Think Tanks
Here's a look at documents from think tanks
Featured Stories
Jamestown Foundation Issues Commentary: Taliban Claims Cross-Border Strikes on ISKP in Pakistan
WASHINGTON, Oct. 24 -- The Jamestown Foundation issued the following commentary on Oct. 23, 2025, in the foundation's Terrorism Monitor:
* * *
Taliban Claims Cross-Border Strikes on ISKP in Pakistan
Barakwal Myakhel
Executive Summary:
* On June 19, the Taliban claimed cross-border strikes on Islamic State in Khorasan Province (ISKP) hideouts in Pakistan, a claim Pakistan dismissed as propaganda and countered that ISKP militants actually operate from within Afghan territory.
* These mutual accusations have fueled a cycle of military escalation, with Pakistan conducting multiple airstrikes ... Show Full Article WASHINGTON, Oct. 24 -- The Jamestown Foundation issued the following commentary on Oct. 23, 2025, in the foundation's Terrorism Monitor: * * * Taliban Claims Cross-Border Strikes on ISKP in Pakistan Barakwal Myakhel Executive Summary: * On June 19, the Taliban claimed cross-border strikes on Islamic State in Khorasan Province (ISKP) hideouts in Pakistan, a claim Pakistan dismissed as propaganda and countered that ISKP militants actually operate from within Afghan territory. * These mutual accusations have fueled a cycle of military escalation, with Pakistan conducting multiple airstrikesinside Afghanistan targeting alleged militant sanctuaries.
* International mediation efforts have not produced a durable diplomatic settlement. This mutual distrust and lack of border coordination allow ISKP to easily exploit ungoverned spaces for continued transnational activity
-
On June 19, the Taliban regime's Defense Ministry claimed its forces "targeted and struck hard" at centers of Islamic State in Khorasan Province (ISKP) in Pakistan's Balochistan and Khyber Pakhtunkhwa provinces (X/@MoDAfghanistan2, June 19). Pakistan promptly denied the claim and described it as propaganda. If confirmed, however, the operation would mark the first publicly claimed Taliban cross-border strike against ISKP targets in Pakistan since the May ceasefire.
Taliban Claims ISKP Bases in Pakistan
ISKP has claimed responsibility for multiple deadly attacks inside Afghanistan since the Taliban seized power in 2021. The Taliban regime has repeatedly claimed that it has defeated ISKP inside Afghanistan, while accusing the group of maintaining bases in Pakistan's Balochistan and Khyber Pakhtunkhwa provinces and using those locations to organize cross-border attacks. Pakistan has consistently denied those allegations. According to the Taliban Defense Ministry statement, the sites it targeted were allegedly used with support from "certain hostile intelligence circles" to plan and coordinate attacks against Afghanistan. The statement appeared to allude to Pakistani intelligence agencies. The Taliban did not, however, provide evidence to substantiate the claim.
The Taliban claimed that its forces struck locations in the Gulistan area of Qila Abdullah district and the Shakar Ab Gardi-Jungle area of Chagai district in Balochistan, as well as the Qamber Khel area of Orakzai district in Khyber Pakhtunkhwa. The statement asserted that the targeted hideouts were frequented by several key ISKP leaders, but it did not identify any senior figures killed in the operation (X/@MoDAfghanistan2, June 19).
Pakistan's Reaction
Pakistan's Ministry of Information and Broadcasting called the Taliban's claim "fake and nefarious." The Ministry countered that camps belonging to ISKP and more than "two dozen" other militant organizations are located, run, and sponsored from inside Afghanistan (X/@FactCheckerMoIB, June 19). The Taliban regime has, however, frequently denied Pakistani allegations that Afghan territory is used by militants to attack Pakistan.
Prior to the reported June 19 Taliban strikes on ISKP in Pakistan, mutual accusations had already led to military escalation. Pakistan had carried out airstrikes inside Afghanistan since at least October 2025 against alleged militant sanctuaries. The most recent strikes before the Taliban's June 19 claim occurred on June 10, in Afghanistan's Kunar, Khost, and Paktika provinces. Pakistani Information Minister Attaullah Tarar claimed that 26 "terrorists" were killed by Pakistan (X/@TararAttaullah, June 10). The Taliban regime, by contrast, counter-claimed that 13 civilians, including children, were killed.
The cycle of cross-border escalation continued after the Taliban's June 19 claim. On June 28, Pakistan carried out airstrikes in Afghanistan's Paktya, Paktika, and Kunar provinces. The United Nations Assistance Mission in Afghanistan (UNAMA) confirmed that at least 28 civilians were killed and 49 injured, including women and children, while Pakistan's Ministry of Information and Broadcasting confirmed that Pakistani security forces had conducted strikes in the three provinces (UNAMA, June 29). In early August, Pakistan's military rejected broader UN findings on civilian casualties from Pakistani operations in Afghanistan, maintaining that its strikes targeted militant hideouts and were conducted in self-defense (CTPost, July 31).
It remains unclear how the Taliban may have carried out strikes inside Pakistan on June 19. Afghanistan has lacked combat aircraft since the collapse of the U.S.-backed Afghan republic and the international withdrawal. The Taliban has only a small air inventory, including six aircraft and 22 helicopters of uncertain operational status, although Taliban forces have used drones during clashes with Pakistan (Reuters, March 17). The Taliban had also previously claimed drone strikes against targets in Pakistan amid intensifying cross-border tensions (Reuters, February 27).
There are no verified reports on how the Taliban regime acquired its drones. Ahmad Zia Saraj, former director general of Afghanistan's National Directorate of Security (NDS), claims, however, that the Taliban mostly "purchase drones from open markets." In an interview with Afghanistan International, Saraj asserted the Taliban modified these commercially available drones to carry explosives (Afghanistan International, June 20; X/@TKCKhyber, June 23).
Search for a Settlement
Former U.S. Special Representative for Afghanistan Reconciliation Zalmay Khalilzad has frequently commented on Afghanistan-Pakistan military escalations. He has urged both countries to pursue diplomacy and reach an agreement under which neither side allows groups or individuals on its territory to threaten the other country's security (X/@realZalmayMK, June 19).
The conflict has also disrupted trade and civilian movements across the Durand Line. The People's Republic of China, Turkiye, and Qatar have attempted to mediate between Afghanistan and Pakistan and encourage both sides to address each other's security concerns. No durable settlement has been reached, however, and the conflict continues to affect border communities, commerce, and regional security.
Pakistan says it is ready to engage the Taliban regime diplomatically but wants guarantees that Afghan soil will not be used for militant attacks in Pakistan. Tahir Andrabi, Pakistan's Foreign Ministry spokesman, told a news conference that Islamabad wants "verifiable commitments" from the Afghan side that militants allegedly operating from across the Durand Line will no longer kill Pakistani nationals (Ministry of Foreign Affairs of Pakistan, June 24). The Taliban's Foreign Ministry has not yet responded to Pakistan's latest demand.
Conclusion
The Taliban's claimed June 19 strikes against ISKP targets in Pakistan, if confirmed, would represent a notable escalation in the Afghanistan-Pakistan security dispute. They also demonstrate how ISKP has become both a direct security threat and a point of diplomatic contention between Kabul and Islamabad. The Taliban's claim that ISKP operates from Pakistani soil and Pakistan's counterclaim that IS-K and other militant groups operate from Afghanistan reflect a deepening cycle of accusation and retaliation.
Indeed, on June 17, Turkiye's National Intelligence Organization (MIT) captured a suspected senior Islamic State operative, Ahmet Kazanci, also known as "Abu Ubeyde" and "Abu Ibrahim," and rendered him to Turkiye. The operation targeted the ISKP media wing, and Turkish security sources alleged Kazanci had traveled from Turkiye to the Afghanistan-Pakistan region, joined ISKP, and played a role in the group's camps (Anadolu Agency, June 17). The case underscored the transnational dimensions of ISKP's recruitment, media, and logistics networks in the Afghanistan-Pakistan region and beyond.
Unless both sides establish credible mechanisms for intelligence sharing, border de-escalation, and commitments not to support or tolerate cross-border militant activity, tensions are likely to persist. ISKP may benefit from this environment by exploiting ungoverned spaces, mutual distrust, and the lack of coordinated counterterrorism efforts across the border.
* * *
Barakwal Myakhel holds a master's degree in literature from the University of Balochistan, Pakistan. He worked as a correspondent for Radio Free Europe in Balochistan for almost eleven years. Since 2017, he has worked as an international broadcaster with Voice of America's Deewa Service in Washington, D.C., covering militancy in Pakistan and Afghanistan, the Baloch separatist movement, and human rights issues.
* * *
Original text here: https://jamestown.org/taliban-claims-cross-border-strikes-on-iskp-in-pakistan/
[Category: ThinkTank]
* * *
Taliban Claims Cross-Border Strikes on ISKP in Pakistan
Barakwal Myakhel
Executive Summary:
* On June 19, the Taliban claimed cross-border strikes on Islamic State in Khorasan Province (ISKP) hideouts in Pakistan, a claim Pakistan dismissed as propaganda and countered that ISKP militants actually operate from within Afghan territory.
* These mutual accusations have fueled a cycle of military escalation, with Pakistan conducting multiple airstrikes ... Show Full Article WASHINGTON, Oct. 24 -- The Jamestown Foundation issued the following commentary on Oct. 23, 2025, in the foundation's Terrorism Monitor: * * * Taliban Claims Cross-Border Strikes on ISKP in Pakistan Barakwal Myakhel Executive Summary: * On June 19, the Taliban claimed cross-border strikes on Islamic State in Khorasan Province (ISKP) hideouts in Pakistan, a claim Pakistan dismissed as propaganda and countered that ISKP militants actually operate from within Afghan territory. * These mutual accusations have fueled a cycle of military escalation, with Pakistan conducting multiple airstrikesinside Afghanistan targeting alleged militant sanctuaries.
* International mediation efforts have not produced a durable diplomatic settlement. This mutual distrust and lack of border coordination allow ISKP to easily exploit ungoverned spaces for continued transnational activity
-
On June 19, the Taliban regime's Defense Ministry claimed its forces "targeted and struck hard" at centers of Islamic State in Khorasan Province (ISKP) in Pakistan's Balochistan and Khyber Pakhtunkhwa provinces (X/@MoDAfghanistan2, June 19). Pakistan promptly denied the claim and described it as propaganda. If confirmed, however, the operation would mark the first publicly claimed Taliban cross-border strike against ISKP targets in Pakistan since the May ceasefire.
Taliban Claims ISKP Bases in Pakistan
ISKP has claimed responsibility for multiple deadly attacks inside Afghanistan since the Taliban seized power in 2021. The Taliban regime has repeatedly claimed that it has defeated ISKP inside Afghanistan, while accusing the group of maintaining bases in Pakistan's Balochistan and Khyber Pakhtunkhwa provinces and using those locations to organize cross-border attacks. Pakistan has consistently denied those allegations. According to the Taliban Defense Ministry statement, the sites it targeted were allegedly used with support from "certain hostile intelligence circles" to plan and coordinate attacks against Afghanistan. The statement appeared to allude to Pakistani intelligence agencies. The Taliban did not, however, provide evidence to substantiate the claim.
The Taliban claimed that its forces struck locations in the Gulistan area of Qila Abdullah district and the Shakar Ab Gardi-Jungle area of Chagai district in Balochistan, as well as the Qamber Khel area of Orakzai district in Khyber Pakhtunkhwa. The statement asserted that the targeted hideouts were frequented by several key ISKP leaders, but it did not identify any senior figures killed in the operation (X/@MoDAfghanistan2, June 19).
Pakistan's Reaction
Pakistan's Ministry of Information and Broadcasting called the Taliban's claim "fake and nefarious." The Ministry countered that camps belonging to ISKP and more than "two dozen" other militant organizations are located, run, and sponsored from inside Afghanistan (X/@FactCheckerMoIB, June 19). The Taliban regime has, however, frequently denied Pakistani allegations that Afghan territory is used by militants to attack Pakistan.
Prior to the reported June 19 Taliban strikes on ISKP in Pakistan, mutual accusations had already led to military escalation. Pakistan had carried out airstrikes inside Afghanistan since at least October 2025 against alleged militant sanctuaries. The most recent strikes before the Taliban's June 19 claim occurred on June 10, in Afghanistan's Kunar, Khost, and Paktika provinces. Pakistani Information Minister Attaullah Tarar claimed that 26 "terrorists" were killed by Pakistan (X/@TararAttaullah, June 10). The Taliban regime, by contrast, counter-claimed that 13 civilians, including children, were killed.
The cycle of cross-border escalation continued after the Taliban's June 19 claim. On June 28, Pakistan carried out airstrikes in Afghanistan's Paktya, Paktika, and Kunar provinces. The United Nations Assistance Mission in Afghanistan (UNAMA) confirmed that at least 28 civilians were killed and 49 injured, including women and children, while Pakistan's Ministry of Information and Broadcasting confirmed that Pakistani security forces had conducted strikes in the three provinces (UNAMA, June 29). In early August, Pakistan's military rejected broader UN findings on civilian casualties from Pakistani operations in Afghanistan, maintaining that its strikes targeted militant hideouts and were conducted in self-defense (CTPost, July 31).
It remains unclear how the Taliban may have carried out strikes inside Pakistan on June 19. Afghanistan has lacked combat aircraft since the collapse of the U.S.-backed Afghan republic and the international withdrawal. The Taliban has only a small air inventory, including six aircraft and 22 helicopters of uncertain operational status, although Taliban forces have used drones during clashes with Pakistan (Reuters, March 17). The Taliban had also previously claimed drone strikes against targets in Pakistan amid intensifying cross-border tensions (Reuters, February 27).
There are no verified reports on how the Taliban regime acquired its drones. Ahmad Zia Saraj, former director general of Afghanistan's National Directorate of Security (NDS), claims, however, that the Taliban mostly "purchase drones from open markets." In an interview with Afghanistan International, Saraj asserted the Taliban modified these commercially available drones to carry explosives (Afghanistan International, June 20; X/@TKCKhyber, June 23).
Search for a Settlement
Former U.S. Special Representative for Afghanistan Reconciliation Zalmay Khalilzad has frequently commented on Afghanistan-Pakistan military escalations. He has urged both countries to pursue diplomacy and reach an agreement under which neither side allows groups or individuals on its territory to threaten the other country's security (X/@realZalmayMK, June 19).
The conflict has also disrupted trade and civilian movements across the Durand Line. The People's Republic of China, Turkiye, and Qatar have attempted to mediate between Afghanistan and Pakistan and encourage both sides to address each other's security concerns. No durable settlement has been reached, however, and the conflict continues to affect border communities, commerce, and regional security.
Pakistan says it is ready to engage the Taliban regime diplomatically but wants guarantees that Afghan soil will not be used for militant attacks in Pakistan. Tahir Andrabi, Pakistan's Foreign Ministry spokesman, told a news conference that Islamabad wants "verifiable commitments" from the Afghan side that militants allegedly operating from across the Durand Line will no longer kill Pakistani nationals (Ministry of Foreign Affairs of Pakistan, June 24). The Taliban's Foreign Ministry has not yet responded to Pakistan's latest demand.
Conclusion
The Taliban's claimed June 19 strikes against ISKP targets in Pakistan, if confirmed, would represent a notable escalation in the Afghanistan-Pakistan security dispute. They also demonstrate how ISKP has become both a direct security threat and a point of diplomatic contention between Kabul and Islamabad. The Taliban's claim that ISKP operates from Pakistani soil and Pakistan's counterclaim that IS-K and other militant groups operate from Afghanistan reflect a deepening cycle of accusation and retaliation.
Indeed, on June 17, Turkiye's National Intelligence Organization (MIT) captured a suspected senior Islamic State operative, Ahmet Kazanci, also known as "Abu Ubeyde" and "Abu Ibrahim," and rendered him to Turkiye. The operation targeted the ISKP media wing, and Turkish security sources alleged Kazanci had traveled from Turkiye to the Afghanistan-Pakistan region, joined ISKP, and played a role in the group's camps (Anadolu Agency, June 17). The case underscored the transnational dimensions of ISKP's recruitment, media, and logistics networks in the Afghanistan-Pakistan region and beyond.
Unless both sides establish credible mechanisms for intelligence sharing, border de-escalation, and commitments not to support or tolerate cross-border militant activity, tensions are likely to persist. ISKP may benefit from this environment by exploiting ungoverned spaces, mutual distrust, and the lack of coordinated counterterrorism efforts across the border.
* * *
Barakwal Myakhel holds a master's degree in literature from the University of Balochistan, Pakistan. He worked as a correspondent for Radio Free Europe in Balochistan for almost eleven years. Since 2017, he has worked as an international broadcaster with Voice of America's Deewa Service in Washington, D.C., covering militancy in Pakistan and Afghanistan, the Baloch separatist movement, and human rights issues.
* * *
Original text here: https://jamestown.org/taliban-claims-cross-border-strikes-on-iskp-in-pakistan/
[Category: ThinkTank]
Center on Budget & Policy Priorities: Federal Policymakers Should Raise Revenue to Address Fiscal and Investment Deficits to Responsibly Steward the Nation's Economy
WASHINGTON, Oct. 24 -- The Center on Budget and Policy Priorities issued the following report:
* * *
Federal Policymakers Should Raise Revenue to Address Fiscal and Investment Deficits to Responsibly Steward the Nation's Economy
October 23, 2026 | Brendan Duke , Richard Kogan and Sonali Master
Executive Summary
Our nation faces twin deficits that threaten the short- and long-term economic well-being of the nation and its people: a federal budget deficit and a federal investment deficit.
The latest data show that the U.S. budget deficit as a percent of the economy was 6 percent last year - ... Show Full Article WASHINGTON, Oct. 24 -- The Center on Budget and Policy Priorities issued the following report: * * * Federal Policymakers Should Raise Revenue to Address Fiscal and Investment Deficits to Responsibly Steward the Nation's Economy October 23, 2026 | Brendan Duke , Richard Kogan and Sonali Master Executive Summary Our nation faces twin deficits that threaten the short- and long-term economic well-being of the nation and its people: a federal budget deficit and a federal investment deficit. The latest data show that the U.S. budget deficit as a percent of the economy was 6 percent last year -the last five years have been the only years since World War II where the unemployment rate was less than 5 percent but the deficit exceeded 5 percent of GDP. At the same time, we have failed to properly make investments that could make our nation better off such as in medical research and policies that will make life more affordable for people in the U.S. with low and moderate incomes.
Policymakers need to address each deficit without exacerbating the other to steward our nation's economy responsibly, expand opportunity, and build a more shared prosperity.
There is no magical way to address both deficits: we will have to raise revenue to solve both challenges.
The Federal Fiscal Deficit and Growing Debt Pose Economic and Political Challenges
The U.S Treasury reported that the federal deficit came in at $2.0 trillion in fiscal year 2026 that ended September 30. The Congressional Budget Office (CBO) projects that debt and interest payments will continue to grow faster than the economy over the coming decades. Because our federal government is running a significant deficit, it must take on debt. Generally, higher debt means higher interest rates for consumers and businesses, which makes buying a car, affording a home, launching a small business, or getting a student loan more expensive. Moreover, there is the risk that policymakers will use higher deficits and debt as an excuse to push for deep and harmful cuts in public services, such as health care and food assistance, that help families with low- and moderate-incomes afford the basics.
These structural fiscal deficits are, in large part, the result of long-expected increased spending on Medicare and Social Security, as baby boomers have reached retirement age, and large tax cuts that decreased revenues under policies advanced by George W. Bush and Donald Trump.
The aging of the population and its upward pressure on federal spending were well understood in the late 1990s. After efforts to reduce Reagan-era deficits by Bill Clinton and George H.W. Bush, federal revenue was projected to grow faster than spending and lead the U.S. to eventually pay off its debt.
Letting revenue as a share of the economy rise naturally to address the added costs of population aging would have been an elegant solution to our long-term fiscal outlook since it would not have required proactive tax increases or spending cuts. In other words, policymakers didn't have to do anything to cover the costs of population aging other than allow revenue to rise as a share of the economy, as they were poised to do under the law in place at the time.
Instead, policymakers took actions that made our fiscal outlook unsustainable - large temporary tax cuts were enacted under President George W. Bush and later most were made permanent under President Obama. Still more temporary tax cuts were enacted during the first Trump Administration and then those that were expiring were extended in the July 2025 reconciliation law, with yet even more temporary tax cuts added on top.
An appropriate fiscal goal for policymakers is stabilizing the debt-to-GDP ratio. We estimate that closing this "fiscal gap" would require revenue increases and/or spending cuts that, taken together, total 2.4 percent of GDP or about $9.5 trillion of deficit reduction over ten years. That, plus the resulting interest savings, would reduce the overall ten-year deficit from its current projected average of 6.2 percent of GDP to 3.4 percent.
At the Same Time, We Are Under-Investing in Areas that Matter to Families and the Economy
The U.S. is a rich but highly unequal country. It has the fifth highest GDP per capita among the industrialized democracies in the Organization for Economic Cooperation and Development (OECD), which is 19 percent higher than Germany's per capita GDP, and more than 35 percent higher than Canada's, the United Kingdom's, and France's. The typical U.S. household - that is, households with incomes in the middle 20 percent - has the second highest income after taxes and transfers of any country in the OECD ($45,000 on average after adjusting for household size).
But the story is completely different for households with incomes in the bottom 10 percent of the income distribution. Despite living in a much wealthier-than-average country, these households' size-adjusted incomes are right around the OECD average ($10,700 compared to $10,500). The average income for this group is lower than in Canada, Australia, and Belgium and right around the same level as in Germany and France. Households of color are disproportionately represented in the bottom of the income distribution due to historical and continuing racial discrimination, which has locked them out of opportunities for economic prosperity through education, employment, housing, and more.
The relatively low incomes of these households reflect, in part, a lack of investment in them. The U.S. spends only 2.7 percent of its economy on economic security programs outside of retirement, which is less than half the OECD average. These programs include disability benefits, child care and family benefits, unemployment benefits, housing, and other benefits. They, for example, help a parent working in a low-paying job afford rent and a working-age person afford groceries when they lose their job.
In addition, the U.S. underinvests in other public services that would support a strong economy and benefit all its residents, such as education and scientific research. For example, public spending on non-defense research and development is below its 1960s, 1970s, and 1980s averages as a percent of GDP and increasing it would grow the economy in the long run.
Raising Additional Revenue Is the Key to Addressing Both Fiscal and Investment Deficits Without Making Either One Worse
Taking away food assistance and health coverage from people who need it, cutting how much we spend on public schools or college financial aid, and retreating on our investments in life-saving medical care or other basic research would, in the short term, reduce our fiscal deficit, but at the expense of increasing our investment deficit and hardship while reducing future widespread prosperity.
In some cases, such as the harmful 2025 Republican reconciliation law in which expensive tax cuts tilted to the wealthy were partially offset by cuts to food assistance and health care, policymakers have enacted laws that made both deficits worse.
Neither approach is good for the country. Policymakers should instead search for solutions that improve both deficits - and raising federal revenue has to be a key element of those solutions.
The main argument against raising revenue is that it will hinder economic growth, but analyses of extending the expiring individual provisions of the 2017 tax law and the 2025 Republican reconciliation law have found that, in the long run, tax increases can grow the economy by reducing deficits, interest rates, and debt.
U.S. Faces a Substantial Fiscal Deficit and Growing Debt
The U.S. recorded a deficit of $2.0 trillion in fiscal year 2026, amounting to 6.2 percent of GDP, because revenue ($5.4 trillion or 16.7 percent of GDP) was less than program costs ($6.3 trillion or 19.6 percent of GDP) and net interest payments ($1.1 trillion or 3.3 percent of GDP). The primary deficit - that is, the difference between revenues and program spending while excluding interest costs - was $922 billion and 2.9 percent of GDP. This is generally a preferred measure for evaluating a government's current fiscal choices since interest payments reflect past debt accumulation; they are not costs that policymakers can choose.
Deficits at this level are especially high for an economy where unemployment is low (Figure 1), since employed people pay more in taxes and are less reliant on economic security programs, such as unemployment insurance. With the exception of pandemic-affected fiscal years 2020 and 2021, each fiscal year since 2019 has had an unemployment rate under 5 percent and a primary deficit around 3 percent. This is an abnormal combination. Over the 1962-2018 period, an unemployment rate below 5 percent typically meant a primary surplus. A primary deficit of 3 percent of GDP was the average fiscal balance when the unemployment rate exceeded 7 percent over that same period. In other words, since 2019, we have been persistently running recession-level deficits even when the economy is strong.
* * *
Figure 1: Primary Deficit Higher Than Expected for Current Unemployment Levels
* * *
When the federal government runs deficits, it takes on debt, which the government must then service by paying interest. Those interest-related costs are the annual budgetary cost of taking on debt. Debt held by the public as a percent of the economy is approaching historically high levels and is projected to reach 121 percent by 2036, according to CBPP estimates. Interest costs as a percent of the economy are already at a record high.
One reason debt levels have grown is the one-time costs of the responses to the Great Recession and the COVID-19 pandemic. Importantly, however, these events are not ongoing drivers of the upward trajectory of our projected debt and interest, which is largely the result of the ongoing annual mismatch between revenue and programmatic (i.e. non-interest) costs. In fact, if revenue equaled programmatic costs, we could generally expect the debt ratio to fall after one-time events that pushed up the debt conclude, as a result of subsequent GDP growth.
One reasonable measure of the size of our fiscal challenge is the amount of non-interest deficit reduction (that is, the increases in revenue and/or cuts to programs) as a percent of GDP required to keep the debt from rising as a percent of the economy (i.e., to "stabilize the debt"). Known as the "fiscal gap," we estimate it is currently 2.4 percent of GDP. That is $9.5 trillion of primary deficit reduction over ten years and is roughly similar in magnitude to having programmatic spending match revenue (i.e., to have a primary balance). This approximates reducing the overall deficit from its current projected average of 6.2 percent of GDP over the next decade to 3.4 percent after taking into account interest savings.
Growing Debt Presents Costs and Risks
An environment like the early 2010s was an inappropriate time to be overly concerned with reducing deficits since the unemployment rate exceeded 6 percent and the 5-year Treasury rate - which is roughly the average maturity of U.S. debt - was routinely below 1 percent.[1]
We and several leading economists explained at the time that the focus on reducing deficits was deeply misguided because the economy was weak and unemployment unacceptably high.[2] For example, then-CBPP chief economist Chad Stone told Congress in 2011, "the economic situation today cries out for significant fiscal stimulus" and recommended temporarily expanding or extending enhancements to unemployment insurance, providing more aid to states and local governments, and cutting taxes for the households with incomes at the bottom end of the income distribution.[3]
But that environment has changed.
The 5-year Treasury rate averaged 4.8 percent in September, which has notably increased the fiscal cost of the Treasury's debt. The 10-year Treasury rate -- changes in which affect the cost of credit for mortgages, auto loans, student loan payments, and more - has grown from less than 2 percent when Stone testified to a 5.0 percent average in September 2026.[4] Indeed, the elevated cost of consumer borrowing is a leading potential explanation for U.S. residents' pessimistic view of the economy.[5]
This summer, we have seen a surge in interest rates on long-term debt across developed countries, including the U.S., France, and Japan. Economists and market participants have pointed to several factors, including inflation (in part owing to the U.S.'s war with Iran that has expanded throughout the Middle East and the uncertainty about if and when the conflict will be resolved and, in part, the Trump tariff regime); the AI investment boom which creates competition for investors' funds; and these countries' fiscal trajectories.
Although the extent to which each of these countries' rise in borrowing costs reflects fiscal concerns is unclear, recent events have shown strong bond market reactions to fiscal policy in other advanced economies. In the United Kingdom, former Prime Minister Liz Truss released a large, deficit-financed tax cut plan that resulted in such a surge in U.K. government bond yields that it led to her resignation weeks later. Japan has long been held as the example of a country that could sustain high debt levels (though this frequently relies on a debt concept serious U.S. budget analysts do not use).[6] Japanese borrowing costs surged this summer to a 30-year high after the prime minister announced a $2.3 trillion increase in public and private investment over 14 years (after several years of falling deficits), prompting the U.S. federal government to intervene in currency markets to support the yen.[7] Indeed, investors believe that part of the reason the U.S. intervened was to prevent Japan from selling off its own supply of U.S. Treasury bonds, which would increase U.S. rates.[8]
While a resolution to the conflict in the Middle East that results in lower oil prices will help with inflation and uncertainty, there is growing concern among economists that high and rising U.S. debt will continue to exert upward pressure on interest rates in ways that increase costs both for the federal government and for households through higher interest rates for mortgages, car loans, credit card balances, and other forms of both business and consumer credit.
More generally, federal deficits and debt create present-day costs and potential risks to the economy and to people. Some of these costs are economic and some are political.
Economic Costs and Risks: Higher Consumer Interest Rates and Potential Fiscal Crisis
Standard economic theory suggests that, all else being equal, a high and rising debt ratio will, over time, put upward pressure on longer-term interest rates and reduce private investment.[9] Importantly, other factors affect interest rates, such as demographics or the demand by foreign central banks for Treasury securities. So there have been times, such as in the 2010s, when longer-term interest rates were low despite rising debt. But careful decomposition still shows that, all things being equal, higher debt means higher interest rates, even when interest rates are falling because of other factors.[10]
Most analysts predict a small effect, with the Congressional Budget Office (CBO) estimating that every percentage point increase in the forecasted debt-to-GDP ratio increases the interest rate on a 10-year Treasury by 2 basis points.[11] But the increase in the debt-to-GDP ratio since 2015 resulting from tax cuts and spending increases (49 percentage points of GDP) suggests that deficit-increasing legislation has raised the 10-year Treasury interest rate by around 1 percentage point.[12]
Higher interest rates on U.S. debt feed through to the interest rates consumers and businesses pay throughout the economy. For example, the 30-year mortgage rate closely tracks the 10-year Treasury rate.[13] Illustrative analysis from the Budget Lab at Yale finds that the legislation increasing the debt-to-GDP ratio since 2015 has increased the amount someone buying a house at the median price must pay in interest annually by $2,500, or by about $76,000 over the lifetime of the 30-year mortgage.[14] Consumers and businesses paying more in interest is the direct economic cost of higher debt.
Higher interest rates can also deter private sector investment, which reduces overall growth in income and wealth. Indeed, given current interest rates, the growth-reducing effects of additional debt can be so large that deficit-financed tax cuts intended to incentivize increases in the supply of labor and capital can actually shrink the economy in the long run. For example, CBO found that extending the expiring 2017 individual tax cuts would shrink the economy by the end of the ten-year budget window.[15] Similarly, the Budget Lab at Yale and the Penn Wharton Budget Model both found that because of the costs of debt, the 2025 Republican reconciliation law, which made permanent the expiring 2017 tax cuts and only partially offset their cost by significantly cutting health care and SNAPs, would shrink the economy in the long run despite the modest supply-side benefits of tax cuts.[16]
Importantly, the effects of higher interest rates on investment are not uniform across all types of investment - they fall more heavily on residential construction than business investment, as a wide array of research shows.[17] Indeed, CBO assumes that an increase in mortgage rates -- which as discussed move closely with 10-year Treasury interest rates - will permanently reduce the number of homes.[18]
Higher deficits also raise the risk of a sudden fiscal and financial crisis resulting from a lack of confidence in the real value of Treasury bonds when, for example, markets expect higher inflation from the sheer amount of Treasury issuance.[19] This not only could cause investors to demand dramatically higher interest rates for Treasury bonds, but also lead to a financial crisis as banks, pension funds, and other holders of Treasury bonds see their portfolios suddenly lose value as higher interest rates reduce the value of the Treasury bonds they hold.
It is impossible to know with any certainty the risk of this kind of crisis or whether it would occur at all. CBO views the risk as low in the short term since "no tipping point can be identified at which the debt-to-GDP ratio would become so high that it would make a crisis likely or imminent, nor is there a specific tipping point beyond which interest costs would become so high in relation to GDP that they were unsustainable."[20] But even though a rising debt need not induce a sudden crisis, an unexpected panic among investors and those holding Treasury securities would be quite harmful; it is a risk that should not be ignored.
The sheer uncertainty of when a fiscal crisis could hit and its negative potential consequences means policymakers should take steps to make the fiscal outlook more sustainable. Certainly, they should not take actions to exacerbate it, such as through large deficit-financed legislation, except during times when it is both necessary and temporary, such as during a recession.
Political Costs: Higher Deficits as an Excuse for Deep and Harmful Budget Cuts
Some policymakers have used higher deficits and debt as an excuse to push for deep and harmful budget cuts to public services. These cuts can have especially detrimental effects on families with the lowest incomes, people with disabilities, children, and many others already struggling to afford their basic needs, when supports such as health coverage and food assistance through SNAP are targeted for cuts. The 2025 Republican reconciliation law is an extreme example. It included $1.4 trillion in tax cuts over ten years just for people making over $500,000, while proponents of the law argued that $1.3 trillion in cuts to SNAP and health care were necessary because of the federal budget outlook.[21] A better choice would have been not to enact the tax cuts for rich households or the cuts to SNAP and health care.
Despite far better choices available to policymakers, the risk remains that lawmakers who refuse to raise revenue or who, worse yet, take actions to reduce revenue will then cite the ensuing deficits to promote harmful cuts. The results include higher poverty and the attendant long-term impacts on children and the economy; more people without access to health coverage; and less public investment in areas such as infrastructure, education, and research, which would also hurt economic growth.
Also, in a future recession or disaster, debt concerns could dissuade policymakers from responding with robust but temporary measures to bolster the economy and mitigate harm; this failure could prolong the downturn and slow the recovery - and, ironically, harm long-term economic growth.
Fiscal Deficits Are Driven by Decisions to Cut Taxes Against a Long-Expected Backdrop of an Aging Population
Policymakers may rightfully ask why deficits are so high and projected to grow. It is helpful to compare the federal budget of 2026 to those of 1993-1995 (Figure 2), when revenue and program costs matched, known as a primary balance, since that is a roughly appropriate fiscal goal for today and over the longer term. What has changed since then?[22]
* * *
Figure 2: Increase in Programmatic Spending Since the Early 1990s Largely Driven by Growing Social Security and Medicare Costs
* * *
Revenue as a percent of GDP was somewhat higher than it was in 2026: 17.5 percent then as opposed to 16.7 percent last year. This reflects last year's revenue level being particularly low - 2025 revenue was closer to its early 1990s average (17.3 percent) as was CBO's February 2026 projection for 2027 (17.7 percent). And even those revenue levels - essentially matching the early 1990s average - were low given the stronger economy: the unemployment rate has been under 4.5 percent since 2022, but it averaged 6.4 percent between 1993 and 1995. As the economy strengthened later in the 1990s, revenue levels began to exceed 19 percent and topped out at 20.0 percent of GDP in 2000. (See Table 1 and interactive chart, "Revenue in 2026 Is in Line With a Much Weaker Economy, Despite Low Unemployment.")
There is no current expectation that we will reach anything like 20 percent of GDP, no matter how strong the economy grows. The tax system of the 1990s was not an accident - it reflected the hard work of Administrations and Congresses under George H.W. Bush and Bill Clinton to bring the earlier Reagan-era deficits to more reasonable levels. The tax cuts advanced by the George W. Bush and both Trump Administrations brought revenue down sharply as a share of GDP.
Programmatic spending, on the other hand, was lower in 1993-1995 (17.4 percent then as opposed to 19.6 percent today); it has grown by 2.2 percentage points of GDP. Increased spending on Social Security and Medicare as the population has aged can account for almost the entire increase in programmatic spending, rising by a combined 2.0 percent of GDP relative to the 1993-1995 average. And key components of spending have shrunk over that period such as defense and non-defense discretionary spending.
* * *
Chart: Revenue in 2026 Is in Line With a Much Weaker Economy, Despite Low Unemployment
* * *
Table 1: 2026 Falls Close to the Bottom of Revenues in the Last 60 Years, Even at Comparable Levels of Employment
* * *
The demographic reality undergirding these trends is obvious: in the mid-1990s, members of the baby boom generation (those born between 1946 and 1964) were in their "prime working years"; today, they are in their "prime retirement years," now that even the youngest baby boomers are becoming eligible for Social Security and soon for Medicare. In 1995, 12.7 percent of the U.S. population was 65 years of age or older; in 2025, the last year for which we have data, some 18.9 percent of the U.S. population was 65 or older. As people live longer, the share of even older populations also has grown: the share of the population over the age of 75 has grown from 5.6 to 8.2 percent, and the share of the population age 80 and older has grown from 3.1 to 4.4 percent.
To be sure, Medicaid spending has also risen substantially, from 1.1 percent to 2.2 percent of GDP. Some of this reflects the fact that Medicaid, like Medicare, has been subject to overall health care inflation. But the inflation-adjusted increase in Medicaid costs per enrollee between 1994 and 2024 (40 percent) was much lower than it was for employer-provided insurance (146 percent) and Medicare (94 percent).[23] (See Figure 3.)The increase also reflects higher enrollment: the share of people receiving coverage from Medicaid rose from an average of 12.1 percent between 1993 and 1995 to 17.1 percent in 2025.[24] A big driver of the increased Medicaid enrollment was the expansion in eligibility, effective in 2014, included in the Affordable Care Act - a positive result for people with low incomes who would otherwise be uninsured. The cost of expanding eligibility raised Medicaid spending as a share of the economy, but did not result in a rapid growth rate; CBO projected it would grow by less than 0.2 percent of GDP over the decade even before the cuts from the 2025 Republican reconciliation law.[25]
* * *
Figure 3: Medicaid Costs Have Grown More Slowly Than Medicare, Which in Turn Have Grown More Slowly Than Employer-Sponsored Insurance
* * *
This population aging and the resulting bump in Social Security and Medicare spending was both predictable and predicted - the question was whether the federal government should let revenue rise above its historical percent of GDP to finance these long-expected costs or, instead, cut the retirement and health programs that would cause federal spending to rise.
Importantly, doing nothing would have kept the overall fiscal deficits and debt in check, given that revenue began to exceed its historic average as a percent of GDP in the late 1990s, and CBO projected that it would continue to rise further.
Much of this projected increase in revenue as a percent of GDP was a result of "real bracket creep," meaning the projections assumed that a rise in inflation-adjusted incomes from a growing economy would put more income in higher tax brackets (which are adjusted for inflation), generating more federal revenue.[26],[27] Families would still see rising after-tax incomes, since the increase in their tax payments from higher tax brackets would only be a fraction of their real income gains. And the federal budget would be, likewise, financially better off and so better able to sustain, or even improve, the important investments and protections it provides.
The aging of the population and its upward pressure on federal spending were well understood in the late 1990s and included in CBO projections, but the projected increase in revenue was even larger - this caused CBO to initially project persistent surpluses that would lead the U.S. to pay off its debt. Letting the increase in revenue as a share of the economy from real economic growth address the added costs of population aging would have been an elegant solution to our long-term fiscal outlook. It would not have required proactive tax increases or spending cuts (though Congress would still have needed to rebalance the mix of payroll and income taxes to keep the Social Security and Medicare trust funds solvent).
Instead, policymakers took actions that made our fiscal outlook unsustainable - large temporary tax cuts were enacted under President George W. Bush and later most were made permanent under President Barack Obama. And then, still more temporary tax cuts were enacted during the first Trump Administration. Those Trump tax cuts that were scheduled to expire were permanently extended in the July 2025 reconciliation law, and yet more temporary tax cuts were added on top.
We estimate that if the Bush tax cuts and their extensions and the 2017 Trump tax cuts had not been enacted, the deficit would be $540 billion, or less than one-third the current deficit ($2 trillion). (See Figure 4.) The ratio of debt held by the public would be considerably lower as well -- 63 percent of GDP in 2025, compared to the actual 99 percent - despite subsequent temporary events that pushed up the level of debt including the Great Recession and the COVID-19 pandemic. Most importantly, the debt would not be on a continually upward trajectory, as it is now.
* * *
Figure 4: The Debt Is Higher Due to the Bush and Trump Tax Cuts
* * *
The question now is how much of the U.S. fiscal imbalance should be addressed through proactive tax increases and how much should be addressed through proactive cuts to the public services the federal government provides.
The U.S. Faces a Substantial Investment Deficit, Complicating Efforts to Reduce the Fiscal Deficit
A key consideration for policymakers who want to address our fiscal deficit is not to worsen our investment deficit. We already don't do enough to support economic security, scientific and medical research, education, and other areas that strengthen our economy and benefit everyone in our nation. We should increase investment in these areas where it makes sense.
For example, federal spending on non-defense research (such as medical and energy research) as a share of the economy has been stuck around 0.3 percent of GDP since 2014. That is below its average in the 1960s (0.7 percent), 1970s (0.6 percent), 1980s (0.4 percent), and 1990s (0.4 percent).[28] The returns on federal investment in this area are so strong that CBO finds $1 of additional investment will increase the present value of GDP by $2 to $5, even if it is deficit financed (though this is not sufficient to "pay for itself" through the resulting higher revenue collections).[29]
One area of particular underinvestment as a nation is economic security programs. We spend less than other advanced economies on programs that ensure people with low and moderate incomes have adequate food, housing, and other essentials. This means that addressing our fiscal outlook by cutting these already insufficient programs will result in higher poverty and hardship.
The U.S. spends 2.7 percent of its economy on economic security programs outside of retirement, which is less than half the OECD average (6.0 percent).[30] (See Figure 5.) This OECD category includes disability benefits, child care and family benefits, unemployment benefits, housing, and other benefits (we will cover public health spending below) at the federal, state, and local levels. This low percentage puts us near the bottom (35 out of 38) among OECD countries, sitting only above Costa Rica, Mexico, and Turkiye. It is well below the other highest income countries, including Australia (8.8 percent), the U.K. (6.4 percent), Germany (6.3 percent), Switzerland (6.1 percent), and Canada (6.0 percent).
This is an important category of investment because these supports help working-age people and their children afford the basics when someone is between jobs or is working a low-paying job. The very low U.S. benefit level reflects a unique hole in the U.S. social contract - a hole that got larger with the deep cuts in food assistance enacted in the 2025 reconciliation law.[31]
* * *
Figure 5: Spending on Non-Retirement Economic Security Programs
* * *
A predictable result of this lack of public economic security spending is that people with incomes at the bottom of the distribution in the U.S. have incomes similar to -- or even lower than - people in other major advanced economies, despite living in a country where the average and median income is much higher. (See textbox, "The U.S. Is a Rich Country but People With the Lowest Incomes Do Not Share in Its Prosperity.") People of color are overrepresented among people with incomes at the lower end of both income and wealth distributions due to historical and continuing racial discrimination, which has locked people out of opportunities for economic prosperity through education, employment, housing, and more.
There are many other reasons for the relatively low incomes of U.S. households with incomes in the bottom of the distribution, including the structure of our labor market institutions, such as the low share of workers covered by a collective bargaining agreement.[32] But the underinvestment in economic security programs that reduce poverty and hardship in other rich countries is a key one. In particular, we provide much smaller supports to families with children and to adults who are between jobs. Paid parental leave and a cash child benefit are not fully available to families with low incomes, and in some cases, are totally unavailable. And our unemployment insurance system provides benefits to a small share of those who are looking for work, provides low benefits, and provides benefits for less time than in many other wealthy nations.[33]
The U.S. investment deficit is particularly complicated when it comes to health care. Total U.S. spending on health care (combined public and private) substantially exceeds the OECD average (17.2 percent of GDP compared to 9.3 percent).[34] Even just public spending on health care (8.4 percent of GDP) is the fourth highest in the OECD and is higher than in countries where health care is financed exclusively or almost exclusively by the government, including the U.K. (8.0 percent) and Canada (7.8 percent).[35] Nevertheless, the U.S. health care system also uniquely excludes a large fraction of people from health insurance among wealthy countries: the OECD average uninsured rate is just 2 percent, with all of the rich countries mentioned above reporting an uninsured rate of 0 percent.[36] Among the 38 OECD countries, the U.S. uninsured rate of 8 percent is smaller only than Mexico's (22 percent). CBO projects it will grow to over 10 percent over the next decade, reflecting congressional Republicans' refusal to extend enhancements to the Affordable Care Act's premium tax credits and the cuts to health care included in the 2025 Republican reconciliation law.[37]
The reason we call these policies "investments" is that they have a proven track record of improving people's lives in the short term and paying off in the long term. For example, research has shown that Medicaid saves lives. One study estimates that the Medicaid expansion included in the Affordable Care Act saved over 27,000 lives between 2010 and 2022, while the decision of some states to refuse the ACA expansion cost almost 13,000 lives.[38]
In particular, investing in children in families with low incomes has enormous payoffs in improving their longer-term educational, health, and employment outcomes. A 2019 report by the National Academy of Sciences, for example, found that stronger income assistance for children with low incomes - through policies such as the Child Tax Credit and food assistance through SNAP - was linked with healthier birthweights, better childhood nutrition, higher school enrollment, higher reading and math test scores, higher high school graduation rates, less alcohol and drug use, and higher rates of college entry.[39]
And there are, of course, other important areas of investment in the federal budget, such as medical and scientific research, education, and infrastructure, that can improve quality of life for everyone in our nation in the long term. For example, a 10 percent reduction in National Institutes of Health funding will result in 20 fewer new, beneficial drugs in the long run, according to the Congressional Budget Office.[40]
* * *
The U.S. Is a Rich Country but People With the Lowest Incomes Do Not Share in Its Prosperity
The U.S. is a rich country. It has the fifth highest GDP per capita among the industrialized democracies in the OECD. The four countries that rank above the U.S. have populations below 9 million - three of them are international tax havens where GDP is likely inflated because of the way multinational corporations' profits are reported, and the other (Norway) has substantial oil wealth.a U.S. GDP per capita is 19 percent higher than Germany's and more than 35 percent higher than Canada's, the U.K.'s, and France's. In part, this is because people in the U.S. work more hours than people in other rich countries, but the U.S. still has the seventh highest GDP per hour worked.b It is higher than in all the large countries mentioned above.
* * *
Chart: Typical U.S. Incomes are Higher Than Other Rich Democracies
* * *
However, the U.S. has substantial income inequality, so a high GDP per capita ranking does not necessarily mean that all U.S. households are richer than similarly situated households in other high-income countries. Fortunately, typical U.S. households - those with size-adjusted incomes after taxes and transfers in the middle 20 percent of the income distribution - enjoy the second highest incomes in the OECD after Luxembourg.c
The story is completely different for households with incomes at the bottom of the distribution. The average income (after taxes and transfers and adjusted for household size) of a U.S. household with an income in the bottom 10 percent was $10,700 in 2024, right around the OECD average ($10,500), even though the U.S. is a much wealthier country than average. The average income for this group was lower than in countries such as Canada ($13,800), Australia ($11,800), and Belgium ($17,300) and right around the same level as in Germany, France, and the U.K. despite those countries being less wealthy than the U.S.
* * *
Chart: U.S. Average Income Much Lower for People With Incomes in the Bottom 10% Than Similarly Wealthy Countries
* * *
The income comparisons reflect tax payments by families and cash and cash-like transfers to them. These comparisons do not take into account provision of other public services, such as health care, child care, public education, and public transit. One way around this shortcoming is to look at the share of households reporting material hardship, such as constrained food choices or falling behind on rent. Here, the U.S. is ranked in the bottom 4 of the 17countries for which data are available - far worse than many countries that have lower GDP per capita than us.d
* * *
a OECD, "Gross domestic product per capita; U.S. dollars, current PPPs, 2025," https://data-explorer.oecd.org/.
b OECD, "GDP per Hour worked; U.S. dollars per hour, PPP converted, current prices, 2023," https://data-explorer.oecd.org/.
c Luxembourg Income Study, Data Access Research Tool (DART), https://dart.lisdatacenter.org/. Income is disposable household income by decile group. Importantly, this measure does include non-monetary transfers in the areas of housing, care (including child care), education, or health. The U.S. likely rises in these rankings relative to GDP per capita because of the distortionary effects of multinational corporations shifting profits to countries that are tax havens, which inflate GDP but not survey-based household income statistics.
d Lane Kenworthy, "A decent and rising income floor," February 2025, https://lanekenworthy.net/a-decent-and-rising-income-floor/.
* * *
Additional Revenue Is the Key to Addressing Both Fiscal and Investment Deficits Without Making Either One Worse
The key goal for policymakers is to address both our fiscal and investment deficits instead of addressing one by exacerbating the other. And there is no magical way to address both deficits: we will have to raise revenue to solve both challenges.
Making our fiscal trajectory sustainable to avoid the harms of higher interest rates and higher interest costs would be counterproductive if it came from taking away food assistance and health care coverage from people who need it, cutting investments in public schools or college access, or retreating on our investments in life-saving medical care or other basic research. Similarly, trillions of dollars in unpaid-for investments in people could be vulnerable to being rolled back later if the costs of financing debt become so great that large-scale deficit reduction becomes necessary. Neither approach is good for the country.
And policymakers should certainly avoid an outcome like the harmful 2025 Republican reconciliation law, which financed expensive and regressive tax cuts with a combination of harmful cuts to food assistance and health care and higher deficits, making both deficits worse.
The U.S. has ample ability to raise revenue. U.S. federal, state, and local tax revenue equaled 25.6 percent of the economy in 2024, which is far below the GDP-weighted average of other OECD countries (34 percent).[41] (See Figure 6.) The U.S. tax-to-GDP ratio ranks it 31 among 38 advanced industrial countries in the OECD and far behind Canada (35 percent), Australia (30 percent), Japan (34 percent), and New Zealand (33 percent), and even farther behind France, Italy, Germany, and Spain, just to name a few.[42]
The U.S. could address many of its fiscal and investment needs while still staying well below the revenue-to-GDP ratio of other advanced economies. For example, eliminating the fiscal gap with just revenue by increasing the tax-to-GDP ratio from 25.6 percent to 28.0 percent would move the U.S. above Switzerland from the 31st highest tax OECD country to the 30th, and still keep federal revenue below its 2000 level as a percent of GDP. Moreover, the higher levels of pre-tax inequality in the U.S. relative to OECD countries would allow us to raise a larger share of revenue from the highest-income households than these other countries do.
The main argument against raising revenue is that it will hinder economic growth, but studies addressing this topic have generally found contradictory or inconclusive results.[43] A previous CBPP analysis of more than two dozen economic studies concluded that "the effect of tax increases on growth depends on many different factors, such as the type of tax, the country, the state of the economy, monetary policy, the time frame studied, and what the revenue is used for."[44]
* * *
Figure 6: The U.S. is a Low Tax Country Compared to Other Wealthy Countries
* * *
In other words, the details of how and for what we raise revenue matter. It is beyond the focus of this paper to answer those important questions precisely. But it is important to note that using additional revenue for deficit reduction can be pro-growth. The CBO estimate of extending the 2017 tax law's individual provisions and the Budget Lab and Penn Wharton analyses of 2025 Republican reconciliation law show that the projected economic benefit of tax cuts was smaller than the projected economic costs of higher debt and interest rates. (See Figure 7.)
It is also important to note that the effect on economic growth is only one dimension of an appropriate cost-benefit analysis of a tax policy.[45] The benefits of past economic growth have not been shared equitably, and focusing on the overall growth rate masks these inequities.[46] Improvements in well-being and opportunity - such as income growth among people with incomes in the bottom half or three - quarters of the income distribution, longer and healthier lives, safer communities, and a healthier environment - may not always show up in aggregate economic statistics.
* * *
Figure 7: Allowing 2017 Trump Tax Cuts to Expire Would Have Grown the Economy in Long Run
* * *
Significant Deficit Reduction Through Spending Cuts Would be Harmful - and Politically Unpopular
The need for additional revenue becomes even clearer when one walks through the challenges of addressing the fiscal gap by cutting public services, to the detriment of people who rely on them. Social Security benefits are modest, currently averaging $24,000 per year, and make up the largest source of income for most retirees. The public is very supportive of Social Security and proposals to cut benefits significantly are very unpopular.[47] Medicare benefits are already, in some respects, less comprehensive than a typical employer-sponsored health plan and have exhibited more cost growth restraint than private coverage. Leaders of both parties have taken cuts to both programs off the table and, in fact, policymakers on a bipartisan basis increased Social Security for some beneficiaries in late 2024 without paying for those increases.
The scope for savings outside of these programs is also limited. Social Security and Medicare make up almost half (48 percent) of projected federal programmatic spending over the next decade. Security spending - defense, supports for veterans, and homeland security - make up another 22 percent and command largely bipartisan support. It would require reducing spending on the rest of the budget by 41 percent to stabilize the debt-to GDP ratio at its current level if Social Security, Medicare, security spending, and revenue were off the table.
The magnitude of these required spending cuts would be both exceedingly harsh and unrealistic. The harmful 2025 Republican reconciliation law will cut Medicaid by 17 percent and SNAP by 20 percent by the end of the budget window. These cuts will increase poverty and hardship and leave millions more people without health coverage. Those cuts are also highly unpopular. Further cuts to these programs would only compound that harm.
Similarly, President Trump proposed a 7 percent cut to non-defense discretionary spending in his fiscal year 2027 budget, relative to the previous fiscal year. House Republicans have proposed a much smaller 2 percent cut (neither figure is adjusted for inflation). Even the House's cuts - which include a 10 percent cut to Title I funding for schools and a 20 percent cut to the National Science Foundation - are often unpopular with the public and with many policymakers and unlikely to become law.
There is simply no getting around the basic math: addressing our nation's twin fiscal and investment deficits will require raising revenue as a percent of the economy above the historical average.
* * *
End Notes
[1] Federal Reserve Economic Database, "Unemployment Rate," last accessed September 13, 2026 https://fred.stlouisfed.org/series/UNRATE; Federal Reserve Economic Database, "Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Quoted on an Investment Basis," last accessed September 13, 2026, https://fred.stlouisfed.org/series/DGS5.
[2] See, e.g., J. Bradford Delong and Lawrence H. Summers, "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Spring 2012, https://www.brookings.edu/wp-content/uploads/2012/03/2012a_DeLong.pdf; Christina D. Romer, "Fiscal Policy in the Crisis: Lessons and Policy Implications," April 16, 2012, https://eml.berkeley.edu/~cromer/Lectures/Lessons%20for%20Fiscal%20Policy.pdf; Olivier Blanchard, "Transcript of a WEO Conference," April 16, 2023, https://www.imf.org/en/news/articles/2015/09/28/04/54/tr041613.
[3] Testimony of Chad Stone, "Policy Prescriptions for the Economy," before the Senate Budget Committee, September 15, 2011, https://www.cbpp.org/testimony-chad-stone-chief-economist-on-policy-prescriptions-for-the-economy
[4] Federal Reserve Economic Database, "Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis," last updated October 19, 2026, https://fred.stlouisfed.org/series/DGS10. The figure is the average yield for September 2026.
[5] Marijun A. Bolhuis et al., "The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly," NBER Working Paper 32163, National Bureau of Economic Research, February 2024, https://www.nber.org/papers/w32163.
[6] The widely reported figure of Japanese debt exceeding 200 percent of GDP is a gross number and netting out the government's financial assets results in a figure that is similar to or lower than of the U.S. One IMF analysis places Japanese debt at between 89-137 percent of GDP depending on the precise concept. Budget analysts across the political spectrum in the U.S. do not use gross debt, but at the very least net out the Social Security trust fund's holdings of U.S. Treasuries and those of other trust funds ("debt held by the public") and sometimes also net out other financial assets like student loans ("debt net of financial assets"). Rahul Anand and Shujaat Khan, "Japan's Debt Beyond the Headlines," International Monetary Fund, September 2026, https://www.imf.org/en/publications/fandd/issues/2026/09/japans-debt-beyond-the-headlines-anand
[7] Ian Smith, "Japan's borrowing costs soar to 30-year high on debt fears," Financial Times, July 7, 2026, https://www.ft.com/content/851aa883-073f-4423-a43e-9b09fdbe7c86?syn-25a6b1a6=1.
[8] Ian Smith et al., "Scott Bessent's yen intervention signals new era of US 'currency activism," Financial Times, August 4, 2026, https://www.ft.com/content/1be83506-b897-4c26-97cc-445d7354ee6f?syn-25a6b1a6=1
[9] Andre R. Nevy and Jeffrey Shafer, "Revisiting the Relationship Between Debt and Long-Term Interest Rates: Working Paper 2024-05," Congressional Budget Office, December 20, 2024, https://www.cbo.gov/publication/60314.
[10] Jack Salmon, "The Impact of Public Debt on Interest Rates," The Mercatus Center, May 14, 2025, https://www.mercatus.org/research/policy-briefs/impact-public-debt-interest-rates; Ernie Tedeschi, "Deficits are Raising Interest Rates. But Other Factors are Lowering Them," February 19, 2019, https://medium.com/bonothesauro/deficits-are-raising-interest-rates-but-other-factors-are-lowering-them-6d1e68776b7a.
[11] Nevy and Shafer.
[12] Abhi Gupta, "The Impact of Deficits on Costs for Households" Yale Budget Lab, March 9, 2026, https://budgetlab.yale.edu/research/impact-deficits-costs-households.
[13] Nathaniel Drake, "What Determines the Rate on a 30-Year Mortgage?," Fannie Mae, December 11, 2024, https://www.fanniemae.com/research-and-insights/publications/housing-insights/rate-30-year-mortgage.
[14] Gupta.
[15] Congressional Budget Office (CBO), "How the Expiring Individual Income Tax Provisions in the 2017 Tax Act Affect CBO's Economic Forecast," December 2024, https://www.cbo.gov/system/files/2024-12/60986-Expiring-Provisions-2017-Tax-Act.pdf.
[16] Budget Lab, "Long-term Impacts of the One Big Beautiful Bill Act, as Enacted on July 4, 2025," July 30, 2025, https://budgetlab.yale.edu/research/long-term-impacts-one-big-beautiful-bill-act-enacted-july-4-2025; Penn Wharton Budget Model, "President Trump-Signed Reconciliation Bill: Budget, Economic, and Distributional Effects," July 8, 2025, https://budgetmodel.wharton.upenn.edu/issues/2025/7/8/president-trump-signed-reconciliation-bill-budget-economic-and-distributional-effects.
[17] Ben S. Bernanke and Mark Gertler, "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspective, Vol. 9, No. 4, 1995, https://www.jstor.org/stable/2138389; Justin Bloesh and Jacob P. Weber, "Structural Changes in Investment and the Waning Power of Monetary Policy," New York Federal Reserve No. 1990, March 2026, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1190.pdf; Nitish Sinha and Michael Smolyansky, "How sensitive is the economy to large interest rate increases? Evidence from the taper tantrum," Federal Reserve Board Finance and Economics Discussion Series, December 2022, https://www.federalreserve.gov/econres/feds/files/2022085pap.pdf; Claudio Raddatz and Roberto Rigobon, "Monetary Policy and Sectoral Shocks: Did the FED react properly to the High-Tech Crisis?," NBER Working Paper 9835, National Bureau of Economic Research, July 2003, https://www.nber.org/papers/w9835.
[18] CBO, "The Outlook for Housing Starts," September 2024, https://www.cbo.gov/publication/60727.
[19] CBO, "The Long-Term Budget Outlook: 2025 to 2055," March 2025, https://www.cbo.gov/publication/61270.
[20] CBO, March 2025.
[21] Brendan Duke, "Republican Megabill Trades Essential Support to Low-Income People for Skewed Tax Cuts," CBPP, February 11, 2026, https://www.cbpp.org/research/federal-tax/republican-megabill-trades-essential-support-to-low-income-people-for-skewed.
[22] Importantly, the 1993-1995 period is mostly representative of the 30 years. The 1962-1995 average had revenue at 17.5 percent of GDP and programmatic spending at 18 percent.
[23] Centers on Medicare and Medicaid Service, National Health Expenditure Tables, Table 21 Expenditures, Enrollment and Per Enrollee Estimates of Health Insurance: United States, Calendar Years 1987-2024," https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/historical. Figures have been adjusted for inflation using the Personal Consumption Expenditure deflator.
[24] U.S. Census Bureau, Health Insurance Historical Tables - Original Series, Table HI-1, https://www.census.gov/data/tables/time-series/demo/health-insurance/historical-series/original.html and Health Insurance Historical Tables - HHI Series, Table HHI-01, https://www.census.gov/data/tables/time-series/demo/health-insurance/historical-series/hic.html.
[25]CBO, "The Budget and Economic Outlook: 2025 to 2035," January 2025, https://www.cbo.gov/system/files/2025-01/51118-2025-01-Budget-Projections.xlsx
[26] The term "bracket creep" refers to when tax brackets are not indexed for inflation, so as prices rise, more income is taxed at higher rates even when there is no inflation-adjusted economic growth. The U.S. now indexes its tax brackets for inflation. This leaves "real bracket creep" from inflation-adjusted economic growth as the main force raising revenue as a share of the economy over time.
[27] One reason revenue as a share of GDP was expected to rise dramatically in CBO projections from the late 1990s to 2012 was that the Alternative Minimum Tax (AMT) was not indexed to inflation. CBO projected AMT would recapture growing amounts of revenue as the years passed, purely from inflation. In our analysis, however, we measure projected revenue relative to a hypothetical AMT that had been indexed for inflation (rather than the actual, unindexed AMT), which still shows considerable growth in projected revenue as a share of the economy because of real bracket creep.
[28] U.S. Office of Management and Budget Historical Tables, "Table 9.7 Summary of Outlays for the Conduct of Research and Development: 1949-2027," https://www.whitehouse.gov/omb/information-resources/budget/historical-tables/.
[29] Sheila Campbell et al., "Estimating the Economic Effects of Federally Funded R&D," Congressional Budget Office Working Paper 2026-08, July 2026, https://www.cbo.gov/system/files/2026-07/62387-Nondefense-Research.pdf. See also, Chuck Marr and Josephine Cureton, "Administration's Proposed Cuts to Non-Defense R&D Pose Long-Term Risk to Rising Living Standards," CBPP, October 6, 2025, https://www.cbpp.org/research/federal-budget/administrations-proposed-cuts-to-non-defense-rd-pose-long-term-risk-to.
[30] Organization for Economic Cooperation and Development (OECD), "Social Expenditure Database," https://www.oecd.org/en/data/datasets/social-expenditure-database-socx.html. The exact concept is "gross public social spending less old age and survivors and health programs for 2019."
[31] Overall, 2019 gross U.S. public social spending (18.2 percent of GDP) is not that much lower than the OECD average (20.3 percent), but this is entirely attributable to above average spending on health and retirement programs (15.5 percent) relative to the OECD average (14.2 percent). The U.S. delivers a particularly large amount of its benefits through the tax code, so its net public social spending (23 percent) is higher than the OECD average (20.0 percent). The additional tax benefits carried in the net figure (which does not exist for social spending outside of retirement and health) mostly do not accrue to low-income households. For example, the refundable portions of the Child Tax Credit and Earned Income Tax Credits are carried in the gross figures cited above while the exclusion for employer-sponsored health insurance is not.
[32] Arindrajit Dube, "The Wage Standard: What's Wrong in the Labor Market and How to Fix It," Dutton, 2026.
[33] Organization for Economic Cooperation and Development (OECD), "Benefit Reforms for Inclusive Societies in the United States," May 2023, https://www.oecd.org/en/publications/benefit-reforms-for-inclusive-societies-in-the-united-states_32d8f005-en/full-report/component-7.html.
[34] OECD, "Health at a Glance 2025: OECD Indicators," 2025, https://www.oecd.org/content/dam/oecd/en/publications/reports/2025/11/health-at-a-glance-2025_a894f72e/8f9e3f98-en.pdf.
[35] OECD, "Social Expenditure Database," https://www.oecd.org/en/data/datasets/social-expenditure-database-socx.html. The exact concept is gross public social spending on health programs for 2019.
[36] OECD, "Health at a Glance 2025: OECD Indicators."
[37] CBO, "Federal Subsidies for Health Insurance, 2026 to 2036," July 23, 2026, https://www.cbo.gov/publication/62539.
[38] Angela Wyse and Bruce Meyer, "Saved by Medicaid: New Evidence on Health Insurance and Mortality from the Universe of Low-Income Adults," National Bureau of Economic Research Working Paper No. 33719, May 2025, https://www.nber.org/papers/w33719.
[39] National Academies of Sciences, Engineering, and Medicine, "A Roadmap to Reducing Child Poverty," National Academies Press, 2019, https://www.nap.edu/read/25246.
[40] CBO, "Re: How Changes to Funding for the NIH and Changes in the FDA's Review Times Would Affect the Development of New Drugs," July 18, 2025, https://www.cbo.gov/system/files/2025-07/61373-Drugs.pdf.
[41] Revenue share of GDP data are from 2024 or 2023, depending on availability. GDP weighting is purchasing power parity current dollars from 2024 and excludes the United States. Organization for Economic Co-operation and Development, "Revenue Statistics 2025," December 9, 2025, https://www.oecd.org/en/publications/2025/12/revenue-statistics-2025_07ca0a8e.html; World Development Indicators, "GDP, PPP (current international $)," https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD.
[42] These figures, from OECD, include tax collections by all levels of government; in the United States, that means federal, state, and local governments. They exclude charges for public services and other items that the OECD classifies as non-tax receipts. The data are from https://www.oecd.org/en/publications/revenue-statistics-2023_9d0453d5-en.html.
[43] Republican Study Committee, "Beautiful Bill, Beautiful Future: RSC Gets the Download from Director Hassett," May 21, 2025, https://rsc-pfluger.house.gov/media/press-releases/beautiful-bill-beautiful-future-rsc-gets-download-director-hassett.
[44] Chye-Ching Huang and Nathaniel Frentz, "What Really Is the Evidence on Taxes and Growth?" CBPP, February 18, 2014, https://www.cbpp.org/research/what-really-is-the-evidence-on-taxes-and-growth.
[45] The inadequacy of GDP as a measure of national well-being is the theme of Mismeasuring Our Lives: Why GDP Doesn't Add Up, by Amartya Sen, Jean Paul Fitoussi, and Joseph Stiglitz, New Press, 2010, https://wcfia.harvard.edu/publications/mismeasuring-our-lives-why-gdp-doesnt-add.
[46] Austen Clemens, "GDP 2.0: Measuring who prospers when the U.S. economy grows," Washington Center for Equitable Growth, July 11, 2023, https://equitablegrowth.org/gdp-2-0-measuring-who-prospers-when-the-u-s-economy-grows/. The analysis points out that growth has increasingly been tilted toward the rich, making aggregate GDP growth a misleading way of measuring the effect of growth on the entire income distribution.
[47] National Academy of Social Insurance, "Social Security at 90: A Bipartisan Roadmap for the Program's Future," January 2025, https://www.nasi.org/wp-content/uploads/2025/01/NASI_SocialSecurityat90.pdf.
* * *
Brendan is the Senior Director for Federal Budget Policy at the Center. He previously served as a senior policy adviser at the Biden-Harris White House National Economic Council and as a volunteer on the Biden-Harris transition team.
Richard Kogan rejoined the Center in May 2011 as a senior fellow after having served as a Senior Adviser at the Office of Management and Budget since January 2009.
Sonali Master is a Research Associate with the Federal Fiscal Policy team. She also currently serves as an Intern Coordinator.
* * *
Original text here: https://www.cbpp.org/research/federal-budget/federal-policymakers-should-raise-revenue-to-address-fiscal-and-investment
[Category: ThinkTank]
* * *
Federal Policymakers Should Raise Revenue to Address Fiscal and Investment Deficits to Responsibly Steward the Nation's Economy
October 23, 2026 | Brendan Duke , Richard Kogan and Sonali Master
Executive Summary
Our nation faces twin deficits that threaten the short- and long-term economic well-being of the nation and its people: a federal budget deficit and a federal investment deficit.
The latest data show that the U.S. budget deficit as a percent of the economy was 6 percent last year - ... Show Full Article WASHINGTON, Oct. 24 -- The Center on Budget and Policy Priorities issued the following report: * * * Federal Policymakers Should Raise Revenue to Address Fiscal and Investment Deficits to Responsibly Steward the Nation's Economy October 23, 2026 | Brendan Duke , Richard Kogan and Sonali Master Executive Summary Our nation faces twin deficits that threaten the short- and long-term economic well-being of the nation and its people: a federal budget deficit and a federal investment deficit. The latest data show that the U.S. budget deficit as a percent of the economy was 6 percent last year -the last five years have been the only years since World War II where the unemployment rate was less than 5 percent but the deficit exceeded 5 percent of GDP. At the same time, we have failed to properly make investments that could make our nation better off such as in medical research and policies that will make life more affordable for people in the U.S. with low and moderate incomes.
Policymakers need to address each deficit without exacerbating the other to steward our nation's economy responsibly, expand opportunity, and build a more shared prosperity.
There is no magical way to address both deficits: we will have to raise revenue to solve both challenges.
The Federal Fiscal Deficit and Growing Debt Pose Economic and Political Challenges
The U.S Treasury reported that the federal deficit came in at $2.0 trillion in fiscal year 2026 that ended September 30. The Congressional Budget Office (CBO) projects that debt and interest payments will continue to grow faster than the economy over the coming decades. Because our federal government is running a significant deficit, it must take on debt. Generally, higher debt means higher interest rates for consumers and businesses, which makes buying a car, affording a home, launching a small business, or getting a student loan more expensive. Moreover, there is the risk that policymakers will use higher deficits and debt as an excuse to push for deep and harmful cuts in public services, such as health care and food assistance, that help families with low- and moderate-incomes afford the basics.
These structural fiscal deficits are, in large part, the result of long-expected increased spending on Medicare and Social Security, as baby boomers have reached retirement age, and large tax cuts that decreased revenues under policies advanced by George W. Bush and Donald Trump.
The aging of the population and its upward pressure on federal spending were well understood in the late 1990s. After efforts to reduce Reagan-era deficits by Bill Clinton and George H.W. Bush, federal revenue was projected to grow faster than spending and lead the U.S. to eventually pay off its debt.
Letting revenue as a share of the economy rise naturally to address the added costs of population aging would have been an elegant solution to our long-term fiscal outlook since it would not have required proactive tax increases or spending cuts. In other words, policymakers didn't have to do anything to cover the costs of population aging other than allow revenue to rise as a share of the economy, as they were poised to do under the law in place at the time.
Instead, policymakers took actions that made our fiscal outlook unsustainable - large temporary tax cuts were enacted under President George W. Bush and later most were made permanent under President Obama. Still more temporary tax cuts were enacted during the first Trump Administration and then those that were expiring were extended in the July 2025 reconciliation law, with yet even more temporary tax cuts added on top.
An appropriate fiscal goal for policymakers is stabilizing the debt-to-GDP ratio. We estimate that closing this "fiscal gap" would require revenue increases and/or spending cuts that, taken together, total 2.4 percent of GDP or about $9.5 trillion of deficit reduction over ten years. That, plus the resulting interest savings, would reduce the overall ten-year deficit from its current projected average of 6.2 percent of GDP to 3.4 percent.
At the Same Time, We Are Under-Investing in Areas that Matter to Families and the Economy
The U.S. is a rich but highly unequal country. It has the fifth highest GDP per capita among the industrialized democracies in the Organization for Economic Cooperation and Development (OECD), which is 19 percent higher than Germany's per capita GDP, and more than 35 percent higher than Canada's, the United Kingdom's, and France's. The typical U.S. household - that is, households with incomes in the middle 20 percent - has the second highest income after taxes and transfers of any country in the OECD ($45,000 on average after adjusting for household size).
But the story is completely different for households with incomes in the bottom 10 percent of the income distribution. Despite living in a much wealthier-than-average country, these households' size-adjusted incomes are right around the OECD average ($10,700 compared to $10,500). The average income for this group is lower than in Canada, Australia, and Belgium and right around the same level as in Germany and France. Households of color are disproportionately represented in the bottom of the income distribution due to historical and continuing racial discrimination, which has locked them out of opportunities for economic prosperity through education, employment, housing, and more.
The relatively low incomes of these households reflect, in part, a lack of investment in them. The U.S. spends only 2.7 percent of its economy on economic security programs outside of retirement, which is less than half the OECD average. These programs include disability benefits, child care and family benefits, unemployment benefits, housing, and other benefits. They, for example, help a parent working in a low-paying job afford rent and a working-age person afford groceries when they lose their job.
In addition, the U.S. underinvests in other public services that would support a strong economy and benefit all its residents, such as education and scientific research. For example, public spending on non-defense research and development is below its 1960s, 1970s, and 1980s averages as a percent of GDP and increasing it would grow the economy in the long run.
Raising Additional Revenue Is the Key to Addressing Both Fiscal and Investment Deficits Without Making Either One Worse
Taking away food assistance and health coverage from people who need it, cutting how much we spend on public schools or college financial aid, and retreating on our investments in life-saving medical care or other basic research would, in the short term, reduce our fiscal deficit, but at the expense of increasing our investment deficit and hardship while reducing future widespread prosperity.
In some cases, such as the harmful 2025 Republican reconciliation law in which expensive tax cuts tilted to the wealthy were partially offset by cuts to food assistance and health care, policymakers have enacted laws that made both deficits worse.
Neither approach is good for the country. Policymakers should instead search for solutions that improve both deficits - and raising federal revenue has to be a key element of those solutions.
The main argument against raising revenue is that it will hinder economic growth, but analyses of extending the expiring individual provisions of the 2017 tax law and the 2025 Republican reconciliation law have found that, in the long run, tax increases can grow the economy by reducing deficits, interest rates, and debt.
U.S. Faces a Substantial Fiscal Deficit and Growing Debt
The U.S. recorded a deficit of $2.0 trillion in fiscal year 2026, amounting to 6.2 percent of GDP, because revenue ($5.4 trillion or 16.7 percent of GDP) was less than program costs ($6.3 trillion or 19.6 percent of GDP) and net interest payments ($1.1 trillion or 3.3 percent of GDP). The primary deficit - that is, the difference between revenues and program spending while excluding interest costs - was $922 billion and 2.9 percent of GDP. This is generally a preferred measure for evaluating a government's current fiscal choices since interest payments reflect past debt accumulation; they are not costs that policymakers can choose.
Deficits at this level are especially high for an economy where unemployment is low (Figure 1), since employed people pay more in taxes and are less reliant on economic security programs, such as unemployment insurance. With the exception of pandemic-affected fiscal years 2020 and 2021, each fiscal year since 2019 has had an unemployment rate under 5 percent and a primary deficit around 3 percent. This is an abnormal combination. Over the 1962-2018 period, an unemployment rate below 5 percent typically meant a primary surplus. A primary deficit of 3 percent of GDP was the average fiscal balance when the unemployment rate exceeded 7 percent over that same period. In other words, since 2019, we have been persistently running recession-level deficits even when the economy is strong.
* * *
Figure 1: Primary Deficit Higher Than Expected for Current Unemployment Levels
* * *
When the federal government runs deficits, it takes on debt, which the government must then service by paying interest. Those interest-related costs are the annual budgetary cost of taking on debt. Debt held by the public as a percent of the economy is approaching historically high levels and is projected to reach 121 percent by 2036, according to CBPP estimates. Interest costs as a percent of the economy are already at a record high.
One reason debt levels have grown is the one-time costs of the responses to the Great Recession and the COVID-19 pandemic. Importantly, however, these events are not ongoing drivers of the upward trajectory of our projected debt and interest, which is largely the result of the ongoing annual mismatch between revenue and programmatic (i.e. non-interest) costs. In fact, if revenue equaled programmatic costs, we could generally expect the debt ratio to fall after one-time events that pushed up the debt conclude, as a result of subsequent GDP growth.
One reasonable measure of the size of our fiscal challenge is the amount of non-interest deficit reduction (that is, the increases in revenue and/or cuts to programs) as a percent of GDP required to keep the debt from rising as a percent of the economy (i.e., to "stabilize the debt"). Known as the "fiscal gap," we estimate it is currently 2.4 percent of GDP. That is $9.5 trillion of primary deficit reduction over ten years and is roughly similar in magnitude to having programmatic spending match revenue (i.e., to have a primary balance). This approximates reducing the overall deficit from its current projected average of 6.2 percent of GDP over the next decade to 3.4 percent after taking into account interest savings.
Growing Debt Presents Costs and Risks
An environment like the early 2010s was an inappropriate time to be overly concerned with reducing deficits since the unemployment rate exceeded 6 percent and the 5-year Treasury rate - which is roughly the average maturity of U.S. debt - was routinely below 1 percent.[1]
We and several leading economists explained at the time that the focus on reducing deficits was deeply misguided because the economy was weak and unemployment unacceptably high.[2] For example, then-CBPP chief economist Chad Stone told Congress in 2011, "the economic situation today cries out for significant fiscal stimulus" and recommended temporarily expanding or extending enhancements to unemployment insurance, providing more aid to states and local governments, and cutting taxes for the households with incomes at the bottom end of the income distribution.[3]
But that environment has changed.
The 5-year Treasury rate averaged 4.8 percent in September, which has notably increased the fiscal cost of the Treasury's debt. The 10-year Treasury rate -- changes in which affect the cost of credit for mortgages, auto loans, student loan payments, and more - has grown from less than 2 percent when Stone testified to a 5.0 percent average in September 2026.[4] Indeed, the elevated cost of consumer borrowing is a leading potential explanation for U.S. residents' pessimistic view of the economy.[5]
This summer, we have seen a surge in interest rates on long-term debt across developed countries, including the U.S., France, and Japan. Economists and market participants have pointed to several factors, including inflation (in part owing to the U.S.'s war with Iran that has expanded throughout the Middle East and the uncertainty about if and when the conflict will be resolved and, in part, the Trump tariff regime); the AI investment boom which creates competition for investors' funds; and these countries' fiscal trajectories.
Although the extent to which each of these countries' rise in borrowing costs reflects fiscal concerns is unclear, recent events have shown strong bond market reactions to fiscal policy in other advanced economies. In the United Kingdom, former Prime Minister Liz Truss released a large, deficit-financed tax cut plan that resulted in such a surge in U.K. government bond yields that it led to her resignation weeks later. Japan has long been held as the example of a country that could sustain high debt levels (though this frequently relies on a debt concept serious U.S. budget analysts do not use).[6] Japanese borrowing costs surged this summer to a 30-year high after the prime minister announced a $2.3 trillion increase in public and private investment over 14 years (after several years of falling deficits), prompting the U.S. federal government to intervene in currency markets to support the yen.[7] Indeed, investors believe that part of the reason the U.S. intervened was to prevent Japan from selling off its own supply of U.S. Treasury bonds, which would increase U.S. rates.[8]
While a resolution to the conflict in the Middle East that results in lower oil prices will help with inflation and uncertainty, there is growing concern among economists that high and rising U.S. debt will continue to exert upward pressure on interest rates in ways that increase costs both for the federal government and for households through higher interest rates for mortgages, car loans, credit card balances, and other forms of both business and consumer credit.
More generally, federal deficits and debt create present-day costs and potential risks to the economy and to people. Some of these costs are economic and some are political.
Economic Costs and Risks: Higher Consumer Interest Rates and Potential Fiscal Crisis
Standard economic theory suggests that, all else being equal, a high and rising debt ratio will, over time, put upward pressure on longer-term interest rates and reduce private investment.[9] Importantly, other factors affect interest rates, such as demographics or the demand by foreign central banks for Treasury securities. So there have been times, such as in the 2010s, when longer-term interest rates were low despite rising debt. But careful decomposition still shows that, all things being equal, higher debt means higher interest rates, even when interest rates are falling because of other factors.[10]
Most analysts predict a small effect, with the Congressional Budget Office (CBO) estimating that every percentage point increase in the forecasted debt-to-GDP ratio increases the interest rate on a 10-year Treasury by 2 basis points.[11] But the increase in the debt-to-GDP ratio since 2015 resulting from tax cuts and spending increases (49 percentage points of GDP) suggests that deficit-increasing legislation has raised the 10-year Treasury interest rate by around 1 percentage point.[12]
Higher interest rates on U.S. debt feed through to the interest rates consumers and businesses pay throughout the economy. For example, the 30-year mortgage rate closely tracks the 10-year Treasury rate.[13] Illustrative analysis from the Budget Lab at Yale finds that the legislation increasing the debt-to-GDP ratio since 2015 has increased the amount someone buying a house at the median price must pay in interest annually by $2,500, or by about $76,000 over the lifetime of the 30-year mortgage.[14] Consumers and businesses paying more in interest is the direct economic cost of higher debt.
Higher interest rates can also deter private sector investment, which reduces overall growth in income and wealth. Indeed, given current interest rates, the growth-reducing effects of additional debt can be so large that deficit-financed tax cuts intended to incentivize increases in the supply of labor and capital can actually shrink the economy in the long run. For example, CBO found that extending the expiring 2017 individual tax cuts would shrink the economy by the end of the ten-year budget window.[15] Similarly, the Budget Lab at Yale and the Penn Wharton Budget Model both found that because of the costs of debt, the 2025 Republican reconciliation law, which made permanent the expiring 2017 tax cuts and only partially offset their cost by significantly cutting health care and SNAPs, would shrink the economy in the long run despite the modest supply-side benefits of tax cuts.[16]
Importantly, the effects of higher interest rates on investment are not uniform across all types of investment - they fall more heavily on residential construction than business investment, as a wide array of research shows.[17] Indeed, CBO assumes that an increase in mortgage rates -- which as discussed move closely with 10-year Treasury interest rates - will permanently reduce the number of homes.[18]
Higher deficits also raise the risk of a sudden fiscal and financial crisis resulting from a lack of confidence in the real value of Treasury bonds when, for example, markets expect higher inflation from the sheer amount of Treasury issuance.[19] This not only could cause investors to demand dramatically higher interest rates for Treasury bonds, but also lead to a financial crisis as banks, pension funds, and other holders of Treasury bonds see their portfolios suddenly lose value as higher interest rates reduce the value of the Treasury bonds they hold.
It is impossible to know with any certainty the risk of this kind of crisis or whether it would occur at all. CBO views the risk as low in the short term since "no tipping point can be identified at which the debt-to-GDP ratio would become so high that it would make a crisis likely or imminent, nor is there a specific tipping point beyond which interest costs would become so high in relation to GDP that they were unsustainable."[20] But even though a rising debt need not induce a sudden crisis, an unexpected panic among investors and those holding Treasury securities would be quite harmful; it is a risk that should not be ignored.
The sheer uncertainty of when a fiscal crisis could hit and its negative potential consequences means policymakers should take steps to make the fiscal outlook more sustainable. Certainly, they should not take actions to exacerbate it, such as through large deficit-financed legislation, except during times when it is both necessary and temporary, such as during a recession.
Political Costs: Higher Deficits as an Excuse for Deep and Harmful Budget Cuts
Some policymakers have used higher deficits and debt as an excuse to push for deep and harmful budget cuts to public services. These cuts can have especially detrimental effects on families with the lowest incomes, people with disabilities, children, and many others already struggling to afford their basic needs, when supports such as health coverage and food assistance through SNAP are targeted for cuts. The 2025 Republican reconciliation law is an extreme example. It included $1.4 trillion in tax cuts over ten years just for people making over $500,000, while proponents of the law argued that $1.3 trillion in cuts to SNAP and health care were necessary because of the federal budget outlook.[21] A better choice would have been not to enact the tax cuts for rich households or the cuts to SNAP and health care.
Despite far better choices available to policymakers, the risk remains that lawmakers who refuse to raise revenue or who, worse yet, take actions to reduce revenue will then cite the ensuing deficits to promote harmful cuts. The results include higher poverty and the attendant long-term impacts on children and the economy; more people without access to health coverage; and less public investment in areas such as infrastructure, education, and research, which would also hurt economic growth.
Also, in a future recession or disaster, debt concerns could dissuade policymakers from responding with robust but temporary measures to bolster the economy and mitigate harm; this failure could prolong the downturn and slow the recovery - and, ironically, harm long-term economic growth.
Fiscal Deficits Are Driven by Decisions to Cut Taxes Against a Long-Expected Backdrop of an Aging Population
Policymakers may rightfully ask why deficits are so high and projected to grow. It is helpful to compare the federal budget of 2026 to those of 1993-1995 (Figure 2), when revenue and program costs matched, known as a primary balance, since that is a roughly appropriate fiscal goal for today and over the longer term. What has changed since then?[22]
* * *
Figure 2: Increase in Programmatic Spending Since the Early 1990s Largely Driven by Growing Social Security and Medicare Costs
* * *
Revenue as a percent of GDP was somewhat higher than it was in 2026: 17.5 percent then as opposed to 16.7 percent last year. This reflects last year's revenue level being particularly low - 2025 revenue was closer to its early 1990s average (17.3 percent) as was CBO's February 2026 projection for 2027 (17.7 percent). And even those revenue levels - essentially matching the early 1990s average - were low given the stronger economy: the unemployment rate has been under 4.5 percent since 2022, but it averaged 6.4 percent between 1993 and 1995. As the economy strengthened later in the 1990s, revenue levels began to exceed 19 percent and topped out at 20.0 percent of GDP in 2000. (See Table 1 and interactive chart, "Revenue in 2026 Is in Line With a Much Weaker Economy, Despite Low Unemployment.")
There is no current expectation that we will reach anything like 20 percent of GDP, no matter how strong the economy grows. The tax system of the 1990s was not an accident - it reflected the hard work of Administrations and Congresses under George H.W. Bush and Bill Clinton to bring the earlier Reagan-era deficits to more reasonable levels. The tax cuts advanced by the George W. Bush and both Trump Administrations brought revenue down sharply as a share of GDP.
Programmatic spending, on the other hand, was lower in 1993-1995 (17.4 percent then as opposed to 19.6 percent today); it has grown by 2.2 percentage points of GDP. Increased spending on Social Security and Medicare as the population has aged can account for almost the entire increase in programmatic spending, rising by a combined 2.0 percent of GDP relative to the 1993-1995 average. And key components of spending have shrunk over that period such as defense and non-defense discretionary spending.
* * *
Chart: Revenue in 2026 Is in Line With a Much Weaker Economy, Despite Low Unemployment
* * *
Table 1: 2026 Falls Close to the Bottom of Revenues in the Last 60 Years, Even at Comparable Levels of Employment
* * *
The demographic reality undergirding these trends is obvious: in the mid-1990s, members of the baby boom generation (those born between 1946 and 1964) were in their "prime working years"; today, they are in their "prime retirement years," now that even the youngest baby boomers are becoming eligible for Social Security and soon for Medicare. In 1995, 12.7 percent of the U.S. population was 65 years of age or older; in 2025, the last year for which we have data, some 18.9 percent of the U.S. population was 65 or older. As people live longer, the share of even older populations also has grown: the share of the population over the age of 75 has grown from 5.6 to 8.2 percent, and the share of the population age 80 and older has grown from 3.1 to 4.4 percent.
To be sure, Medicaid spending has also risen substantially, from 1.1 percent to 2.2 percent of GDP. Some of this reflects the fact that Medicaid, like Medicare, has been subject to overall health care inflation. But the inflation-adjusted increase in Medicaid costs per enrollee between 1994 and 2024 (40 percent) was much lower than it was for employer-provided insurance (146 percent) and Medicare (94 percent).[23] (See Figure 3.)The increase also reflects higher enrollment: the share of people receiving coverage from Medicaid rose from an average of 12.1 percent between 1993 and 1995 to 17.1 percent in 2025.[24] A big driver of the increased Medicaid enrollment was the expansion in eligibility, effective in 2014, included in the Affordable Care Act - a positive result for people with low incomes who would otherwise be uninsured. The cost of expanding eligibility raised Medicaid spending as a share of the economy, but did not result in a rapid growth rate; CBO projected it would grow by less than 0.2 percent of GDP over the decade even before the cuts from the 2025 Republican reconciliation law.[25]
* * *
Figure 3: Medicaid Costs Have Grown More Slowly Than Medicare, Which in Turn Have Grown More Slowly Than Employer-Sponsored Insurance
* * *
This population aging and the resulting bump in Social Security and Medicare spending was both predictable and predicted - the question was whether the federal government should let revenue rise above its historical percent of GDP to finance these long-expected costs or, instead, cut the retirement and health programs that would cause federal spending to rise.
Importantly, doing nothing would have kept the overall fiscal deficits and debt in check, given that revenue began to exceed its historic average as a percent of GDP in the late 1990s, and CBO projected that it would continue to rise further.
Much of this projected increase in revenue as a percent of GDP was a result of "real bracket creep," meaning the projections assumed that a rise in inflation-adjusted incomes from a growing economy would put more income in higher tax brackets (which are adjusted for inflation), generating more federal revenue.[26],[27] Families would still see rising after-tax incomes, since the increase in their tax payments from higher tax brackets would only be a fraction of their real income gains. And the federal budget would be, likewise, financially better off and so better able to sustain, or even improve, the important investments and protections it provides.
The aging of the population and its upward pressure on federal spending were well understood in the late 1990s and included in CBO projections, but the projected increase in revenue was even larger - this caused CBO to initially project persistent surpluses that would lead the U.S. to pay off its debt. Letting the increase in revenue as a share of the economy from real economic growth address the added costs of population aging would have been an elegant solution to our long-term fiscal outlook. It would not have required proactive tax increases or spending cuts (though Congress would still have needed to rebalance the mix of payroll and income taxes to keep the Social Security and Medicare trust funds solvent).
Instead, policymakers took actions that made our fiscal outlook unsustainable - large temporary tax cuts were enacted under President George W. Bush and later most were made permanent under President Barack Obama. And then, still more temporary tax cuts were enacted during the first Trump Administration. Those Trump tax cuts that were scheduled to expire were permanently extended in the July 2025 reconciliation law, and yet more temporary tax cuts were added on top.
We estimate that if the Bush tax cuts and their extensions and the 2017 Trump tax cuts had not been enacted, the deficit would be $540 billion, or less than one-third the current deficit ($2 trillion). (See Figure 4.) The ratio of debt held by the public would be considerably lower as well -- 63 percent of GDP in 2025, compared to the actual 99 percent - despite subsequent temporary events that pushed up the level of debt including the Great Recession and the COVID-19 pandemic. Most importantly, the debt would not be on a continually upward trajectory, as it is now.
* * *
Figure 4: The Debt Is Higher Due to the Bush and Trump Tax Cuts
* * *
The question now is how much of the U.S. fiscal imbalance should be addressed through proactive tax increases and how much should be addressed through proactive cuts to the public services the federal government provides.
The U.S. Faces a Substantial Investment Deficit, Complicating Efforts to Reduce the Fiscal Deficit
A key consideration for policymakers who want to address our fiscal deficit is not to worsen our investment deficit. We already don't do enough to support economic security, scientific and medical research, education, and other areas that strengthen our economy and benefit everyone in our nation. We should increase investment in these areas where it makes sense.
For example, federal spending on non-defense research (such as medical and energy research) as a share of the economy has been stuck around 0.3 percent of GDP since 2014. That is below its average in the 1960s (0.7 percent), 1970s (0.6 percent), 1980s (0.4 percent), and 1990s (0.4 percent).[28] The returns on federal investment in this area are so strong that CBO finds $1 of additional investment will increase the present value of GDP by $2 to $5, even if it is deficit financed (though this is not sufficient to "pay for itself" through the resulting higher revenue collections).[29]
One area of particular underinvestment as a nation is economic security programs. We spend less than other advanced economies on programs that ensure people with low and moderate incomes have adequate food, housing, and other essentials. This means that addressing our fiscal outlook by cutting these already insufficient programs will result in higher poverty and hardship.
The U.S. spends 2.7 percent of its economy on economic security programs outside of retirement, which is less than half the OECD average (6.0 percent).[30] (See Figure 5.) This OECD category includes disability benefits, child care and family benefits, unemployment benefits, housing, and other benefits (we will cover public health spending below) at the federal, state, and local levels. This low percentage puts us near the bottom (35 out of 38) among OECD countries, sitting only above Costa Rica, Mexico, and Turkiye. It is well below the other highest income countries, including Australia (8.8 percent), the U.K. (6.4 percent), Germany (6.3 percent), Switzerland (6.1 percent), and Canada (6.0 percent).
This is an important category of investment because these supports help working-age people and their children afford the basics when someone is between jobs or is working a low-paying job. The very low U.S. benefit level reflects a unique hole in the U.S. social contract - a hole that got larger with the deep cuts in food assistance enacted in the 2025 reconciliation law.[31]
* * *
Figure 5: Spending on Non-Retirement Economic Security Programs
* * *
A predictable result of this lack of public economic security spending is that people with incomes at the bottom of the distribution in the U.S. have incomes similar to -- or even lower than - people in other major advanced economies, despite living in a country where the average and median income is much higher. (See textbox, "The U.S. Is a Rich Country but People With the Lowest Incomes Do Not Share in Its Prosperity.") People of color are overrepresented among people with incomes at the lower end of both income and wealth distributions due to historical and continuing racial discrimination, which has locked people out of opportunities for economic prosperity through education, employment, housing, and more.
There are many other reasons for the relatively low incomes of U.S. households with incomes in the bottom of the distribution, including the structure of our labor market institutions, such as the low share of workers covered by a collective bargaining agreement.[32] But the underinvestment in economic security programs that reduce poverty and hardship in other rich countries is a key one. In particular, we provide much smaller supports to families with children and to adults who are between jobs. Paid parental leave and a cash child benefit are not fully available to families with low incomes, and in some cases, are totally unavailable. And our unemployment insurance system provides benefits to a small share of those who are looking for work, provides low benefits, and provides benefits for less time than in many other wealthy nations.[33]
The U.S. investment deficit is particularly complicated when it comes to health care. Total U.S. spending on health care (combined public and private) substantially exceeds the OECD average (17.2 percent of GDP compared to 9.3 percent).[34] Even just public spending on health care (8.4 percent of GDP) is the fourth highest in the OECD and is higher than in countries where health care is financed exclusively or almost exclusively by the government, including the U.K. (8.0 percent) and Canada (7.8 percent).[35] Nevertheless, the U.S. health care system also uniquely excludes a large fraction of people from health insurance among wealthy countries: the OECD average uninsured rate is just 2 percent, with all of the rich countries mentioned above reporting an uninsured rate of 0 percent.[36] Among the 38 OECD countries, the U.S. uninsured rate of 8 percent is smaller only than Mexico's (22 percent). CBO projects it will grow to over 10 percent over the next decade, reflecting congressional Republicans' refusal to extend enhancements to the Affordable Care Act's premium tax credits and the cuts to health care included in the 2025 Republican reconciliation law.[37]
The reason we call these policies "investments" is that they have a proven track record of improving people's lives in the short term and paying off in the long term. For example, research has shown that Medicaid saves lives. One study estimates that the Medicaid expansion included in the Affordable Care Act saved over 27,000 lives between 2010 and 2022, while the decision of some states to refuse the ACA expansion cost almost 13,000 lives.[38]
In particular, investing in children in families with low incomes has enormous payoffs in improving their longer-term educational, health, and employment outcomes. A 2019 report by the National Academy of Sciences, for example, found that stronger income assistance for children with low incomes - through policies such as the Child Tax Credit and food assistance through SNAP - was linked with healthier birthweights, better childhood nutrition, higher school enrollment, higher reading and math test scores, higher high school graduation rates, less alcohol and drug use, and higher rates of college entry.[39]
And there are, of course, other important areas of investment in the federal budget, such as medical and scientific research, education, and infrastructure, that can improve quality of life for everyone in our nation in the long term. For example, a 10 percent reduction in National Institutes of Health funding will result in 20 fewer new, beneficial drugs in the long run, according to the Congressional Budget Office.[40]
* * *
The U.S. Is a Rich Country but People With the Lowest Incomes Do Not Share in Its Prosperity
The U.S. is a rich country. It has the fifth highest GDP per capita among the industrialized democracies in the OECD. The four countries that rank above the U.S. have populations below 9 million - three of them are international tax havens where GDP is likely inflated because of the way multinational corporations' profits are reported, and the other (Norway) has substantial oil wealth.a U.S. GDP per capita is 19 percent higher than Germany's and more than 35 percent higher than Canada's, the U.K.'s, and France's. In part, this is because people in the U.S. work more hours than people in other rich countries, but the U.S. still has the seventh highest GDP per hour worked.b It is higher than in all the large countries mentioned above.
* * *
Chart: Typical U.S. Incomes are Higher Than Other Rich Democracies
* * *
However, the U.S. has substantial income inequality, so a high GDP per capita ranking does not necessarily mean that all U.S. households are richer than similarly situated households in other high-income countries. Fortunately, typical U.S. households - those with size-adjusted incomes after taxes and transfers in the middle 20 percent of the income distribution - enjoy the second highest incomes in the OECD after Luxembourg.c
The story is completely different for households with incomes at the bottom of the distribution. The average income (after taxes and transfers and adjusted for household size) of a U.S. household with an income in the bottom 10 percent was $10,700 in 2024, right around the OECD average ($10,500), even though the U.S. is a much wealthier country than average. The average income for this group was lower than in countries such as Canada ($13,800), Australia ($11,800), and Belgium ($17,300) and right around the same level as in Germany, France, and the U.K. despite those countries being less wealthy than the U.S.
* * *
Chart: U.S. Average Income Much Lower for People With Incomes in the Bottom 10% Than Similarly Wealthy Countries
* * *
The income comparisons reflect tax payments by families and cash and cash-like transfers to them. These comparisons do not take into account provision of other public services, such as health care, child care, public education, and public transit. One way around this shortcoming is to look at the share of households reporting material hardship, such as constrained food choices or falling behind on rent. Here, the U.S. is ranked in the bottom 4 of the 17countries for which data are available - far worse than many countries that have lower GDP per capita than us.d
* * *
a OECD, "Gross domestic product per capita; U.S. dollars, current PPPs, 2025," https://data-explorer.oecd.org/.
b OECD, "GDP per Hour worked; U.S. dollars per hour, PPP converted, current prices, 2023," https://data-explorer.oecd.org/.
c Luxembourg Income Study, Data Access Research Tool (DART), https://dart.lisdatacenter.org/. Income is disposable household income by decile group. Importantly, this measure does include non-monetary transfers in the areas of housing, care (including child care), education, or health. The U.S. likely rises in these rankings relative to GDP per capita because of the distortionary effects of multinational corporations shifting profits to countries that are tax havens, which inflate GDP but not survey-based household income statistics.
d Lane Kenworthy, "A decent and rising income floor," February 2025, https://lanekenworthy.net/a-decent-and-rising-income-floor/.
* * *
Additional Revenue Is the Key to Addressing Both Fiscal and Investment Deficits Without Making Either One Worse
The key goal for policymakers is to address both our fiscal and investment deficits instead of addressing one by exacerbating the other. And there is no magical way to address both deficits: we will have to raise revenue to solve both challenges.
Making our fiscal trajectory sustainable to avoid the harms of higher interest rates and higher interest costs would be counterproductive if it came from taking away food assistance and health care coverage from people who need it, cutting investments in public schools or college access, or retreating on our investments in life-saving medical care or other basic research. Similarly, trillions of dollars in unpaid-for investments in people could be vulnerable to being rolled back later if the costs of financing debt become so great that large-scale deficit reduction becomes necessary. Neither approach is good for the country.
And policymakers should certainly avoid an outcome like the harmful 2025 Republican reconciliation law, which financed expensive and regressive tax cuts with a combination of harmful cuts to food assistance and health care and higher deficits, making both deficits worse.
The U.S. has ample ability to raise revenue. U.S. federal, state, and local tax revenue equaled 25.6 percent of the economy in 2024, which is far below the GDP-weighted average of other OECD countries (34 percent).[41] (See Figure 6.) The U.S. tax-to-GDP ratio ranks it 31 among 38 advanced industrial countries in the OECD and far behind Canada (35 percent), Australia (30 percent), Japan (34 percent), and New Zealand (33 percent), and even farther behind France, Italy, Germany, and Spain, just to name a few.[42]
The U.S. could address many of its fiscal and investment needs while still staying well below the revenue-to-GDP ratio of other advanced economies. For example, eliminating the fiscal gap with just revenue by increasing the tax-to-GDP ratio from 25.6 percent to 28.0 percent would move the U.S. above Switzerland from the 31st highest tax OECD country to the 30th, and still keep federal revenue below its 2000 level as a percent of GDP. Moreover, the higher levels of pre-tax inequality in the U.S. relative to OECD countries would allow us to raise a larger share of revenue from the highest-income households than these other countries do.
The main argument against raising revenue is that it will hinder economic growth, but studies addressing this topic have generally found contradictory or inconclusive results.[43] A previous CBPP analysis of more than two dozen economic studies concluded that "the effect of tax increases on growth depends on many different factors, such as the type of tax, the country, the state of the economy, monetary policy, the time frame studied, and what the revenue is used for."[44]
* * *
Figure 6: The U.S. is a Low Tax Country Compared to Other Wealthy Countries
* * *
In other words, the details of how and for what we raise revenue matter. It is beyond the focus of this paper to answer those important questions precisely. But it is important to note that using additional revenue for deficit reduction can be pro-growth. The CBO estimate of extending the 2017 tax law's individual provisions and the Budget Lab and Penn Wharton analyses of 2025 Republican reconciliation law show that the projected economic benefit of tax cuts was smaller than the projected economic costs of higher debt and interest rates. (See Figure 7.)
It is also important to note that the effect on economic growth is only one dimension of an appropriate cost-benefit analysis of a tax policy.[45] The benefits of past economic growth have not been shared equitably, and focusing on the overall growth rate masks these inequities.[46] Improvements in well-being and opportunity - such as income growth among people with incomes in the bottom half or three - quarters of the income distribution, longer and healthier lives, safer communities, and a healthier environment - may not always show up in aggregate economic statistics.
* * *
Figure 7: Allowing 2017 Trump Tax Cuts to Expire Would Have Grown the Economy in Long Run
* * *
Significant Deficit Reduction Through Spending Cuts Would be Harmful - and Politically Unpopular
The need for additional revenue becomes even clearer when one walks through the challenges of addressing the fiscal gap by cutting public services, to the detriment of people who rely on them. Social Security benefits are modest, currently averaging $24,000 per year, and make up the largest source of income for most retirees. The public is very supportive of Social Security and proposals to cut benefits significantly are very unpopular.[47] Medicare benefits are already, in some respects, less comprehensive than a typical employer-sponsored health plan and have exhibited more cost growth restraint than private coverage. Leaders of both parties have taken cuts to both programs off the table and, in fact, policymakers on a bipartisan basis increased Social Security for some beneficiaries in late 2024 without paying for those increases.
The scope for savings outside of these programs is also limited. Social Security and Medicare make up almost half (48 percent) of projected federal programmatic spending over the next decade. Security spending - defense, supports for veterans, and homeland security - make up another 22 percent and command largely bipartisan support. It would require reducing spending on the rest of the budget by 41 percent to stabilize the debt-to GDP ratio at its current level if Social Security, Medicare, security spending, and revenue were off the table.
The magnitude of these required spending cuts would be both exceedingly harsh and unrealistic. The harmful 2025 Republican reconciliation law will cut Medicaid by 17 percent and SNAP by 20 percent by the end of the budget window. These cuts will increase poverty and hardship and leave millions more people without health coverage. Those cuts are also highly unpopular. Further cuts to these programs would only compound that harm.
Similarly, President Trump proposed a 7 percent cut to non-defense discretionary spending in his fiscal year 2027 budget, relative to the previous fiscal year. House Republicans have proposed a much smaller 2 percent cut (neither figure is adjusted for inflation). Even the House's cuts - which include a 10 percent cut to Title I funding for schools and a 20 percent cut to the National Science Foundation - are often unpopular with the public and with many policymakers and unlikely to become law.
There is simply no getting around the basic math: addressing our nation's twin fiscal and investment deficits will require raising revenue as a percent of the economy above the historical average.
* * *
End Notes
[1] Federal Reserve Economic Database, "Unemployment Rate," last accessed September 13, 2026 https://fred.stlouisfed.org/series/UNRATE; Federal Reserve Economic Database, "Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Quoted on an Investment Basis," last accessed September 13, 2026, https://fred.stlouisfed.org/series/DGS5.
[2] See, e.g., J. Bradford Delong and Lawrence H. Summers, "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Spring 2012, https://www.brookings.edu/wp-content/uploads/2012/03/2012a_DeLong.pdf; Christina D. Romer, "Fiscal Policy in the Crisis: Lessons and Policy Implications," April 16, 2012, https://eml.berkeley.edu/~cromer/Lectures/Lessons%20for%20Fiscal%20Policy.pdf; Olivier Blanchard, "Transcript of a WEO Conference," April 16, 2023, https://www.imf.org/en/news/articles/2015/09/28/04/54/tr041613.
[3] Testimony of Chad Stone, "Policy Prescriptions for the Economy," before the Senate Budget Committee, September 15, 2011, https://www.cbpp.org/testimony-chad-stone-chief-economist-on-policy-prescriptions-for-the-economy
[4] Federal Reserve Economic Database, "Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis," last updated October 19, 2026, https://fred.stlouisfed.org/series/DGS10. The figure is the average yield for September 2026.
[5] Marijun A. Bolhuis et al., "The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly," NBER Working Paper 32163, National Bureau of Economic Research, February 2024, https://www.nber.org/papers/w32163.
[6] The widely reported figure of Japanese debt exceeding 200 percent of GDP is a gross number and netting out the government's financial assets results in a figure that is similar to or lower than of the U.S. One IMF analysis places Japanese debt at between 89-137 percent of GDP depending on the precise concept. Budget analysts across the political spectrum in the U.S. do not use gross debt, but at the very least net out the Social Security trust fund's holdings of U.S. Treasuries and those of other trust funds ("debt held by the public") and sometimes also net out other financial assets like student loans ("debt net of financial assets"). Rahul Anand and Shujaat Khan, "Japan's Debt Beyond the Headlines," International Monetary Fund, September 2026, https://www.imf.org/en/publications/fandd/issues/2026/09/japans-debt-beyond-the-headlines-anand
[7] Ian Smith, "Japan's borrowing costs soar to 30-year high on debt fears," Financial Times, July 7, 2026, https://www.ft.com/content/851aa883-073f-4423-a43e-9b09fdbe7c86?syn-25a6b1a6=1.
[8] Ian Smith et al., "Scott Bessent's yen intervention signals new era of US 'currency activism," Financial Times, August 4, 2026, https://www.ft.com/content/1be83506-b897-4c26-97cc-445d7354ee6f?syn-25a6b1a6=1
[9] Andre R. Nevy and Jeffrey Shafer, "Revisiting the Relationship Between Debt and Long-Term Interest Rates: Working Paper 2024-05," Congressional Budget Office, December 20, 2024, https://www.cbo.gov/publication/60314.
[10] Jack Salmon, "The Impact of Public Debt on Interest Rates," The Mercatus Center, May 14, 2025, https://www.mercatus.org/research/policy-briefs/impact-public-debt-interest-rates; Ernie Tedeschi, "Deficits are Raising Interest Rates. But Other Factors are Lowering Them," February 19, 2019, https://medium.com/bonothesauro/deficits-are-raising-interest-rates-but-other-factors-are-lowering-them-6d1e68776b7a.
[11] Nevy and Shafer.
[12] Abhi Gupta, "The Impact of Deficits on Costs for Households" Yale Budget Lab, March 9, 2026, https://budgetlab.yale.edu/research/impact-deficits-costs-households.
[13] Nathaniel Drake, "What Determines the Rate on a 30-Year Mortgage?," Fannie Mae, December 11, 2024, https://www.fanniemae.com/research-and-insights/publications/housing-insights/rate-30-year-mortgage.
[14] Gupta.
[15] Congressional Budget Office (CBO), "How the Expiring Individual Income Tax Provisions in the 2017 Tax Act Affect CBO's Economic Forecast," December 2024, https://www.cbo.gov/system/files/2024-12/60986-Expiring-Provisions-2017-Tax-Act.pdf.
[16] Budget Lab, "Long-term Impacts of the One Big Beautiful Bill Act, as Enacted on July 4, 2025," July 30, 2025, https://budgetlab.yale.edu/research/long-term-impacts-one-big-beautiful-bill-act-enacted-july-4-2025; Penn Wharton Budget Model, "President Trump-Signed Reconciliation Bill: Budget, Economic, and Distributional Effects," July 8, 2025, https://budgetmodel.wharton.upenn.edu/issues/2025/7/8/president-trump-signed-reconciliation-bill-budget-economic-and-distributional-effects.
[17] Ben S. Bernanke and Mark Gertler, "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspective, Vol. 9, No. 4, 1995, https://www.jstor.org/stable/2138389; Justin Bloesh and Jacob P. Weber, "Structural Changes in Investment and the Waning Power of Monetary Policy," New York Federal Reserve No. 1990, March 2026, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1190.pdf; Nitish Sinha and Michael Smolyansky, "How sensitive is the economy to large interest rate increases? Evidence from the taper tantrum," Federal Reserve Board Finance and Economics Discussion Series, December 2022, https://www.federalreserve.gov/econres/feds/files/2022085pap.pdf; Claudio Raddatz and Roberto Rigobon, "Monetary Policy and Sectoral Shocks: Did the FED react properly to the High-Tech Crisis?," NBER Working Paper 9835, National Bureau of Economic Research, July 2003, https://www.nber.org/papers/w9835.
[18] CBO, "The Outlook for Housing Starts," September 2024, https://www.cbo.gov/publication/60727.
[19] CBO, "The Long-Term Budget Outlook: 2025 to 2055," March 2025, https://www.cbo.gov/publication/61270.
[20] CBO, March 2025.
[21] Brendan Duke, "Republican Megabill Trades Essential Support to Low-Income People for Skewed Tax Cuts," CBPP, February 11, 2026, https://www.cbpp.org/research/federal-tax/republican-megabill-trades-essential-support-to-low-income-people-for-skewed.
[22] Importantly, the 1993-1995 period is mostly representative of the 30 years. The 1962-1995 average had revenue at 17.5 percent of GDP and programmatic spending at 18 percent.
[23] Centers on Medicare and Medicaid Service, National Health Expenditure Tables, Table 21 Expenditures, Enrollment and Per Enrollee Estimates of Health Insurance: United States, Calendar Years 1987-2024," https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/historical. Figures have been adjusted for inflation using the Personal Consumption Expenditure deflator.
[24] U.S. Census Bureau, Health Insurance Historical Tables - Original Series, Table HI-1, https://www.census.gov/data/tables/time-series/demo/health-insurance/historical-series/original.html and Health Insurance Historical Tables - HHI Series, Table HHI-01, https://www.census.gov/data/tables/time-series/demo/health-insurance/historical-series/hic.html.
[25]CBO, "The Budget and Economic Outlook: 2025 to 2035," January 2025, https://www.cbo.gov/system/files/2025-01/51118-2025-01-Budget-Projections.xlsx
[26] The term "bracket creep" refers to when tax brackets are not indexed for inflation, so as prices rise, more income is taxed at higher rates even when there is no inflation-adjusted economic growth. The U.S. now indexes its tax brackets for inflation. This leaves "real bracket creep" from inflation-adjusted economic growth as the main force raising revenue as a share of the economy over time.
[27] One reason revenue as a share of GDP was expected to rise dramatically in CBO projections from the late 1990s to 2012 was that the Alternative Minimum Tax (AMT) was not indexed to inflation. CBO projected AMT would recapture growing amounts of revenue as the years passed, purely from inflation. In our analysis, however, we measure projected revenue relative to a hypothetical AMT that had been indexed for inflation (rather than the actual, unindexed AMT), which still shows considerable growth in projected revenue as a share of the economy because of real bracket creep.
[28] U.S. Office of Management and Budget Historical Tables, "Table 9.7 Summary of Outlays for the Conduct of Research and Development: 1949-2027," https://www.whitehouse.gov/omb/information-resources/budget/historical-tables/.
[29] Sheila Campbell et al., "Estimating the Economic Effects of Federally Funded R&D," Congressional Budget Office Working Paper 2026-08, July 2026, https://www.cbo.gov/system/files/2026-07/62387-Nondefense-Research.pdf. See also, Chuck Marr and Josephine Cureton, "Administration's Proposed Cuts to Non-Defense R&D Pose Long-Term Risk to Rising Living Standards," CBPP, October 6, 2025, https://www.cbpp.org/research/federal-budget/administrations-proposed-cuts-to-non-defense-rd-pose-long-term-risk-to.
[30] Organization for Economic Cooperation and Development (OECD), "Social Expenditure Database," https://www.oecd.org/en/data/datasets/social-expenditure-database-socx.html. The exact concept is "gross public social spending less old age and survivors and health programs for 2019."
[31] Overall, 2019 gross U.S. public social spending (18.2 percent of GDP) is not that much lower than the OECD average (20.3 percent), but this is entirely attributable to above average spending on health and retirement programs (15.5 percent) relative to the OECD average (14.2 percent). The U.S. delivers a particularly large amount of its benefits through the tax code, so its net public social spending (23 percent) is higher than the OECD average (20.0 percent). The additional tax benefits carried in the net figure (which does not exist for social spending outside of retirement and health) mostly do not accrue to low-income households. For example, the refundable portions of the Child Tax Credit and Earned Income Tax Credits are carried in the gross figures cited above while the exclusion for employer-sponsored health insurance is not.
[32] Arindrajit Dube, "The Wage Standard: What's Wrong in the Labor Market and How to Fix It," Dutton, 2026.
[33] Organization for Economic Cooperation and Development (OECD), "Benefit Reforms for Inclusive Societies in the United States," May 2023, https://www.oecd.org/en/publications/benefit-reforms-for-inclusive-societies-in-the-united-states_32d8f005-en/full-report/component-7.html.
[34] OECD, "Health at a Glance 2025: OECD Indicators," 2025, https://www.oecd.org/content/dam/oecd/en/publications/reports/2025/11/health-at-a-glance-2025_a894f72e/8f9e3f98-en.pdf.
[35] OECD, "Social Expenditure Database," https://www.oecd.org/en/data/datasets/social-expenditure-database-socx.html. The exact concept is gross public social spending on health programs for 2019.
[36] OECD, "Health at a Glance 2025: OECD Indicators."
[37] CBO, "Federal Subsidies for Health Insurance, 2026 to 2036," July 23, 2026, https://www.cbo.gov/publication/62539.
[38] Angela Wyse and Bruce Meyer, "Saved by Medicaid: New Evidence on Health Insurance and Mortality from the Universe of Low-Income Adults," National Bureau of Economic Research Working Paper No. 33719, May 2025, https://www.nber.org/papers/w33719.
[39] National Academies of Sciences, Engineering, and Medicine, "A Roadmap to Reducing Child Poverty," National Academies Press, 2019, https://www.nap.edu/read/25246.
[40] CBO, "Re: How Changes to Funding for the NIH and Changes in the FDA's Review Times Would Affect the Development of New Drugs," July 18, 2025, https://www.cbo.gov/system/files/2025-07/61373-Drugs.pdf.
[41] Revenue share of GDP data are from 2024 or 2023, depending on availability. GDP weighting is purchasing power parity current dollars from 2024 and excludes the United States. Organization for Economic Co-operation and Development, "Revenue Statistics 2025," December 9, 2025, https://www.oecd.org/en/publications/2025/12/revenue-statistics-2025_07ca0a8e.html; World Development Indicators, "GDP, PPP (current international $)," https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD.
[42] These figures, from OECD, include tax collections by all levels of government; in the United States, that means federal, state, and local governments. They exclude charges for public services and other items that the OECD classifies as non-tax receipts. The data are from https://www.oecd.org/en/publications/revenue-statistics-2023_9d0453d5-en.html.
[43] Republican Study Committee, "Beautiful Bill, Beautiful Future: RSC Gets the Download from Director Hassett," May 21, 2025, https://rsc-pfluger.house.gov/media/press-releases/beautiful-bill-beautiful-future-rsc-gets-download-director-hassett.
[44] Chye-Ching Huang and Nathaniel Frentz, "What Really Is the Evidence on Taxes and Growth?" CBPP, February 18, 2014, https://www.cbpp.org/research/what-really-is-the-evidence-on-taxes-and-growth.
[45] The inadequacy of GDP as a measure of national well-being is the theme of Mismeasuring Our Lives: Why GDP Doesn't Add Up, by Amartya Sen, Jean Paul Fitoussi, and Joseph Stiglitz, New Press, 2010, https://wcfia.harvard.edu/publications/mismeasuring-our-lives-why-gdp-doesnt-add.
[46] Austen Clemens, "GDP 2.0: Measuring who prospers when the U.S. economy grows," Washington Center for Equitable Growth, July 11, 2023, https://equitablegrowth.org/gdp-2-0-measuring-who-prospers-when-the-u-s-economy-grows/. The analysis points out that growth has increasingly been tilted toward the rich, making aggregate GDP growth a misleading way of measuring the effect of growth on the entire income distribution.
[47] National Academy of Social Insurance, "Social Security at 90: A Bipartisan Roadmap for the Program's Future," January 2025, https://www.nasi.org/wp-content/uploads/2025/01/NASI_SocialSecurityat90.pdf.
* * *
Brendan is the Senior Director for Federal Budget Policy at the Center. He previously served as a senior policy adviser at the Biden-Harris White House National Economic Council and as a volunteer on the Biden-Harris transition team.
Richard Kogan rejoined the Center in May 2011 as a senior fellow after having served as a Senior Adviser at the Office of Management and Budget since January 2009.
Sonali Master is a Research Associate with the Federal Fiscal Policy team. She also currently serves as an Intern Coordinator.
* * *
Original text here: https://www.cbpp.org/research/federal-budget/federal-policymakers-should-raise-revenue-to-address-fiscal-and-investment
[Category: ThinkTank]
Ifo Institute: Too Much European Research Is Still Monetized in the U.S.
MUNICH, Germany, Oct. 23 -- ifo Institute issued the following news release:
* * *
23 October 2026
Too Much European Research Is Still Monetized in the US
According to ifo President Clemens Fuest, too little is still being done to translate Europe's innovative strength into economic strength. Research funded in Europe also frequently flows into patents held by US start-ups and underpins their market success, he says. "We need to channel funding to where research results in Europe can give rise to marketable innovations," says Fuest. Together with more than 50 other scientists, he makes this ... Show Full Article MUNICH, Germany, Oct. 23 -- ifo Institute issued the following news release: * * * 23 October 2026 Too Much European Research Is Still Monetized in the US According to ifo President Clemens Fuest, too little is still being done to translate Europe's innovative strength into economic strength. Research funded in Europe also frequently flows into patents held by US start-ups and underpins their market success, he says. "We need to channel funding to where research results in Europe can give rise to marketable innovations," says Fuest. Together with more than 50 other scientists, he makes thiscall in a paper in the journal Science.
As evidence, the authors point out that research funded by the European Research Council (ERC) is disproportionately cited in patents of US start-ups. In addition, only about 1 to 2 percent of the ERC budget goes toward further developing new research ideas (proof-of-concept funding). Funding amounts are also considerably lower in Europe than in the US: while the European early-stage funding programs (Pathfinder and Transition) can spend only around EUR 500 million between them, the US ARPA research agencies have a combined budget of more than EUR 7 billion.
Among other things, the authors propose shifting funds from programs with limited innovation potential to funding for potential breakthrough innovations. The "Global Challenges and European Industrial Competitiveness" program, for example, ties up more than half of the Horizon Europe budget, yet there is no evidence of substantial effects of this program on sales or patents.
In addition, member states are to co-fund projects that were rated excellent EU-wide but not funded for budgetary reasons. The authors also call for more efficient research funding processes: according to studies, preparing a single application to the European Innovation Council currently still requires 36 to 45 person-days.
The timing for changes is now favorable, the authors say: the European Commission has proposed a budget of just under EUR 175 billion for Horizon Europe 2028-34, almost twice as much as in the current program. The budget is currently under negotiation.
* * *
Original text here: https://www.ifo.de/en/press-release/2026-10-23/too-much-european-research-still-monetized-us
[Category: ThinkTank]
* * *
23 October 2026
Too Much European Research Is Still Monetized in the US
According to ifo President Clemens Fuest, too little is still being done to translate Europe's innovative strength into economic strength. Research funded in Europe also frequently flows into patents held by US start-ups and underpins their market success, he says. "We need to channel funding to where research results in Europe can give rise to marketable innovations," says Fuest. Together with more than 50 other scientists, he makes this ... Show Full Article MUNICH, Germany, Oct. 23 -- ifo Institute issued the following news release: * * * 23 October 2026 Too Much European Research Is Still Monetized in the US According to ifo President Clemens Fuest, too little is still being done to translate Europe's innovative strength into economic strength. Research funded in Europe also frequently flows into patents held by US start-ups and underpins their market success, he says. "We need to channel funding to where research results in Europe can give rise to marketable innovations," says Fuest. Together with more than 50 other scientists, he makes thiscall in a paper in the journal Science.
As evidence, the authors point out that research funded by the European Research Council (ERC) is disproportionately cited in patents of US start-ups. In addition, only about 1 to 2 percent of the ERC budget goes toward further developing new research ideas (proof-of-concept funding). Funding amounts are also considerably lower in Europe than in the US: while the European early-stage funding programs (Pathfinder and Transition) can spend only around EUR 500 million between them, the US ARPA research agencies have a combined budget of more than EUR 7 billion.
Among other things, the authors propose shifting funds from programs with limited innovation potential to funding for potential breakthrough innovations. The "Global Challenges and European Industrial Competitiveness" program, for example, ties up more than half of the Horizon Europe budget, yet there is no evidence of substantial effects of this program on sales or patents.
In addition, member states are to co-fund projects that were rated excellent EU-wide but not funded for budgetary reasons. The authors also call for more efficient research funding processes: according to studies, preparing a single application to the European Innovation Council currently still requires 36 to 45 person-days.
The timing for changes is now favorable, the authors say: the European Commission has proposed a budget of just under EUR 175 billion for Horizon Europe 2028-34, almost twice as much as in the current program. The budget is currently under negotiation.
* * *
Original text here: https://www.ifo.de/en/press-release/2026-10-23/too-much-european-research-still-monetized-us
[Category: ThinkTank]
Capital Research Center Issues InfluenceWatch Wrap Up on Oct. 23, 2026
WASHINGTON, Oct. 23 -- The Capital Research Center issued the following InfluenceWatch wrap up on Oct. 23, 2026:
* * *
InfluenceWatch, a project of Capital Research Center, is a comprehensive and ever-evolving compilation of our research into the numerous advocacy groups, foundations, and donors working to influence the public policy process. The website offers transparency into these influencers' funding, motives, and connections while providing insight often neglected by other watchdog groups.
The information compiled in InfluenceWatch gives news outlets and other interested parties research ... Show Full Article WASHINGTON, Oct. 23 -- The Capital Research Center issued the following InfluenceWatch wrap up on Oct. 23, 2026: * * * InfluenceWatch, a project of Capital Research Center, is a comprehensive and ever-evolving compilation of our research into the numerous advocacy groups, foundations, and donors working to influence the public policy process. The website offers transparency into these influencers' funding, motives, and connections while providing insight often neglected by other watchdog groups. The information compiled in InfluenceWatch gives news outlets and other interested parties researchto use in reporting on significant topics that are often overlooked by the American public.
CRC is pleased to present some of the most significant additions to InfluenceWatch in the past week:
* Florida Philanthropic Network is a Tampa-based coalition of foundations and other Grantmakers that provides networking and educational opportunities for philanthropic organizations in the state. In September 2026, it hosted a virtual meeting to discuss ballot proposals that would eliminate or restrict property taxes. Attendees included staff from the Florida Policy Institute, the Oklahoma Policy Institute, the W.K. Kellogg Foundation, and the Center on Budget and Policy Priorities. The Florida Philanthropic Network has received funding from the Gates Foundation, the Robert Wood Johnson Foundation, the New Venture Fund, the Rockefeller Foundation, and NEO Philanthropy.
* Freedom Trainers is a network that provides training to activists and organizers in "nonviolent resistance" and civil disobedience. The group is a project of Community Change, a Washington D.C.-based left-of-center advocacy group with an affiliated lobbying group, Community Change Action. Community Change itself has received funding from left-of-center Grantmakers such as the Open Society Foundations and the Tides Foundation.
* Yellowhammer Fund is a left-of-center nonprofit that advocates for increased abortion and contraceptive access in southern states such as Alabama, Mississippi, and Florida. It is listed as a partner of Elevated Access, a transportation network that facilitates travel to obtain abortions. Other Elevated Access partners include Midwest Access Coalition, the Cobalt Foundation, and the Campaign for Southern Equality. The Yellowhammer Fund has received grants from groups that include the Ford Foundation, Borealis Philanthropy, and the Foundation for Women.
* Yes on 4 Coalition was a California-based ballot measure committee formed to support Proposition 4, a ballot measure which passed in November 2024 that approved the issuance of $10 billion in state bonds to fund environmental projects in the state. Contributors to the Yes on 4 Coalition included Fund for a Better Future, The Nature Conservancy (TNC), and the Trust for Public Land. Organizations that endorsed Proposition 4 also included Clean Water Action, the National Wildlife Federation, the Resources Legacy Fund, the California Teachers Association, and the California Federation of Teachers.
* Los Angeles County Bicycle Coalition (BikeLA) is a transportation advocacy group that has supported ballot proposals to increase taxes in Los Angeles. These included Measure M, a Los Angeles County sales tax increase of 0.5 percent that passed in November 2016, and Measure ULA, which levied new city real estate transfer taxes on properties over $5 million that passed in November 2022. BikeLA's funders have included the Fidelity Investments Charitable Gift Fund, the California Community Foundation, Climate Ride, and Donor Advised Charitable Giving.
* * *
Original text here: https://capitalresearch.org/article/influencewatch-friday-10-23-2026/
[Category: ThinkTank]
* * *
InfluenceWatch, a project of Capital Research Center, is a comprehensive and ever-evolving compilation of our research into the numerous advocacy groups, foundations, and donors working to influence the public policy process. The website offers transparency into these influencers' funding, motives, and connections while providing insight often neglected by other watchdog groups.
The information compiled in InfluenceWatch gives news outlets and other interested parties research ... Show Full Article WASHINGTON, Oct. 23 -- The Capital Research Center issued the following InfluenceWatch wrap up on Oct. 23, 2026: * * * InfluenceWatch, a project of Capital Research Center, is a comprehensive and ever-evolving compilation of our research into the numerous advocacy groups, foundations, and donors working to influence the public policy process. The website offers transparency into these influencers' funding, motives, and connections while providing insight often neglected by other watchdog groups. The information compiled in InfluenceWatch gives news outlets and other interested parties researchto use in reporting on significant topics that are often overlooked by the American public.
CRC is pleased to present some of the most significant additions to InfluenceWatch in the past week:
* Florida Philanthropic Network is a Tampa-based coalition of foundations and other Grantmakers that provides networking and educational opportunities for philanthropic organizations in the state. In September 2026, it hosted a virtual meeting to discuss ballot proposals that would eliminate or restrict property taxes. Attendees included staff from the Florida Policy Institute, the Oklahoma Policy Institute, the W.K. Kellogg Foundation, and the Center on Budget and Policy Priorities. The Florida Philanthropic Network has received funding from the Gates Foundation, the Robert Wood Johnson Foundation, the New Venture Fund, the Rockefeller Foundation, and NEO Philanthropy.
* Freedom Trainers is a network that provides training to activists and organizers in "nonviolent resistance" and civil disobedience. The group is a project of Community Change, a Washington D.C.-based left-of-center advocacy group with an affiliated lobbying group, Community Change Action. Community Change itself has received funding from left-of-center Grantmakers such as the Open Society Foundations and the Tides Foundation.
* Yellowhammer Fund is a left-of-center nonprofit that advocates for increased abortion and contraceptive access in southern states such as Alabama, Mississippi, and Florida. It is listed as a partner of Elevated Access, a transportation network that facilitates travel to obtain abortions. Other Elevated Access partners include Midwest Access Coalition, the Cobalt Foundation, and the Campaign for Southern Equality. The Yellowhammer Fund has received grants from groups that include the Ford Foundation, Borealis Philanthropy, and the Foundation for Women.
* Yes on 4 Coalition was a California-based ballot measure committee formed to support Proposition 4, a ballot measure which passed in November 2024 that approved the issuance of $10 billion in state bonds to fund environmental projects in the state. Contributors to the Yes on 4 Coalition included Fund for a Better Future, The Nature Conservancy (TNC), and the Trust for Public Land. Organizations that endorsed Proposition 4 also included Clean Water Action, the National Wildlife Federation, the Resources Legacy Fund, the California Teachers Association, and the California Federation of Teachers.
* Los Angeles County Bicycle Coalition (BikeLA) is a transportation advocacy group that has supported ballot proposals to increase taxes in Los Angeles. These included Measure M, a Los Angeles County sales tax increase of 0.5 percent that passed in November 2016, and Measure ULA, which levied new city real estate transfer taxes on properties over $5 million that passed in November 2022. BikeLA's funders have included the Fidelity Investments Charitable Gift Fund, the California Community Foundation, Climate Ride, and Donor Advised Charitable Giving.
* * *
Original text here: https://capitalresearch.org/article/influencewatch-friday-10-23-2026/
[Category: ThinkTank]
American Action Forum Issues Insight: OCC's Stablecoin Rule - Limits of Regulatory Clarity
WASHINGTON, Oct. 23 -- The American Action Forum issued the following insight:
* * *
October 22, 2026
The OCC's Stablecoin Rule: The Limits of Regulatory Clarity
Thomas Kingsley
Executive Summary
* The Office of the Comptroller of the Currency (OCC) has finalized its rule implementing the GENIUS Act, establishing requirements for payment stablecoin issuers under its jurisdiction.
* Two changes to the final rule are particularly significant: The OCC eliminated a proposed rebuttable presumption that certain third-party rewards arrangements violate the statutory prohibition on stablecoin ... Show Full Article WASHINGTON, Oct. 23 -- The American Action Forum issued the following insight: * * * October 22, 2026 The OCC's Stablecoin Rule: The Limits of Regulatory Clarity Thomas Kingsley Executive Summary * The Office of the Comptroller of the Currency (OCC) has finalized its rule implementing the GENIUS Act, establishing requirements for payment stablecoin issuers under its jurisdiction. * Two changes to the final rule are particularly significant: The OCC eliminated a proposed rebuttable presumption that certain third-party rewards arrangements violate the statutory prohibition on stablecoinyield and adopted a principles-based approach to reserve diversification and concentration supplemented by quantitative liquidity and counterparty limits.
* Both changes reflect a preference for regulatory flexibility over a more prescriptive framework; they also leave questions about the boundaries of permissible stablecoin rewards, the appropriate treatment of competing financial products, and the extent to which agencies should determine consequential policy choices that Congress has left unresolved.
-
Introduction
The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, enacted in July 2025, establishes a federal framework for payment stablecoins, including requirements for permitted issuers, reserve backing, redemption, and supervision. The Office of the Comptroller of the Currency's (OCC) final rule, effective January 18, 2027, implements the act for issuers under its jurisdiction, including certain bank subsidiaries, federally qualified nonbank issuers, qualifying state issuers subject to OCC oversight, and foreign payment stablecoin issuers. It also establishes requirements for certain custody activities conducted by OCC-supervised entities. The rule addresses most of the OCC's required implementing regulations, with Bank Secrecy Act, anti-money laundering, and sanctions requirements reserved for separate rulemaking.
The final rule establishes standards governing permissible activities, reserve management, redemption, risk management, capital and operational backstops, audits, reporting, licensing, and ongoing supervision. The final rule also amends existing regulations concerning capital adequacy, prompt corrective action, assessments, and administrative proceedings. The OCC received more than 20 comments on its proposal and revised several provisions in response, particularly those concerning reserve management and the prohibition on stablecoin yield. The resulting framework combines statutory requirements and quantitative standards with substantial supervisory discretion. Two changes illustrate the implications of that approach.
The Yield Prohibition: A Rule Without Defined Boundaries
The GENIUS Act prohibits permitted payment stablecoin issuers from paying interest or yield solely in connection with holding, using, or retaining a payment stablecoin. The difficulty lies in determining when a payment described as a reward or commercial incentive is, in substance, prohibited yield. The OCC's proposed rule addressed this question through a rebuttable presumption covering certain arrangements involving issuers and affiliates or related third parties. Under that approach, covered arrangements would be presumed prohibited, subject to an issuer's ability to demonstrate otherwise.
The final rule eliminates this presumption. The OCC concluded that it could capture permissible arrangements while failing to identify other arrangements that violate the statute, and that the resulting rebuttal process could impose compliance costs without a commensurate benefit. Instead, the agency will initially rely on applications, ongoing supervision, and enforcement, issuing additional guidance as appropriate and considering further rulemaking as it gains experience with the market.
This approach preserves flexibility but leaves firms without clear prospective standards for distinguishing permissible transaction-based payments from prohibited yield. The OCC interprets the word "solely" to allow arrangements that serve a genuine purpose beyond holding, using, or retaining a stablecoin to fall outside the prohibition. That does not establish a categorical exemption for transaction-based rewards: The agency retains the authority to examine the substance of an arrangement and address attempts to evade the prohibition. The practical boundaries of the statutory rule will therefore depend in part on future supervisory judgements.
There are arguments for this approach. The market is nascent, and a prescriptive framework could capture legitimate commercial arrangements or become obsolete as business models evolve. But the alternative is not costless. Issuers must assess the legality of rewards programs without knowing how the OCC will treat arrangements that have not yet been addressed. Removing the presumption may reduce one source of compliance burden while increasing the importance of the agency's discretionary interpretation.
The OCC has not abandoned the prohibition or established a general safe harbor for rewards programs. It has instead deferred the development of more specific standards until it has accumulated experience through supervision and enforcement. Whether that sequence produces a more adaptable framework or prolongs uncertainty remains to be seen.
Reserve Requirements: Flexibility Within Statutory Limits
The GENIUS Act specifies the principal categories of eligible reserve assets and requires at least one-to-one backing of outstanding payment stablecoins. Congress therefore made the fundamental policy choice about eligible assets; the OCC's discretion instead concerns the implementation of liquidity, diversification, concentration, and risk-management requirements.
The proposed rule offered two approaches to diversification and concentration: a principles-based standard with an optional quantitative safe harbor, or quantitative requirements for all issuers. The final rule adopts a principles-based approach supplemented by two quantitative requirements. Issuers generally must maintain at least 5 percent of reserve assets in specified funds available on demand, while exposure to a single counterparty is generally limited to 40 percent of reserve assets, subject to specified exclusions and exceptions. The rule omits the proposed weekly liquidity requirement, weighted-average maturity limit, and separate quantitative safe-harbor limits on concentration at individual financial institutions. It also strengthens requirements for monetizing reserves under stress, including stress testing and, where necessary, reserve buffers above outstanding issuance value.
The OCC has not abandoned quantitative reserve regulation; it has narrowed its use while placing greater weight on issuers' ability to demonstrate adequate diversification, liquidity, and operational resilience. This may allow requirements to reflect differences in business models and risk profiles, rather than impose uniform constraints on every issuer. At the same time, principles-based standards leave more room for supervisory interpretation and may make compliance less predictable.
The question is whether the OCC has provided sufficient clarity for firms to understand their obligations while retaining the discretion necessary to manage risks that cannot be fully anticipated in advance. The final rule preserves quantitative safeguards, but its reduced reliance on uniform portfolio constraints places greater weight on consistent supervision.
Is This a Battle Between Banking and Crypto?
The debate over stablecoin rewards is often presented as a contest between traditional banks and crypto firms. Banks have reason to be concerned that stablecoins offering attractive rewards could compete with deposits, while crypto firms have an interest in developing products that make stablecoins more attractive to consumers and businesses. The consequences could extend beyond individual firms to bank funding, lending, and the allocation of money across the financial system.
The scale of those effects remains uncertain. It will depend on the adoption of stablecoins, the structure of rewards programs, the location and stability of reserve deposits, and the extent to which stablecoins substitute for existing payment instruments and bank accounts. Stablecoin reserves can also provide funding to banks, so the relationship between stablecoins and traditional banking is not simply one of displacement. The net effect will depend on where reserves are held and whether stablecoins are acquired from existing bank deposits or other assets.
The policy questions should be distinguished accordingly. Financial stability concerns center on reserve quality, liquidity, redemption, and the possibility of destabilizing outflows. Competition concerns center on whether firms offering economically similar products face comparable risks and regulatory burdens. Protecting bank deposits from competition is a separate objective that should be evaluated on its merits rather than assumed to follow from the need for financial stability.
The distinction between banking and crypto matters to the extent that competing business models present different risks or operate under different regulatory constraints. It matters less when industry labels substitute for an examination of the economic substance of competing products. The central issue is whether the framework permits competition consistent with financial stability, not whether one industry prevails in a regulatory dispute.
Congress and the Agencies: Who Makes the Policy?
The final rule illustrates the limits of congressional legislation that leaves consequential implementation questions unresolved. Congress enacted the GENIUS Act, specified eligible reserve assets, and prohibited certain stablecoin yield payments. It also directed regulators to establish standards for liquidity, diversification, risk management, and other aspects of issuer supervision. The OCC's task is to translate those statutory requirements into administrable rules, but that task necessarily involves judgements that can affect market structure and competition.
The yield prohibition is a particularly clear example. Congress established the legal boundary, but the application of that boundary to third-party rewards and commercial arrangements remains uncertain. The OCC proposed a presumption, received objections that it could capture permissible arrangements, and removed it from the final rule. The agency will now develop its understanding through supervision and enforcement before considering further rulemaking. That may be a defensible response to uncertainty, but it leaves the practical scope of the prohibition to be developed over time - and future development and administration to future agencies and administrations.
Reserve regulation presents a different balance. Congress specified eligible assets and minimum backing, while delegating the development of risk-management standards to regulators. The OCC's final rule retains quantitative requirements but relies more heavily on principles-based diversification and concentration standards. Here, discretion is not an alternative to statutory direction; it is part of the implementation authority Congress expressly provided.
The broader question is where implementation ends and policymaking begins. Agencies need discretion to respond to changing markets and unforeseen risks, but extensive reliance on supervision and case-specific interpretation can leave firms uncertain about the rules governing their conduct. Conversely, rigid statutory requirements may become outdated or impose costs that Congress did not anticipate.
The standard should be practical: Firms should be able to understand the principal factors governing compliance before making consequential business decisions, without requiring the OCC to prescribe the treatment of every possible arrangement. Where the agency's interpretation determines which business models can compete, it should explain its reasoning and provide meaningful notice of the standards it intends to apply.
These questions will become more consequential as stablecoins develop and the regulatory framework expands. The OCC has stated that it expects to update its rules and supplement them with guidance as market practices evolve. That approach acknowledges the limits of what can be resolved in a first rulemaking, but it also makes the quality and transparency of future implementation central to the success of the statutory framework.
Conclusion
The OCC's final rule establishes a substantial framework for payment stablecoin issuance, but its most consequential choices increase the discretion retained by the agency. Eliminating the rebuttable presumption leaves the yield prohibition in place while deferring clearer standards for its application; the reserve provisions preserve quantitative safeguards while relying more heavily on principles-based supervision. Neither change necessarily proves that the OCC has sided with banks or crypto firms. If anything, the OCC appears to have sided with itself. Firms should not have to discover the limits of a federal prohibition by guessing what a regulator might decide after the fact. Delegated discretion is not permission to leave consequential policy questions unresolved.
* * *
Thomas Kingsley is the Director of Financial Services Policy at the American Action Forum.
* * *
Original text here: https://www.americanactionforum.org/insight/the-occs-stablecoin-rule-the-limits-of-regulatory-clarity/
[Category: Think Tank]
* * *
October 22, 2026
The OCC's Stablecoin Rule: The Limits of Regulatory Clarity
Thomas Kingsley
Executive Summary
* The Office of the Comptroller of the Currency (OCC) has finalized its rule implementing the GENIUS Act, establishing requirements for payment stablecoin issuers under its jurisdiction.
* Two changes to the final rule are particularly significant: The OCC eliminated a proposed rebuttable presumption that certain third-party rewards arrangements violate the statutory prohibition on stablecoin ... Show Full Article WASHINGTON, Oct. 23 -- The American Action Forum issued the following insight: * * * October 22, 2026 The OCC's Stablecoin Rule: The Limits of Regulatory Clarity Thomas Kingsley Executive Summary * The Office of the Comptroller of the Currency (OCC) has finalized its rule implementing the GENIUS Act, establishing requirements for payment stablecoin issuers under its jurisdiction. * Two changes to the final rule are particularly significant: The OCC eliminated a proposed rebuttable presumption that certain third-party rewards arrangements violate the statutory prohibition on stablecoinyield and adopted a principles-based approach to reserve diversification and concentration supplemented by quantitative liquidity and counterparty limits.
* Both changes reflect a preference for regulatory flexibility over a more prescriptive framework; they also leave questions about the boundaries of permissible stablecoin rewards, the appropriate treatment of competing financial products, and the extent to which agencies should determine consequential policy choices that Congress has left unresolved.
-
Introduction
The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, enacted in July 2025, establishes a federal framework for payment stablecoins, including requirements for permitted issuers, reserve backing, redemption, and supervision. The Office of the Comptroller of the Currency's (OCC) final rule, effective January 18, 2027, implements the act for issuers under its jurisdiction, including certain bank subsidiaries, federally qualified nonbank issuers, qualifying state issuers subject to OCC oversight, and foreign payment stablecoin issuers. It also establishes requirements for certain custody activities conducted by OCC-supervised entities. The rule addresses most of the OCC's required implementing regulations, with Bank Secrecy Act, anti-money laundering, and sanctions requirements reserved for separate rulemaking.
The final rule establishes standards governing permissible activities, reserve management, redemption, risk management, capital and operational backstops, audits, reporting, licensing, and ongoing supervision. The final rule also amends existing regulations concerning capital adequacy, prompt corrective action, assessments, and administrative proceedings. The OCC received more than 20 comments on its proposal and revised several provisions in response, particularly those concerning reserve management and the prohibition on stablecoin yield. The resulting framework combines statutory requirements and quantitative standards with substantial supervisory discretion. Two changes illustrate the implications of that approach.
The Yield Prohibition: A Rule Without Defined Boundaries
The GENIUS Act prohibits permitted payment stablecoin issuers from paying interest or yield solely in connection with holding, using, or retaining a payment stablecoin. The difficulty lies in determining when a payment described as a reward or commercial incentive is, in substance, prohibited yield. The OCC's proposed rule addressed this question through a rebuttable presumption covering certain arrangements involving issuers and affiliates or related third parties. Under that approach, covered arrangements would be presumed prohibited, subject to an issuer's ability to demonstrate otherwise.
The final rule eliminates this presumption. The OCC concluded that it could capture permissible arrangements while failing to identify other arrangements that violate the statute, and that the resulting rebuttal process could impose compliance costs without a commensurate benefit. Instead, the agency will initially rely on applications, ongoing supervision, and enforcement, issuing additional guidance as appropriate and considering further rulemaking as it gains experience with the market.
This approach preserves flexibility but leaves firms without clear prospective standards for distinguishing permissible transaction-based payments from prohibited yield. The OCC interprets the word "solely" to allow arrangements that serve a genuine purpose beyond holding, using, or retaining a stablecoin to fall outside the prohibition. That does not establish a categorical exemption for transaction-based rewards: The agency retains the authority to examine the substance of an arrangement and address attempts to evade the prohibition. The practical boundaries of the statutory rule will therefore depend in part on future supervisory judgements.
There are arguments for this approach. The market is nascent, and a prescriptive framework could capture legitimate commercial arrangements or become obsolete as business models evolve. But the alternative is not costless. Issuers must assess the legality of rewards programs without knowing how the OCC will treat arrangements that have not yet been addressed. Removing the presumption may reduce one source of compliance burden while increasing the importance of the agency's discretionary interpretation.
The OCC has not abandoned the prohibition or established a general safe harbor for rewards programs. It has instead deferred the development of more specific standards until it has accumulated experience through supervision and enforcement. Whether that sequence produces a more adaptable framework or prolongs uncertainty remains to be seen.
Reserve Requirements: Flexibility Within Statutory Limits
The GENIUS Act specifies the principal categories of eligible reserve assets and requires at least one-to-one backing of outstanding payment stablecoins. Congress therefore made the fundamental policy choice about eligible assets; the OCC's discretion instead concerns the implementation of liquidity, diversification, concentration, and risk-management requirements.
The proposed rule offered two approaches to diversification and concentration: a principles-based standard with an optional quantitative safe harbor, or quantitative requirements for all issuers. The final rule adopts a principles-based approach supplemented by two quantitative requirements. Issuers generally must maintain at least 5 percent of reserve assets in specified funds available on demand, while exposure to a single counterparty is generally limited to 40 percent of reserve assets, subject to specified exclusions and exceptions. The rule omits the proposed weekly liquidity requirement, weighted-average maturity limit, and separate quantitative safe-harbor limits on concentration at individual financial institutions. It also strengthens requirements for monetizing reserves under stress, including stress testing and, where necessary, reserve buffers above outstanding issuance value.
The OCC has not abandoned quantitative reserve regulation; it has narrowed its use while placing greater weight on issuers' ability to demonstrate adequate diversification, liquidity, and operational resilience. This may allow requirements to reflect differences in business models and risk profiles, rather than impose uniform constraints on every issuer. At the same time, principles-based standards leave more room for supervisory interpretation and may make compliance less predictable.
The question is whether the OCC has provided sufficient clarity for firms to understand their obligations while retaining the discretion necessary to manage risks that cannot be fully anticipated in advance. The final rule preserves quantitative safeguards, but its reduced reliance on uniform portfolio constraints places greater weight on consistent supervision.
Is This a Battle Between Banking and Crypto?
The debate over stablecoin rewards is often presented as a contest between traditional banks and crypto firms. Banks have reason to be concerned that stablecoins offering attractive rewards could compete with deposits, while crypto firms have an interest in developing products that make stablecoins more attractive to consumers and businesses. The consequences could extend beyond individual firms to bank funding, lending, and the allocation of money across the financial system.
The scale of those effects remains uncertain. It will depend on the adoption of stablecoins, the structure of rewards programs, the location and stability of reserve deposits, and the extent to which stablecoins substitute for existing payment instruments and bank accounts. Stablecoin reserves can also provide funding to banks, so the relationship between stablecoins and traditional banking is not simply one of displacement. The net effect will depend on where reserves are held and whether stablecoins are acquired from existing bank deposits or other assets.
The policy questions should be distinguished accordingly. Financial stability concerns center on reserve quality, liquidity, redemption, and the possibility of destabilizing outflows. Competition concerns center on whether firms offering economically similar products face comparable risks and regulatory burdens. Protecting bank deposits from competition is a separate objective that should be evaluated on its merits rather than assumed to follow from the need for financial stability.
The distinction between banking and crypto matters to the extent that competing business models present different risks or operate under different regulatory constraints. It matters less when industry labels substitute for an examination of the economic substance of competing products. The central issue is whether the framework permits competition consistent with financial stability, not whether one industry prevails in a regulatory dispute.
Congress and the Agencies: Who Makes the Policy?
The final rule illustrates the limits of congressional legislation that leaves consequential implementation questions unresolved. Congress enacted the GENIUS Act, specified eligible reserve assets, and prohibited certain stablecoin yield payments. It also directed regulators to establish standards for liquidity, diversification, risk management, and other aspects of issuer supervision. The OCC's task is to translate those statutory requirements into administrable rules, but that task necessarily involves judgements that can affect market structure and competition.
The yield prohibition is a particularly clear example. Congress established the legal boundary, but the application of that boundary to third-party rewards and commercial arrangements remains uncertain. The OCC proposed a presumption, received objections that it could capture permissible arrangements, and removed it from the final rule. The agency will now develop its understanding through supervision and enforcement before considering further rulemaking. That may be a defensible response to uncertainty, but it leaves the practical scope of the prohibition to be developed over time - and future development and administration to future agencies and administrations.
Reserve regulation presents a different balance. Congress specified eligible assets and minimum backing, while delegating the development of risk-management standards to regulators. The OCC's final rule retains quantitative requirements but relies more heavily on principles-based diversification and concentration standards. Here, discretion is not an alternative to statutory direction; it is part of the implementation authority Congress expressly provided.
The broader question is where implementation ends and policymaking begins. Agencies need discretion to respond to changing markets and unforeseen risks, but extensive reliance on supervision and case-specific interpretation can leave firms uncertain about the rules governing their conduct. Conversely, rigid statutory requirements may become outdated or impose costs that Congress did not anticipate.
The standard should be practical: Firms should be able to understand the principal factors governing compliance before making consequential business decisions, without requiring the OCC to prescribe the treatment of every possible arrangement. Where the agency's interpretation determines which business models can compete, it should explain its reasoning and provide meaningful notice of the standards it intends to apply.
These questions will become more consequential as stablecoins develop and the regulatory framework expands. The OCC has stated that it expects to update its rules and supplement them with guidance as market practices evolve. That approach acknowledges the limits of what can be resolved in a first rulemaking, but it also makes the quality and transparency of future implementation central to the success of the statutory framework.
Conclusion
The OCC's final rule establishes a substantial framework for payment stablecoin issuance, but its most consequential choices increase the discretion retained by the agency. Eliminating the rebuttable presumption leaves the yield prohibition in place while deferring clearer standards for its application; the reserve provisions preserve quantitative safeguards while relying more heavily on principles-based supervision. Neither change necessarily proves that the OCC has sided with banks or crypto firms. If anything, the OCC appears to have sided with itself. Firms should not have to discover the limits of a federal prohibition by guessing what a regulator might decide after the fact. Delegated discretion is not permission to leave consequential policy questions unresolved.
* * *
Thomas Kingsley is the Director of Financial Services Policy at the American Action Forum.
* * *
Original text here: https://www.americanactionforum.org/insight/the-occs-stablecoin-rule-the-limits-of-regulatory-clarity/
[Category: Think Tank]
America First Policy Institute: Education Freedom Tax Credit Rules - What's Next for States
WASHINGTON, Oct. 23 -- The America First Policy Institute issued the following expert insights:
* * *
Education Freedom Tax Credit Rules: What's Next for States
October 22, 2026
Topline Points
* Treasury's new rules for the Education Freedom Tax Credit (EFTC) are a win for families.
* Governors have until January 1, 2027 to opt in to the credit, and participating states must then submit lists of scholarship granting organizations by February 15, 2027.
* States should focus the EFTC on innovative learning options, weigh how state law treats homeschools and microschools, and coordinate the ... Show Full Article WASHINGTON, Oct. 23 -- The America First Policy Institute issued the following expert insights: * * * Education Freedom Tax Credit Rules: What's Next for States October 22, 2026 Topline Points * Treasury's new rules for the Education Freedom Tax Credit (EFTC) are a win for families. * Governors have until January 1, 2027 to opt in to the credit, and participating states must then submit lists of scholarship granting organizations by February 15, 2027. * States should focus the EFTC on innovative learning options, weigh how state law treats homeschools and microschools, and coordinate thecredit with their existing school choice options.
* States should pass AFPI's Every Dollar for Every Child Act, which guarantees families can combine state awards, EFTC scholarships, and 529 distributions.
-
Introduction
The United States Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) recently released regulations for the Education Freedom Tax Credit (EFTC). Beginning January 1, 2027, individual taxpayers can claim a dollar-for-dollar, nonrefundable federal tax credit up to $1,700 for contributions to scholarship granting organizations (SGOs), which fund scholarships that families can use for K-12 expenses such as private school tuition, tutoring, and more. Married couples filing jointly can claim up to $3,400. The EFTC is likely to become the largest expansion of school choice in American history.
Treasury issued two documents on October 1, 2026:
1. Temporary regulations that govern how states opt in to the credit, how states submit lists of participating SGOs, SGO registration, and donor reporting.
2. Proposed regulations that govern how donors claim the credit; how SGOs award and account for scholarship funds; student eligibility; and other aspects of administration and enforcement.
The regulations reflect many principles of AFPI's public comment on a previous IRS request for input, and they are a win for families. Treasury's rules give donors, SGOs, and states a clear picture of how the credit will work and the confidence to move forward. Some provisions are temporary, and all aspects are open to public comment through December 1, 2026, so details could change in final rules or other future guidance.
Rather than summarizing every provision of the regulations, this Expert Insight focuses on the most important things state leaders need to know and do. Specifically, it identifies three federal deadlines and four policy choices for states to successfully implement the EFTC. The paper then describes AFPI's Every Dollar for Every Child Act, our model legislation that lets families combine the federal credit with state school choice programs and 529 savings plans.
Since most EFTC-participating states already run school choice programs of their own, leaders in these states should coordinate these programs with the EFTC. Of the 30 states that have already opted in to the EFTC, 14 operate state tax-credit scholarships, five offer education savings accounts funded by tax credits, and seven have other forms of private school choice. These programs differ from the EFTC with respect to student eligibility, allowable expenses, and award amounts. Accordingly, a child could qualify for an EFTC scholarship but not a state award. Nearly every participating state must therefore decide how the EFTC will work alongside its existing programs. Moreover, states without state-level school choice now have an opportunity to pass new programs that build successfully on the federal credit.
Upcoming Federal Deadlines
State leaders should prepare for three upcoming deadlines. The first deadline is an opportunity to shape the final rules. The second and third deadlines determine whether a state participates in the credit in 2027.
SUBMIT PUBLIC COMMENT TO TREASURY BY DECEMBER 1, 2026
What the rules say: Treasury is soliciting comments on the regulatory package through December 1, 2026. A public hearing on the regulations is planned for December 15, 2026, in Washington, D.C.
What states should do: Governors and other state leaders should ask Treasury to:
* Interpret "school...as determined under State law" in forthcoming Section 530 guidance to include any home education, microschool, hybrid program, or other educational arrangement that state law recognizes as satisfying its compulsory attendance requirements. Not only is this interpretation consistent with the federal statute, but it will ensure all students in non-traditional learning environments can benefit from EFTC m scholarships.
* Confirm that SGOs may not pay a public school for services the school must already provide to the student for free at the point of use, such as special education services under IDEA, because no qualified expense is incurred. Scholarships should not pay for services that taxpayers already fund.
* When an SGO is controlled by a school district or other governmental unit, measure the 85 percent activity test across the entire controlling entity. Under the proposed rules, an SGO must show that awarding scholarships is its main purpose. When a school district establishes an SGO, Treasury should look at the district as a whole, not just its allied foundation.
* Clarify that families can choose their own providers through a qualified digital wallet and explain what happens to unspent scholarship dollars at the end of a school year.
* Limit state certification of SGO eligibility. States should simply confirm that they reviewed SGO audits and annual filings, and Treasury should eliminate the requirement that states certify "any other requirements the IRS deems necessary."
* Open the IRS state portal before the end of 2026.
OPT IN BY FILING THE ADVANCE ELECTION BY JANUARY 1, 2027
What the rules say: Any state that seeks to participate in 2027 must file an advance election on IRS Form 15714 by 11:59 p.m. on January 1, 2027. The form is signed by the governor or other official designated to make elections on federal tax benefits. Note that election into the credit is complete only when the state submits its certified SGO list, which it does through the IRS state portal described below.
For 2028 and later years, advance elections take place in the IRS portal and are filed between January 2 and September 30 of the preceding year. A state that previously participated in the credit may instead make its election when submitting its list in the portal, between October 1 of the preceding year and January 1 of the next participation year.
What states should do: Governors of the 20 non-participating states should file Form 15714 as soon as possible, no later than January 1. Missing this deadline means a state cannot participate, and no child in that state would be able to receive EFTC scholarships in 2027. Residents in non-participating states could still claim the credit for contributions to SGOs, but these donations would fund scholarships across state lines, and their home state would forego hundreds of millions in charitable giving.
CERTIFY SCHOLARSHIP-GRANTING ORGANIZATIONS BY FEBRUARY 15, 2027
What the rules say: Each state completes its election by submitting a certified list of SGOs in the IRS state portal by February 15, 2027. A state that files an advance election but fails to submit its list cannot participate. Once a list is submitted, however, the election cannot be revoked for the rest of the calendar year. Treasury has not yet announced when the portal will open.
A state's certified list must include every qualifying SGO located in the state that asks to be included. Consistent with AFPI's recommendation, Treasury will consider an SGO to be "located in a state" if it is authorized to do business there and complies with the state's laws for nonprofit organizations. Moreover, because the rules allow an SGO to operate in multiple participating states, state lawmakers cannot require an SGO to establish a separate legal entity or physical office in a state as a condition of EFTC participation.
The rules prohibit a state from imposing additional requirements on SGOs that are more restrictive than Section 25F, or from excluding SGOs based on the type of school or expenses its scholarships will support. States' responsibilities are to certify that SGOs meet federal requirements, review their audit and IRS filings, and require documentation that prevents fraudulent or duplicative awards. Treasury has anticipated that new SGOs will be established to distribute scholarships, and in these cases, states can certify SGOs based on governing documents and written internal policies.
What states should do: Immediately authorize one or two officials to use the portal. Register for the portal as soon as the IRS opens it. Publish an application that SGOs use to appear on the state list. Designate an agency to review SGOs, approving every SGO that meets federal requirements. Governors can use executive orders, or simply take administrative action, to adopt procedures for SGO certification and audit review well before February 15, 2027.
Policy Decisions for States
Beyond meeting deadlines, states can take legislative and administrative actions to maximize the potential of the EFTC. The following recommendations are intended to ensure that the EFTC is a springboard for educational innovation and excellence for as many children as possible.
TREAT HOMESCHOOLS, MICROSCHOOLS, AND OTHER INNOVATIVE MODELS AS "SCHOOLS" UNDER STATE LAW
What the rules say: The federal statute requires scholarships to be used for a "qualified elementary or secondary education expense," which incorporates Section 530's definition of a school as determined under state law. Treasury's proposed regulations clarify that a student does not have to be enrolled in or attending a school when the scholarship is awarded. But an unresolved question is whether homeschool, microschool, and hybrid arrangements constitute a "school" under applicable state law. The proposed rules suggest that students in these non-traditional learning environments could be ineligible for EFTC scholarships in certain states that define homeschooling as an alternative to a school, rather than a school itself.
What states should do: Many states deliberately keep home education separate from the legal definition of a school to protect these models from teacher certification requirements, testing mandates, facility rules, and attendance reporting. States should weigh what is more important: shielding families from these requirements or opening access to EFTC scholarships. One solutions for states willing to pursue legislative changes is to narrowly amend their statutes classifying non-traditional learning environments as schools only for the purposes of Sections 25F and 530.
For those states that prefer not to change legal definitions in their education codes, state officials should submit public comments urging Treasury, in its forthcoming Section 530 guidance, to treat any home education, microschool, or hybrid program that satisfies compulsory attendance requirements as a school under state law. This would open EFTC scholarships to families nationwide without requiring states to change how they regulate them.
FOCUS THE CREDIT ON INNOVATIVE SCHOOL MODELS
What the rules say: Congress, and Treasury, have provided significant discretion to SGOs to determine what types of scholarships they will offer. SGOs can award scholarships for certain academic subjects, types of expenses (like tutoring or tuition), or educational themes and models. States may not keep an SGO off their list because it funds religious education, nor may states exclude SGOs that plan to fund public school students' expenses.
What states should do: The EFTC will be most transformative if it funds new, innovative options rather than directing additional revenue into public school systems that already receive considerable taxpayer investment. States should therefore:
* Clear the way for new providers to serve students. Microschools and learning pods run into barriers from zoning, building occupancy, and child-care licensing rules that are designed for traditional school buildings. Addressing these obstacles will encourage new education service providers to which parents can direct scholarships.
* Make it simpler for new SGOs to qualify for state lists. States should review their charitable registration and non-profit incorporation procedures, looking for opportunities to streamline the process so that new SGOs can be quickly approved in time to distribute scholarships in 2027.
* Keep public resources out of SGO fundraising. SGOs may award scholarships that families use for expenses at traditional public schools, but districts should be barred from using staff time, facilities, family contact lists, or school newsletters to solicit gifts for SGOs.
LET FAMILIES EASILY COMBINE EFTC & STATE SCHOLARSHIPS
What the rules say: The federal rules do not prohibit students from receiving an EFTC scholarship and other types of school choice awards. They do, however, require SGOs to prevent duplicative scholarship payments from exceeding the cost of a given qualifying expense. States can develop their own rules governing coordination with ESAs, vouchers, state tax-credit scholarships, or other school choice programs.
What states should do: Ensure that families can access EFTC scholarships in addition to any existing state-level school choice programs. The federal tax credit was never intended to replace choice options states have already built. Accordingly, state agencies should be prohibited from reducing or offsetting a state award because a child also benefits from the EFTC.
Plus, public school students who receive EFTC scholarships for tutoring or other services will not lose state funding that supports their education in a district school. Students who attend nonpublic schools and supplement with EFTC scholarships deserve the same treatment.
STRENGTHEN OR CREATE STATE TAX CREDITS THAT BUILD ON THE FEDERAL CREDIT
What the rules say: Section 25F reduces the federal credit by any state tax credit a donor claims for the same contribution, so a donor's combined federal and state credits never exceed the amount of the gift. Treasury adopted the most generous reading of that language, subtracting the state credit before applying the $1,700 cap, which effectively encourages donors in states with existing credits to give more than $1,700.
For example, take a state credit worth 20% of each gift. Here, a donor who gives $2,500 earns $500 in state credit and still earns the full $1,700 in federal credit (rather than $1,200, as a less generous reading might have allowed). A donor who gives $1,700 earns a $340 state credit and only $1,360 in federal credit.
What states should do: The federal credit gives every American with sufficient tax liability a reason to give $1,700. State tax credits incentivize giving even more. States that already offer a tax-credit scholarship should expand it by raising the program's cap so it can absorb new giving. Lawmakers should also align student eligibility and allowable expenses with the federal credit so families qualify for both types of scholarships. States without tax-credit scholarships should create one designed to work seamlessly alongside the EFTC.
Additionally, states should consider requiring SGOs to maintain clearly segregated state and federal accounts, with donors choosing where to send each gift. This will make it simple for donors to give $1,700 to claim the full federal credit and earn the state credit on everything above $1,700.
AFPI's Every Dollar for Every Child Act
States should pass the Every Dollar for Every Child Act, a model policy for strengthening existing state programs, creating new ones, and coordinating them with the EFTC. The Act guarantees that a student may receive a state scholarship, an EFTC scholarship, and a 529 plan distribution in the same school year.
Consider a working-class family whose child is accepted to a private school that charges $8,000 in tuition. The state's tax-credit scholarship program is valuable, but only provides $3,000 and still leaves the child's parents struggling to cover the full cost of private school. Thanks to the federal credit, an SGO in the participating state can award that student an EFTC scholarship of $5,000 to cover the remaining tuition. The two scholarships work together best if state laws and rules explicitly plan for this scenario.
* * *
Figure 1. Illustrating how the Every Dollar for Every Child Act Helps Families
* * *
COORDINATING WITH EXISTING PROGRAMS
A state award and an EFTC scholarship can help the same student meet different needs. A family may want to use EFTC scholarships for private school tuition and their state ESA for tutoring and other expenses. The Every Dollar for Every Child Act makes this possible for families by barring state agencies and program administrators from reducing a state award if a student receives an EFTC scholarship or 529 plan distribution, or from counting either as income in eligibility determinations.
STRENGTHENING EXISTING STATE TAX-CREDIT SCHOLARSHIPS
For states with existing tax-credit scholarships, the Act raises the credit's aggregate cap and adds an automatic escalator when at least 90 percent of the cap is claimed in the prior year. Students may qualify under either the state's program eligibility rules or the federal definition, and students who are not enrolled full-time in a public school may use state scholarships for any expense the federal credit allows. Aligning the standards simplifies the process for parents, who can rest assured their child qualifies for both scholarships.
CREATING NEW STATE TAX-CREDIT SCHOLARSHIPS
For EFTC-participating states without a tax-credit scholarship, the Act creates a nonrefundable state credit for a set percentage of each donation, up to 100%, with a five-year carryforward and an aggregate cap. By default, state tax-credit scholarships go to students who are not enrolled full-time in a public school and otherwise follow federal eligibility and expense rules. States may set their own rules but are encouraged to align closely with federal rules for parents' ease of use.
KEEPING THE FEDERAL CREDIT WHOLE
In every state that already administers a tax-credit scholarship, the Act requires SGOs to keep separate state and federal accounts and bars donors from claiming both credits for the same dollars. A donor can still make a single gift and split it, for example, by sending $1,700 to the federal account and $2,000 toward the state account. This way the donor keeps the full federal credit, earns state credit on the rest, and families have access to more scholarship funding than either credit could produce by itself.
Conclusion
The next few months will be critical in determining how much the EFTC does for families and students. States should submit public comment by December 1, make an advance election by January 1, and perfect that election by submitting their SGO list by February 15. Beyond those deadlines, states should take action to make the federal credit work seamlessly alongside programs states have already built, so families can combine every source available to them while retaining eligibility. AFPI's Every Dollar for Every Child Act gives states a blueprint, whether they are expanding existing programs or creating new ones.
* * *
James Paul, Ph.D.
Director of State Education Opportunity Policy
* * *
Original text here: https://americafirstpolicy.com/issues/education-freedom-tax-credit-rules-whats-next-for-states/
[Category: ThinkTank]
* * *
Education Freedom Tax Credit Rules: What's Next for States
October 22, 2026
Topline Points
* Treasury's new rules for the Education Freedom Tax Credit (EFTC) are a win for families.
* Governors have until January 1, 2027 to opt in to the credit, and participating states must then submit lists of scholarship granting organizations by February 15, 2027.
* States should focus the EFTC on innovative learning options, weigh how state law treats homeschools and microschools, and coordinate the ... Show Full Article WASHINGTON, Oct. 23 -- The America First Policy Institute issued the following expert insights: * * * Education Freedom Tax Credit Rules: What's Next for States October 22, 2026 Topline Points * Treasury's new rules for the Education Freedom Tax Credit (EFTC) are a win for families. * Governors have until January 1, 2027 to opt in to the credit, and participating states must then submit lists of scholarship granting organizations by February 15, 2027. * States should focus the EFTC on innovative learning options, weigh how state law treats homeschools and microschools, and coordinate thecredit with their existing school choice options.
* States should pass AFPI's Every Dollar for Every Child Act, which guarantees families can combine state awards, EFTC scholarships, and 529 distributions.
-
Introduction
The United States Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) recently released regulations for the Education Freedom Tax Credit (EFTC). Beginning January 1, 2027, individual taxpayers can claim a dollar-for-dollar, nonrefundable federal tax credit up to $1,700 for contributions to scholarship granting organizations (SGOs), which fund scholarships that families can use for K-12 expenses such as private school tuition, tutoring, and more. Married couples filing jointly can claim up to $3,400. The EFTC is likely to become the largest expansion of school choice in American history.
Treasury issued two documents on October 1, 2026:
1. Temporary regulations that govern how states opt in to the credit, how states submit lists of participating SGOs, SGO registration, and donor reporting.
2. Proposed regulations that govern how donors claim the credit; how SGOs award and account for scholarship funds; student eligibility; and other aspects of administration and enforcement.
The regulations reflect many principles of AFPI's public comment on a previous IRS request for input, and they are a win for families. Treasury's rules give donors, SGOs, and states a clear picture of how the credit will work and the confidence to move forward. Some provisions are temporary, and all aspects are open to public comment through December 1, 2026, so details could change in final rules or other future guidance.
Rather than summarizing every provision of the regulations, this Expert Insight focuses on the most important things state leaders need to know and do. Specifically, it identifies three federal deadlines and four policy choices for states to successfully implement the EFTC. The paper then describes AFPI's Every Dollar for Every Child Act, our model legislation that lets families combine the federal credit with state school choice programs and 529 savings plans.
Since most EFTC-participating states already run school choice programs of their own, leaders in these states should coordinate these programs with the EFTC. Of the 30 states that have already opted in to the EFTC, 14 operate state tax-credit scholarships, five offer education savings accounts funded by tax credits, and seven have other forms of private school choice. These programs differ from the EFTC with respect to student eligibility, allowable expenses, and award amounts. Accordingly, a child could qualify for an EFTC scholarship but not a state award. Nearly every participating state must therefore decide how the EFTC will work alongside its existing programs. Moreover, states without state-level school choice now have an opportunity to pass new programs that build successfully on the federal credit.
Upcoming Federal Deadlines
State leaders should prepare for three upcoming deadlines. The first deadline is an opportunity to shape the final rules. The second and third deadlines determine whether a state participates in the credit in 2027.
SUBMIT PUBLIC COMMENT TO TREASURY BY DECEMBER 1, 2026
What the rules say: Treasury is soliciting comments on the regulatory package through December 1, 2026. A public hearing on the regulations is planned for December 15, 2026, in Washington, D.C.
What states should do: Governors and other state leaders should ask Treasury to:
* Interpret "school...as determined under State law" in forthcoming Section 530 guidance to include any home education, microschool, hybrid program, or other educational arrangement that state law recognizes as satisfying its compulsory attendance requirements. Not only is this interpretation consistent with the federal statute, but it will ensure all students in non-traditional learning environments can benefit from EFTC m scholarships.
* Confirm that SGOs may not pay a public school for services the school must already provide to the student for free at the point of use, such as special education services under IDEA, because no qualified expense is incurred. Scholarships should not pay for services that taxpayers already fund.
* When an SGO is controlled by a school district or other governmental unit, measure the 85 percent activity test across the entire controlling entity. Under the proposed rules, an SGO must show that awarding scholarships is its main purpose. When a school district establishes an SGO, Treasury should look at the district as a whole, not just its allied foundation.
* Clarify that families can choose their own providers through a qualified digital wallet and explain what happens to unspent scholarship dollars at the end of a school year.
* Limit state certification of SGO eligibility. States should simply confirm that they reviewed SGO audits and annual filings, and Treasury should eliminate the requirement that states certify "any other requirements the IRS deems necessary."
* Open the IRS state portal before the end of 2026.
OPT IN BY FILING THE ADVANCE ELECTION BY JANUARY 1, 2027
What the rules say: Any state that seeks to participate in 2027 must file an advance election on IRS Form 15714 by 11:59 p.m. on January 1, 2027. The form is signed by the governor or other official designated to make elections on federal tax benefits. Note that election into the credit is complete only when the state submits its certified SGO list, which it does through the IRS state portal described below.
For 2028 and later years, advance elections take place in the IRS portal and are filed between January 2 and September 30 of the preceding year. A state that previously participated in the credit may instead make its election when submitting its list in the portal, between October 1 of the preceding year and January 1 of the next participation year.
What states should do: Governors of the 20 non-participating states should file Form 15714 as soon as possible, no later than January 1. Missing this deadline means a state cannot participate, and no child in that state would be able to receive EFTC scholarships in 2027. Residents in non-participating states could still claim the credit for contributions to SGOs, but these donations would fund scholarships across state lines, and their home state would forego hundreds of millions in charitable giving.
CERTIFY SCHOLARSHIP-GRANTING ORGANIZATIONS BY FEBRUARY 15, 2027
What the rules say: Each state completes its election by submitting a certified list of SGOs in the IRS state portal by February 15, 2027. A state that files an advance election but fails to submit its list cannot participate. Once a list is submitted, however, the election cannot be revoked for the rest of the calendar year. Treasury has not yet announced when the portal will open.
A state's certified list must include every qualifying SGO located in the state that asks to be included. Consistent with AFPI's recommendation, Treasury will consider an SGO to be "located in a state" if it is authorized to do business there and complies with the state's laws for nonprofit organizations. Moreover, because the rules allow an SGO to operate in multiple participating states, state lawmakers cannot require an SGO to establish a separate legal entity or physical office in a state as a condition of EFTC participation.
The rules prohibit a state from imposing additional requirements on SGOs that are more restrictive than Section 25F, or from excluding SGOs based on the type of school or expenses its scholarships will support. States' responsibilities are to certify that SGOs meet federal requirements, review their audit and IRS filings, and require documentation that prevents fraudulent or duplicative awards. Treasury has anticipated that new SGOs will be established to distribute scholarships, and in these cases, states can certify SGOs based on governing documents and written internal policies.
What states should do: Immediately authorize one or two officials to use the portal. Register for the portal as soon as the IRS opens it. Publish an application that SGOs use to appear on the state list. Designate an agency to review SGOs, approving every SGO that meets federal requirements. Governors can use executive orders, or simply take administrative action, to adopt procedures for SGO certification and audit review well before February 15, 2027.
Policy Decisions for States
Beyond meeting deadlines, states can take legislative and administrative actions to maximize the potential of the EFTC. The following recommendations are intended to ensure that the EFTC is a springboard for educational innovation and excellence for as many children as possible.
TREAT HOMESCHOOLS, MICROSCHOOLS, AND OTHER INNOVATIVE MODELS AS "SCHOOLS" UNDER STATE LAW
What the rules say: The federal statute requires scholarships to be used for a "qualified elementary or secondary education expense," which incorporates Section 530's definition of a school as determined under state law. Treasury's proposed regulations clarify that a student does not have to be enrolled in or attending a school when the scholarship is awarded. But an unresolved question is whether homeschool, microschool, and hybrid arrangements constitute a "school" under applicable state law. The proposed rules suggest that students in these non-traditional learning environments could be ineligible for EFTC scholarships in certain states that define homeschooling as an alternative to a school, rather than a school itself.
What states should do: Many states deliberately keep home education separate from the legal definition of a school to protect these models from teacher certification requirements, testing mandates, facility rules, and attendance reporting. States should weigh what is more important: shielding families from these requirements or opening access to EFTC scholarships. One solutions for states willing to pursue legislative changes is to narrowly amend their statutes classifying non-traditional learning environments as schools only for the purposes of Sections 25F and 530.
For those states that prefer not to change legal definitions in their education codes, state officials should submit public comments urging Treasury, in its forthcoming Section 530 guidance, to treat any home education, microschool, or hybrid program that satisfies compulsory attendance requirements as a school under state law. This would open EFTC scholarships to families nationwide without requiring states to change how they regulate them.
FOCUS THE CREDIT ON INNOVATIVE SCHOOL MODELS
What the rules say: Congress, and Treasury, have provided significant discretion to SGOs to determine what types of scholarships they will offer. SGOs can award scholarships for certain academic subjects, types of expenses (like tutoring or tuition), or educational themes and models. States may not keep an SGO off their list because it funds religious education, nor may states exclude SGOs that plan to fund public school students' expenses.
What states should do: The EFTC will be most transformative if it funds new, innovative options rather than directing additional revenue into public school systems that already receive considerable taxpayer investment. States should therefore:
* Clear the way for new providers to serve students. Microschools and learning pods run into barriers from zoning, building occupancy, and child-care licensing rules that are designed for traditional school buildings. Addressing these obstacles will encourage new education service providers to which parents can direct scholarships.
* Make it simpler for new SGOs to qualify for state lists. States should review their charitable registration and non-profit incorporation procedures, looking for opportunities to streamline the process so that new SGOs can be quickly approved in time to distribute scholarships in 2027.
* Keep public resources out of SGO fundraising. SGOs may award scholarships that families use for expenses at traditional public schools, but districts should be barred from using staff time, facilities, family contact lists, or school newsletters to solicit gifts for SGOs.
LET FAMILIES EASILY COMBINE EFTC & STATE SCHOLARSHIPS
What the rules say: The federal rules do not prohibit students from receiving an EFTC scholarship and other types of school choice awards. They do, however, require SGOs to prevent duplicative scholarship payments from exceeding the cost of a given qualifying expense. States can develop their own rules governing coordination with ESAs, vouchers, state tax-credit scholarships, or other school choice programs.
What states should do: Ensure that families can access EFTC scholarships in addition to any existing state-level school choice programs. The federal tax credit was never intended to replace choice options states have already built. Accordingly, state agencies should be prohibited from reducing or offsetting a state award because a child also benefits from the EFTC.
Plus, public school students who receive EFTC scholarships for tutoring or other services will not lose state funding that supports their education in a district school. Students who attend nonpublic schools and supplement with EFTC scholarships deserve the same treatment.
STRENGTHEN OR CREATE STATE TAX CREDITS THAT BUILD ON THE FEDERAL CREDIT
What the rules say: Section 25F reduces the federal credit by any state tax credit a donor claims for the same contribution, so a donor's combined federal and state credits never exceed the amount of the gift. Treasury adopted the most generous reading of that language, subtracting the state credit before applying the $1,700 cap, which effectively encourages donors in states with existing credits to give more than $1,700.
For example, take a state credit worth 20% of each gift. Here, a donor who gives $2,500 earns $500 in state credit and still earns the full $1,700 in federal credit (rather than $1,200, as a less generous reading might have allowed). A donor who gives $1,700 earns a $340 state credit and only $1,360 in federal credit.
What states should do: The federal credit gives every American with sufficient tax liability a reason to give $1,700. State tax credits incentivize giving even more. States that already offer a tax-credit scholarship should expand it by raising the program's cap so it can absorb new giving. Lawmakers should also align student eligibility and allowable expenses with the federal credit so families qualify for both types of scholarships. States without tax-credit scholarships should create one designed to work seamlessly alongside the EFTC.
Additionally, states should consider requiring SGOs to maintain clearly segregated state and federal accounts, with donors choosing where to send each gift. This will make it simple for donors to give $1,700 to claim the full federal credit and earn the state credit on everything above $1,700.
AFPI's Every Dollar for Every Child Act
States should pass the Every Dollar for Every Child Act, a model policy for strengthening existing state programs, creating new ones, and coordinating them with the EFTC. The Act guarantees that a student may receive a state scholarship, an EFTC scholarship, and a 529 plan distribution in the same school year.
Consider a working-class family whose child is accepted to a private school that charges $8,000 in tuition. The state's tax-credit scholarship program is valuable, but only provides $3,000 and still leaves the child's parents struggling to cover the full cost of private school. Thanks to the federal credit, an SGO in the participating state can award that student an EFTC scholarship of $5,000 to cover the remaining tuition. The two scholarships work together best if state laws and rules explicitly plan for this scenario.
* * *
Figure 1. Illustrating how the Every Dollar for Every Child Act Helps Families
* * *
COORDINATING WITH EXISTING PROGRAMS
A state award and an EFTC scholarship can help the same student meet different needs. A family may want to use EFTC scholarships for private school tuition and their state ESA for tutoring and other expenses. The Every Dollar for Every Child Act makes this possible for families by barring state agencies and program administrators from reducing a state award if a student receives an EFTC scholarship or 529 plan distribution, or from counting either as income in eligibility determinations.
STRENGTHENING EXISTING STATE TAX-CREDIT SCHOLARSHIPS
For states with existing tax-credit scholarships, the Act raises the credit's aggregate cap and adds an automatic escalator when at least 90 percent of the cap is claimed in the prior year. Students may qualify under either the state's program eligibility rules or the federal definition, and students who are not enrolled full-time in a public school may use state scholarships for any expense the federal credit allows. Aligning the standards simplifies the process for parents, who can rest assured their child qualifies for both scholarships.
CREATING NEW STATE TAX-CREDIT SCHOLARSHIPS
For EFTC-participating states without a tax-credit scholarship, the Act creates a nonrefundable state credit for a set percentage of each donation, up to 100%, with a five-year carryforward and an aggregate cap. By default, state tax-credit scholarships go to students who are not enrolled full-time in a public school and otherwise follow federal eligibility and expense rules. States may set their own rules but are encouraged to align closely with federal rules for parents' ease of use.
KEEPING THE FEDERAL CREDIT WHOLE
In every state that already administers a tax-credit scholarship, the Act requires SGOs to keep separate state and federal accounts and bars donors from claiming both credits for the same dollars. A donor can still make a single gift and split it, for example, by sending $1,700 to the federal account and $2,000 toward the state account. This way the donor keeps the full federal credit, earns state credit on the rest, and families have access to more scholarship funding than either credit could produce by itself.
Conclusion
The next few months will be critical in determining how much the EFTC does for families and students. States should submit public comment by December 1, make an advance election by January 1, and perfect that election by submitting their SGO list by February 15. Beyond those deadlines, states should take action to make the federal credit work seamlessly alongside programs states have already built, so families can combine every source available to them while retaining eligibility. AFPI's Every Dollar for Every Child Act gives states a blueprint, whether they are expanding existing programs or creating new ones.
* * *
James Paul, Ph.D.
Director of State Education Opportunity Policy
* * *
Original text here: https://americafirstpolicy.com/issues/education-freedom-tax-credit-rules-whats-next-for-states/
[Category: ThinkTank]
America First Policy Institute Issues Letter to Ark. Human Services Secretary Mann
WASHINGTON, Oct. 23 (TNSletter) -- The America First Policy Institute issued the following letter to Arkansas Human Services Secretary Janet Mann:
* * *
Here is the text of the letter:
October 13, 2026
Ms. Janet Mann, Secretary
Arkansas Department of Human Services
700 Main Street
P.O. Box 1437, Slot S201
Little Rock, Arkansas 72203
RE: Updated CMS Guidance Protecting Voting Rights in Arkansas Nursing Facilities QSSAM-26-04-NH
Dear Secretary Mann:
On behalf of the America First Policy Institute (AFPI), we hereby request that the Arkansas Department of Human Services (DHS) promptly notify ... Show Full Article WASHINGTON, Oct. 23 (TNSletter) -- The America First Policy Institute issued the following letter to Arkansas Human Services Secretary Janet Mann: * * * Here is the text of the letter: October 13, 2026 Ms. Janet Mann, Secretary Arkansas Department of Human Services 700 Main Street P.O. Box 1437, Slot S201 Little Rock, Arkansas 72203 RE: Updated CMS Guidance Protecting Voting Rights in Arkansas Nursing Facilities QSSAM-26-04-NH Dear Secretary Mann: On behalf of the America First Policy Institute (AFPI), we hereby request that the Arkansas Department of Human Services (DHS) promptly notifyMedicaid nursing facilities of updated federal guidance protecting residents' voting rights and autonomy. We also ask that DHS ensure compliance with resident rights and notice requirements.
On July 20, 2026, the Centers for Medicare & Medicaid Services (CMS) issued Quality and Safety Special Alert Memo QSSAM-26-04-[NH],1 Protecting the Voting Rights and Autonomy of Vulnerable Residents in Long-Term Care (LTC) Facilities, rescinding QSO-21-02-[NH]2 and QSO-24-21-[NH].3 The alert provides notice to nursing facilities and skilled nursing facilities of their obligation to comply with all applicable federal and state laws and regulations to avoid instances of coercion or other violations of resident rights or voter protection laws.
Under 42 C.F.R. Sec. 483.10(b)(1)-(2), facilities must support residents' exercise of their rights and protect them from interference, coercion, discrimination, and reprisal. The CMS alert specifically cautions against registering residents without their knowledge or consent and completing a resident's mail ballot without authorization. The alert also recognizes residents' freedom to decline participation and calls for residents needing assistance to be offered help from their authorized representative. Under 52 U.S.C. Sec. 10508, voters needing assistance because of blindness, disability, or inability to read or write may choose their assistant, except their employer, an employer's agent, or a union officer or agent. Nursing facilities offering representative assistance must respect that choice.
Consistent with the voting rights of Arkansas residents living in nursing and assisted living facilities, the State of Arkansas has affirmative oversight and educational duties. Under 42 U.S.C. Sec. 1396r(g)(1)(A)-(B) the State is responsible for certifying compliance by nursing facilities other than state facilities and requires periodic educational programs for facility staff, residents, and their representatives on current regulations, procedures, and policies, including those related to resident's rights to vote.
Federal law also requires facilities to provide residents notice of their rights before or upon admission and during their stay, to explain those rights orally and in writing in a language they understand, and obtain written acknowledgment of the information and amendments. See 42 C.F.R. Sec. 483.10(g)(16). They must also promptly notify residents and their representatives, if any, of changes in resident rights under federal or state law or regulations. 42 C.F.R. Sec. 483.10(g)(14)(iii)(B). The CMS alert specifies that notice should be provided to authorized representatives when residents' legal or civil rights related to voting change. This includes a change in voter registration status.
Accordingly, we ask DHS to take the following steps promptly:
1. Circulate the CMS alert and a bulletin explaining resident protections and notice requirements to every Arkansas Medicaid nursing facility and relevant survey personnel.
2. Direct facilities to review voting assistance practices and resident notices, train staff on consent and the resident's choice of assistant, and ensure required notices reach residents and authorized representatives.
3. Use Arkansas's periodic educational programs to explain these protections to staff, residents, and representatives, and address substantiated noncompliance through applicable survey and enforcement procedures.
4. Coordinate with election officials on lawful assistance, including through the use of bipartisan election workers where authorized by state law, and publicize DHS's complaint process4 and hotline, 800-582-4887.
CMS participation requirements govern federally certified nursing facilities and do not automatically extend to assisted living or other facilities solely because they are state licensed. Federal voting protections apply independently of nursing facility certification. Federal law prohibits voting-related intimidation, threats, and coercion.52 U.S.C. Sec. 10307(b). For elections involving federal office, knowing and willful intimidation and fraud involving registration applications or ballots is also prohibited. 52 U.S.C. Sec. 20511, 52 U.S.C. Sec. 10307(c).
AFPI invites DHS to reproduce and distribute the enclosed poster which summarizes federal protections and provides required notices, to administrators, staff, residents, and representatives, and to include it in training and resident information materials.
We welcome the opportunity for further collaboration on your voter education efforts and respectfully request that you share your office's plans to ensure this information is properly distributed to facilities throughout Arkansas.
Sincerely,
Ashley Hayek, Executive Vice President, America First Policy Institute
The Hon. J. Kenneth Blackwell, Chair, Secure Elections, America First Policy Institute
Encl.
* * *
Original text and footnotes here: https://americafirstpolicy.com/wp-content/uploads/2026/10/CMS-Guidance-Letter-to-State-Agency-Heads-Arkansas.pdf
News Release here: https://americafirstpolicy.com/issues/afpi-moves-to-protect-vulnerable-voters-in-nursing-homes-from-coercive-ballot-harvesting-schemes/
[Category: ThinkTank]
* * *
Here is the text of the letter:
October 13, 2026
Ms. Janet Mann, Secretary
Arkansas Department of Human Services
700 Main Street
P.O. Box 1437, Slot S201
Little Rock, Arkansas 72203
RE: Updated CMS Guidance Protecting Voting Rights in Arkansas Nursing Facilities QSSAM-26-04-NH
Dear Secretary Mann:
On behalf of the America First Policy Institute (AFPI), we hereby request that the Arkansas Department of Human Services (DHS) promptly notify ... Show Full Article WASHINGTON, Oct. 23 (TNSletter) -- The America First Policy Institute issued the following letter to Arkansas Human Services Secretary Janet Mann: * * * Here is the text of the letter: October 13, 2026 Ms. Janet Mann, Secretary Arkansas Department of Human Services 700 Main Street P.O. Box 1437, Slot S201 Little Rock, Arkansas 72203 RE: Updated CMS Guidance Protecting Voting Rights in Arkansas Nursing Facilities QSSAM-26-04-NH Dear Secretary Mann: On behalf of the America First Policy Institute (AFPI), we hereby request that the Arkansas Department of Human Services (DHS) promptly notifyMedicaid nursing facilities of updated federal guidance protecting residents' voting rights and autonomy. We also ask that DHS ensure compliance with resident rights and notice requirements.
On July 20, 2026, the Centers for Medicare & Medicaid Services (CMS) issued Quality and Safety Special Alert Memo QSSAM-26-04-[NH],1 Protecting the Voting Rights and Autonomy of Vulnerable Residents in Long-Term Care (LTC) Facilities, rescinding QSO-21-02-[NH]2 and QSO-24-21-[NH].3 The alert provides notice to nursing facilities and skilled nursing facilities of their obligation to comply with all applicable federal and state laws and regulations to avoid instances of coercion or other violations of resident rights or voter protection laws.
Under 42 C.F.R. Sec. 483.10(b)(1)-(2), facilities must support residents' exercise of their rights and protect them from interference, coercion, discrimination, and reprisal. The CMS alert specifically cautions against registering residents without their knowledge or consent and completing a resident's mail ballot without authorization. The alert also recognizes residents' freedom to decline participation and calls for residents needing assistance to be offered help from their authorized representative. Under 52 U.S.C. Sec. 10508, voters needing assistance because of blindness, disability, or inability to read or write may choose their assistant, except their employer, an employer's agent, or a union officer or agent. Nursing facilities offering representative assistance must respect that choice.
Consistent with the voting rights of Arkansas residents living in nursing and assisted living facilities, the State of Arkansas has affirmative oversight and educational duties. Under 42 U.S.C. Sec. 1396r(g)(1)(A)-(B) the State is responsible for certifying compliance by nursing facilities other than state facilities and requires periodic educational programs for facility staff, residents, and their representatives on current regulations, procedures, and policies, including those related to resident's rights to vote.
Federal law also requires facilities to provide residents notice of their rights before or upon admission and during their stay, to explain those rights orally and in writing in a language they understand, and obtain written acknowledgment of the information and amendments. See 42 C.F.R. Sec. 483.10(g)(16). They must also promptly notify residents and their representatives, if any, of changes in resident rights under federal or state law or regulations. 42 C.F.R. Sec. 483.10(g)(14)(iii)(B). The CMS alert specifies that notice should be provided to authorized representatives when residents' legal or civil rights related to voting change. This includes a change in voter registration status.
Accordingly, we ask DHS to take the following steps promptly:
1. Circulate the CMS alert and a bulletin explaining resident protections and notice requirements to every Arkansas Medicaid nursing facility and relevant survey personnel.
2. Direct facilities to review voting assistance practices and resident notices, train staff on consent and the resident's choice of assistant, and ensure required notices reach residents and authorized representatives.
3. Use Arkansas's periodic educational programs to explain these protections to staff, residents, and representatives, and address substantiated noncompliance through applicable survey and enforcement procedures.
4. Coordinate with election officials on lawful assistance, including through the use of bipartisan election workers where authorized by state law, and publicize DHS's complaint process4 and hotline, 800-582-4887.
CMS participation requirements govern federally certified nursing facilities and do not automatically extend to assisted living or other facilities solely because they are state licensed. Federal voting protections apply independently of nursing facility certification. Federal law prohibits voting-related intimidation, threats, and coercion.52 U.S.C. Sec. 10307(b). For elections involving federal office, knowing and willful intimidation and fraud involving registration applications or ballots is also prohibited. 52 U.S.C. Sec. 20511, 52 U.S.C. Sec. 10307(c).
AFPI invites DHS to reproduce and distribute the enclosed poster which summarizes federal protections and provides required notices, to administrators, staff, residents, and representatives, and to include it in training and resident information materials.
We welcome the opportunity for further collaboration on your voter education efforts and respectfully request that you share your office's plans to ensure this information is properly distributed to facilities throughout Arkansas.
Sincerely,
Ashley Hayek, Executive Vice President, America First Policy Institute
The Hon. J. Kenneth Blackwell, Chair, Secure Elections, America First Policy Institute
Encl.
* * *
Original text and footnotes here: https://americafirstpolicy.com/wp-content/uploads/2026/10/CMS-Guidance-Letter-to-State-Agency-Heads-Arkansas.pdf
News Release here: https://americafirstpolicy.com/issues/afpi-moves-to-protect-vulnerable-voters-in-nursing-homes-from-coercive-ballot-harvesting-schemes/
[Category: ThinkTank]