Eliminating the income tax exclusion for employer fringe benefits would cut the federal deficit by $396.8 billion over 10 years while causing far less economic damage than raising the top income tax rate to 50 percent, according to a new report from the Tax Foundation. The organization's Options for Reforming America's Tax Code 3.0 models 86 different changes to the tax system, including 52 options that would shrink budget deficits on a dynamic basis through 2036. As annual shortfalls approach $2 trillion, the guide offers lawmakers a roadmap for choosing revenue raisers that won't tank economic growth.
The report compares five deficit-cutting strategies with alternative approaches that raise similar amounts of money but inflict greater harm. Repealing the low-income housing tax credit and new markets tax credit would reduce the primary deficit by $202.7 billion over 10 years—more than capping the business state and local tax deduction, which would cause a much larger drop in GDP and greater job losses. Eliminating the income tax exclusion for municipal bond interest would decrease the deficit by $155.2 billion, while scrapping the SALT deduction entirely would raise similar revenue but hurt the economy more by increasing marginal tax rates on labor and business income. Tightening the limit on itemized deductions to 28 percent for top earners would cut the deficit by $139.0 billion, compared to taxing capital gains at ordinary rates, which broadens the base with less economic damage. A vehicle miles traveled tax, charging about 0.9 cents per mile for passenger vehicles and 10.6 cents for freight trucks, would reduce the deficit by $133.7 billion—less than boosting the gas tax but more sustainable as electric vehicle adoption rises.
The fringe benefits exclusion creates unequal treatment for workers earning the same total compensation, the report finds. Consider two employees each making $50,000—one receives it all in wages, the other takes $2,000 in tax-free perks like gym memberships or student loan payments. The worker with fringe benefits pays less tax despite identical compensation. The municipal bond interest exclusion, in place since 1913, violates neutrality by favoring one savings vehicle over others, letting cities offer investors lower interest rates than corporations while delivering the same after-tax return. The federal gas tax hasn't been adjusted for inflation since 1993, leaving the Highway Trust Fund running persistent deficits even as electric and hybrid vehicles contribute to road wear without paying into the system.
Broadening the tax base produces revenue with less economic harm than raising marginal rates, the report explains. Two tax increases may raise similar amounts conventionally, but one can damage the economy far more while making the code more complex or inefficient. Targeting narrow, inefficient business tax credits raises more revenue dynamically than denying all businesses a widely claimed deduction, even though both broaden the base. The report warns that not all revenue raisers are created equal, and Congress must weigh core principles—simplicity, neutrality, transparency, and stability—alongside economic effects as debt and deficits climb beyond historic norms. The bottom line: when lawmakers turn to the tax code for money, how they raise it matters as much as how much they raise.