comparable labor and receiving identical total compensation can face drastically different tax bills simply because a portion of one worker’s earnings comes in the form of qualifying tips.
Furthermore, empirical reviews show that the tip income deduction delivers minimal financial assistance to workers situated in the bottom 20 percent of the income distribution. Because the baseline standard deduction already shields most of their earnings from taxation, many low-income service workers have little remaining tax liability against which the new tip deduction can be applied.
Big Picture
Taken together, the ongoing debate surrounding these temporary "no tax on" provisions illustrates the fundamental drawbacks of relying on narrowly tailored tax carveouts to deliver broad-based economic relief. Permanently extending the four OBBBA deductions would reduce federal revenue by approximately $577 billion over the course of a decade. While the combined policy changes would yield a virtually imperceptible change in the long-run size of the overall economy, they would institutionalize complex phaseouts that artificially inflate marginal tax rates for targeted groups of taxpayers, foster ongoing disputes over eligibility, and enforce unequal tax treatment among individuals earning the exact same economic income.
Rather than locking these temporary carveouts into permanent law, tax policy experts suggest that Congress allow them to naturally expire after 2028 in favor of pursuing broader, more structurally neutral tax reforms. A simplified tax code characterized by fewer narrow exceptions would treat similar sources of income equally, dramatically reduce administrative compliance burdens and opportunities for strategic tax planning, and establish a far more durable foundation for sustainable, pro-growth fiscal policy over the long term.
