President Trump’s new domestic policy law includes tax cuts angled toward the highest-income Americans and spending cuts that will fall mainly on lower-income residents, economists say.
“The winners and losers are pretty clear,” said Martha Gimbel, executive director and co-founder of the Yale Budget Lab. “The highest-earning Americans will benefit, and the lowest-earning Americans will lose.”
The new law makes permanent tax cuts Trump enacted during his first term. It eliminates taxes on overtime and tips. And, it raises the cap on state and local tax deductions, or SALT, from $10,000 to $40,000 for people earning less than $600,000 a year.
The law pays for these initiatives by restricting access to Medicaid and the Supplemental Nutrition Assistance Program, or SNAP, formerly known as food stamps. And those effects could be felt for decades, Gimbel said.
“In the short run, there will be a boost to economic growth, but in the long run, economic growth slows and interest rates go up because of the amount in debt and debt-deficit spending,” Gimbel said. “That also means that people are going to have to pay more for mortgages. They’re going to have to pay more on auto loans.”
To illustrate how the law combined with the tariffs that took effect earlier this year will impact families across the country at various income levels, we created an economic model based on three fictional families. The Yale Budget Lab’s John Ricco, associate director of policy analysis, and Harris Eppsteiner, associate director of economic analysis, ran the numbers and included the potential effect Trump’s current tariffs could have on people’s finances.
The Keller family comprises a single father, Jamie, and his 14-year-old daughter Jessica. They live in Mission, South Dakota. Jamie works in construction. Because South Dakota is prone to severe and inclement winter weather, Jamie gains and loses work based on environmental factors and project completion timelines.
Jamie earns $20,000 per year, or about $1,600 per month. He and his daughter Jessica rent a one-bedroom apartment for $600 per month.
They rely on Medicaid and SNAP benefits. Because Jamie’s work hours are often long and unpredictable, he relies on after-school programs for Jessica when he cannot be home with her. Those programs total $500 per month, making his regular monthly expenses $1,100.
Could lose Medicaid and SNAP benefits
The Keller family benefited from the original 2017 version of the Tax Cuts and Jobs Act, which brought down the tax rate on Jamie’s income by 3%. New provisions from Trump’s domestic policy law do not benefit him at all. His total tax cut under the 207 law is $700 per year, but tariff-related increases on materials, groceries, and other expenses raise his cost of living by $900 per year.
The new tax and spending law also introduces new work requirements — 80 hours per month — for Medicaid eligibility. Jamie’s work hours are dependent on external factors and are ever-changing. If he experiences one month with fewer than 80 hours — even if his annual work hours average more than 80 per month — he could lose Medicaid coverage. He would have to wait until he’s worked 80 hours or more for at least one month before reapplying.
The law also introduces similar work requirements for SNAP eligibility, requiring 80 hours of work per month and more frequent eligibility reviews. Mission, South Dakota, has a higher unemployment rate and fewer jobs, so Jamie no longer qualifies for a waiver of SNAP’s work requirement. If he can’t consistently document 80 hours per month because of the unpredictability of his job, he and his daughter would be cut off from receiving benefits and have to rely on food banks. Even if his benefits remain, there is no longer a state grant in place to provide nutrition and obesity prevention education.
Mother Maria, father Dennis and 16-year-old Joshua make up this family. They live in Carson City, Nevada. Maria works as a firefighter who makes regular overtime pay, and Dennis works as a bartender who makes tipped income. Joshua is a junior in high school and plans to attend an in-state university.
Maria earns $72,000, including overtime pay. Dennis earns $12.50 per hour and makes $180 in tips per day on average. He works four 10-hour shifts per week and earns about $61,000 per year. The family’s total income is $133,000 per year, or around $11,000 per month.
The Alavardos own a 3-bedroom house and pay $2,500 per month to cover their mortgage and housing insurance costs. They are all covered by Maria’s private insurance policy through her job and pay $1,000 per month for coverage. As Joshua prepares to graduate from high school and enter college, Maria and Dennis save $600 per month in a 529 plan for his tuition.
The family’s regular monthly expenses total $4,100.
Benefits from new provisions
The new spending law eliminates taxes on overtime or tipped income, which bodes well for firefighter Maria and bartender Dennis. If only the existing 2017 tax cuts had been extended, the family would have seen a tax savings of $2,700 per year. With the new provisions outlined in the spending law, they get an additional cut of $4,100, bringing their total tax cut to $6,800 per year.
Because of tariff-based price hikes on imported goods, the family is hit hard by the rising costs of groceries and other necessities. Tariffs increase their cost of living by about $2,500 per year, according to an analysis by the Yale Budget Lab.
The Marsh family is made up of Kevin, a nonprofit director, and Cindy, a civil litigation attorney. They have two daughters; Sophia is 17, and Jenny is 19. The Marshes live on the Upper West Side of New York City. Sophia is a senior at a private high school with college aspirations, and Jenny is a sophomore at New York University.
Kevin earns $225,000 each year. Cindy earns $200,000. Their combined income is $425,000 per year, or roughly $35,400 per month.
The family lives in an $8-million brownstone that they inherited from Kevin’s parents, which is already paid off. All four family members are covered by private insurance through Kevin’s job, and they pay $2,000 per month for coverage.
Jenny lives at home as a student at NYU, and Kevin and Cindy pay her yearly tuition of $96,000. Each month, the tuition bill comes out to $8,000. Sophia attends a private high school in Manhattan, and yearly tuition totals $66,000 per year, or $5,500 per month. Kevin and Cindy also have a 529 plan set up for Sophia’s impending college expenses, and the account has $250,000 in it.
The Marsh family’s regular monthly expenses total $15,000.
Generational wealth transfer
Changes to the TCJA work in the Marsh family’s favor, providing them with $16,000 tax cut per year. With new increases to caps on SALT deductions, including itemized deductions, income and local property taxes, the family gets another $5,000 in tax breaks. That new $40,000 cap on SALT deductions starts to decrease for households that earn more than $500,000 per year, but the family’s combined income comes in a bit lower than that, so they get the full benefit.
The spending law also increased the estate and gift tax exemption to $15 million per person — $30 million for a married couple — and made that change permanent. Children Jenny and Sophia look forward to inheriting their parents’ $25 million net worth and not having to pay estate taxes on it.
Between the 2017 tax law and new provisions, the Marsh family sees a total tax cut of $21,000. Tariff-related expenses increase their cost of living by about $5,700 per year, but because of their financial reality and newly introduced tax cuts, that increase is negligible.
The big picture
Under these new provisions, wealthy households like the Marshes will benefit from existing and new tax breaks and be able to increase their wealth, passing down millions in tax-free income to their children and future generations. Because of their wealth, tariffs barely impact their finances.
Middle-income families like the Alvarados will benefit moderately from new provisions like the expansion of tax-exempt income from overtime and tipped wages. Some of that extra money will be canceled out by tariff-related costs that could put strain on middle-income households. And as housing and higher education costs likely continue to rise, more of their monthly income will go toward their mortgage and their son’s college fund.
The lower-income Keller family will be hit the hardest with these changes as Medicaid and SNAP eligibility become more tenuous. The work requirements make these benefits harder to obtain for people with unpredictable work schedules. Even with some tax cuts brought on the new law, tariffs increase the cost of living, so those cuts don’t make much of an impact, according to the analysis.
This article was originally published on WBUR.org.
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