On September 21, the House Budget Committee held a field hearing in Dallas, TX, on the need for a fiscal commission. My ears perked up when former Secretary of Defense Leon Panetta started speaking about BRAC, the Base Realignment and Closure Commission, as a model for overcoming politically difficult budget choices:
Republicans have resisted broad tax increases for decades. Social Security’s approaching insolvency may be testing that commitment.
The Washington Post recently reported that several prominent Republicans are becoming more receptive to raising taxes to avoid Social Security reform. While much of the current debate concerns raising or eliminating the limit on earnings subject to Social Security taxes, Rep. Tom Cole (R‑OK), chair of the House Appropriations Committee, said he is “willing to look at the [payroll] tax rate” and “willing to raise the amount of income through tax.”
The federal debt is on pace to rise uncontrollably, driven by rapidly escalating spending. Bond markets are demanding higher interest rates on Treasuries. Economic growth will no longer be sufficient to address mounting fiscal pressures.
Against that backdrop, one might expect Congress to prioritize reining in the growth of spending. Instead, the House has cancelled planned session days, leaving just six weeks in session for the remainder of 2026. Worse, both the House and Senate have set up the fiscal year (FY) 2027 budget reconciliation package, or Reconciliation 3.0, to facilitate new appropriations rather than generate savings.
Over the past decade, state income tax policy has moved sharply in two directions. Hawaii, Maine, Massachusetts, and New York raised their top rates by 2 percentage points or more. Meanwhile, seven states converted to a single-rate flat tax, and 21 cut income tax rates.
In a new Cato Briefing Paper, I find that states adopting flat taxes experienced roughly 1 percentage point faster annual growth in per capita income and state GDP by the fourth year after reform. If that income advantage persisted for five years, it would amount to nearly $4,000 more income per resident.
The AI boom and resulting data center backlash are taking several forms. One dimension is the growing concern over subsidies. The latest estimates from Good Jobs First show that data center tax exemptions in Georgia, Texas, Virginia, and Ohio could reduce revenue by more than $1 billion a year in each state. The National Conference of State Legislatures counts 38 states with data center tax incentives.
But not every deviation from the revenue-maximizing tax base is created equal.
Data centers should be treated like every other industry. Government policy should neither penalize nor favor specific sectors or types of investment. However, as is the case with tax expenditure analysis more generally, the term “tax subsidy” often describes two fundamentally different things.
Read the rest of this post →Senate Finance Committee Ranking Member Ron Wyden (D‑OR) recently proposed a new federal tax on data centers. The proposal would tax gross data center revenue “at a low single-digit rate.” Because it taxes revenue rather than net profits, the proposal risks imposing effective tax rates exceeding 100 percent.
Such a tax could end new data center development and risk stripping the US of its status as the global leader in AI and other cloud-based technologies.
The fundamental problem with taxing revenue rather than profits is that the tax ignores whether a firm can pay the tax. Revenue tells policymakers nothing about profitability. Grocery stores, for example, generate hundreds of billions of dollars in sales each year while typically earning profit margins of only 1 to 3 percent.
Read the rest of this post →The House is expected to vote Tuesday on a continuing resolution (CR) that would fund the federal government through December 11. Speaker Mike Johnson stated the priority is to “make sure this government gets funded and we don’t have another Democratic shutdown.”
Avoiding another pointless government shutdown is reasonable. But funding the government should not be Congress’s sole fiscal ambition, especially as it vies for Americans’ support in the upcoming midterm elections. Governing at a time when debt exceeds the size of the economy, while interest expenses consume more of the federal budget than national defense, requires more than maintaining an untenable status quo. Bond markets increasingly view federal debt as a riskier investment, demanding higher interest rates. (The Treasury Department’s recent attempt to intervene in the bond market and push rates down was misguided and ineffective.)