Supply-side economists are panning Texas Senate hopeful Ken Paxton‘s tax proposal, saying it cuts against the long-sought Republican goal of broadening the tax base while lowering overall rates.
Paxton, the attorney general of Texas who is running against Democratic state Rep. James Talarico in this year’s election, has released a plan to grant tax breaks for housing, healthcare, and children, aimed at voters upset about the cost of living.
As with the tax breaks that President Donald Trump campaigned on and enacted, such as cutting taxes on tips and Social Security, the proposals championed by Paxton have a populist bent but cut against the tax reform principles embraced by conservatives for decades.
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Conservative economists argue that the plan isn’t sound and could increase prices in some cases, by increasing demand for certain goods and services without increasing supply. It would also complicate the tax code, rather than simplifying it. And it would not produce lower rates, which free-market economists see as helpful for increasing economic efficiency.
“What is being proposed here is a distinct departure from the traditional Republican tax reform agenda of broadening the base and lowering the rates,” Adam Michel, director of tax policy studies at the libertarian Cato Institute, told the Washington Examiner.
The Paxton campaign did not respond to a request for comment on the criticisms.
Among the proposals in the Paxton plan, which the campaign has dubbed the “Protecting the Texas Promise Agenda,” are a $25,000 deduction for out-of-pocket medical expenses and premiums, a $50,000 home down payment deduction, a $5,000 “healthy living” deduction, a 100% increase in the child tax credit, and making the Trump Accounts program permanent.
Will McBride, vice president of federal tax policy at the Tax Foundation, said the plan is “not great.”
“It goes in the opposite direction of tax reform, and it’s the reason tax reform is needed,” McBride told the Washington Examiner.
McBride said tax reform, as it’s commonly understood, entails removing special preferences and carve-outs that accumulate over decades and complicate the tax code.
In 1986, President Ronald Reagan shepherded through landmark tax legislation with bipartisan support that simplified the tax code, closed loopholes, and was designed to make the system fairer. It gutted special tax deductions and lowered income and corporate taxes.
Since then, broadening the tax base has been the North Star for Republican budgeteers. The idea is that special deductions and credits should be limited in the tax code so that there is a larger amount of income being taxed. That larger pool allows for overall rates to be lowered without reducing the revenues that fund the government.
Broadening the base was top of mind for former House Speaker Paul Ryan, a budget hawk who helped enact the 2017 Tax Cuts and Jobs Act, better known as the Trump tax cuts. But since then, the Republican Party has shifted, at least with some policies, toward narrowing the base.
For instance, many of the tax promises from the 2024 Trump presidential campaign — such as no taxes on tips, no taxes on overtime, and raising the cap on state and local tax deductions — cut in the other direction, away from broadening the base.
Supply-side opponents of these provisions that only apply to certain subsets of taxpayers argue that they create distortions in the tax code. For example, cutting taxes on tips could give full-service restaurants an advantage over fast-casual chains. Allowing more deductions for state and local taxes paid could incentivize mayors to spend more on government services.
Preston Brashers, a research fellow at Advancing American Freedom’s Plymouth Institute for Free Enterprise, said the proposal is “taking the wrong approach.”
“I think ultimately it reveals a misunderstanding of what tax policy is supposed to be about, about how the economy works,” Brashers told the Washington Examiner.
Still, Paxton is betting that the plan will resonate with voters who are fed up with high inflation and with homeownership being out of reach.
“Washington has made it harder than ever to get ahead, and the American dream is slipping away as the cost of everything from housing to healthcare rises,” Paxton said in an ad released by the campaign about the plan.
“My agenda is very simple: I believe every Texan should be able to buy a home, raise a family, and live a healthy life without struggling to make ends meet,” the GOP Senate hopeful added.
‘Subsidies on top of subsidies’
Paxton’s plan has a $5,000 tax deduction for “healthy lifestyle” expenses, including gym expenses and costs associated with GLP-1 drugs like Ozempic.
Another major item is a $25,000 tax deduction for out-of-pocket medical expenses, which includes an additional $25,000 deduction for dependents.
But McBride said a lot of those health costs are already deductible. He said that essentially all of those premiums are already exempt from both income and payroll taxes, referring to the exclusion of employer-sponsored health insurance from taxable income.
“So you know this is piling on subsidies on top of subsidies … it’s like trying to put out a fire by setting the place on fire again,” he added.
Joshua Rowley, a researcher at the libertarian Mercatus Center at George Mason University, told the Washington Examiner that Paxton is correct in that Washington is making it harder for people to get ahead. Still, he said the attorney general’s plan could backfire by making things more expensive.
Rowley said that the demand-side subsidies would increase demand for health insurance and health expenses, as well as increase demand for homeownership.
“And that’s going to push up those prices rather than moderate those prices, which is what Americans want to see,” he said.
Costs to the Treasury
There is also the question of how the tax cuts would be paid for.
Paxton hinted to reporters that he thinks the lower taxes would return to the Treasury through more spending by consumers, according to the Dallas Morning News.
“I never believe that tax cuts necessarily mean you have less money in the Treasury, because often if people are able to keep more of their money, they spend it, and it runs through the economy,” he told reporters in Allen, Texas.
Rowley said while it is correct that when taxes are cut, people use those tax dollars somewhere else, the Paxton proposals wouldn’t do so to the extent of increasing revenues.
“As people who focus on tax policy would say, they’re not pro-growth. These aren’t things that are going to expand the size of the economy, especially relative to the revenue loss,” he said.
Paxton’s plan would double the child tax credit, which would mean increasing the maximum credit to $4,400 per child. Some populist Republicans have supported a bigger child tax credit in recent years.
“We want to make it easier for you to take care of your children,” Paxton told voters at a campaign stop this week.
McBride said the political path for Paxton’s tax proposals to become law is unclear, but that you can “never say never” in politics. He noted that many of the campaign trail tax proposals that Trump ran on in 2024 did, in fact, become law.
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“The affordability problem is real, but the impulse for more free stuff is going to make that problem worse in the end,” McBride said.
Paxton is touting his economic agenda this week, which included stops in Allen on Aug. 4, Houston on Aug. 5, and McAllen on Aug. 6. He will also visit San Antonio on Aug. 8.