Tighten the Limitation on Itemized Deductions

The One Big Beautiful Bill Act of 2025 introduced a new limitation on itemized deductions for high-income taxpayers in the 37 percent tax bracket, limiting the value of their itemized deductions to 35 percent. Instead of $1 of itemized deduction reducing taxable income by 37 cents, it only reduces it by 35 cents.

This option tightens the itemized deduction limitation to 28 cents on the dollar, affecting taxpayers in the 32 percent bracket, 35 percent bracket, and 37 percent bracket. Reducing the value of itemized deductions would impact economic output through two channels. First, it would increase how much income is subject to tax, raising marginal tax rates on labor and pass-through business income. Second, it would increase the tax burden on economic activity that benefits from itemized deductions, including charitable giving and investment in owner-occupied housing. The resulting reductions in hours worked and the capital stock would shrink economic output.

On a conventional basis, this option would decrease the primary deficit by $169.0 billion over the budget window. Long-run GDP and GNP would decline slightly. On a dynamic basis, the primary deficit would decrease by $139.0 billion from 2027 through 2036, $30.0 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 175.0 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.1 percent. The top quintile of taxpayers would experience a 0.1 percent decrease, whereas other groups would be unaffected. On a long-run dynamic basis, taxpayers would see a 0.1 percent decrease on average.