During his campaign, President Trump promised to create a “beautiful golden age of business” by reducing inflation, lowering taxes, and cutting government spending. The budget reconciliation bill working its way through Congress could help Trump achieve this goal, but the current version falls short. Some additional reforms to Medicaid and the state and local tax (SALT) deduction coupled with changes to the way businesses deduct investment expenses would improve the bill and the economy.

The Tax Foundation estimates that the current tax bill would boost GDP by 0.6% but cause wages to decline by 0.1%. This is hardly the pro-growth tax reform Trump promised. The Tax Foundation estimates that making the 2017 Tax Cuts and Jobs Act (TCJA) permanent, so just extending Trump’s tax cuts from his first term, would increase GDP by 1.1% and wages by 0.5% while also adding 847,000 jobs.

One of the differences between the two tax plans is how they treat the expensing of business investment. The TCJA allowed businesses to expense the full cost of short-lived investments such as tools and equipment in the year purchased from 2018 to 2021. After 2021, the amount businesses could expense declined annually and will phase out completely in 2027, reverting to the old depreciation schedules. The current bill brings back full expensing, but only until 2029. Making full expensing permanent would eliminate the tax penalty imposed on capital intensive businesses, such as manufacturers, and encourage more investment. This ultimately boosts productivity, wages, and economic growth.

The Tax Foundation estimates that permanent full expensing would increase GDP by 0.5%, which would close the growth gap between the current tax bill and what a permanent extension of the TCJA would provide. If the Republicans really want to increase U.S. manufacturing output and boost middle-class wages, they should encourage businesses to invest in new tools, equipment, and technologies. Permanent full expensing does that.

Trump and Republicans also want to reduce the government deficit, and making full expensing permeant without doing anything else would reduce tax revenue and increase the deficit. Fortunately, there are good ways to offset this revenue loss that do not discourage productive investment. One is to maintain the current SALT deduction cap.

The TCJA put a $10,000 cap on the amount of state and local taxes tax filers could deduct from their income before paying taxes. The new bill increases the cap to $30,000 along with some other changes, which would lower revenue by $356 billion over ten years. Research shows that households in California and New York would benefit most from the higher cap, and the benefits are even more concentrated than that. According to the Tax Policy Center, before the TCJA cap, only eight counties in the whole country, largely around San Francisco and New York City, had an average SALT deduction of $30,000 or more.

The higher SALT cap would benefit a small number of high-income households while making it harder to implement true pro-growth reforms like permanent full expensing. Trading a lower SALT cap for permanent expensing is a smart choice.

Another way to improve the current bill and reduce the deficit is to reform Medicaid. The Affordable Care Act, aka Obamacare, expanded Medicaid eligibility to able-bodied, working adults. To encourage states to accept this expansion, it set the Federal Medical Assistance Percentage (FMAP) for this new population at 90% instead of the 57% average used for the traditional Medicaid population e.g., the disabled, pregnant women, children, and low-income senior citizens.

In dollar terms, this means that for every $1 a state spends on the traditional population it receives about $1.33 from the federal government while for the expansion population, largely able-bodied adults, it receives $9 for every $1 it spends. This gives states an incentive to enroll more able-bodied people into Medicaid, which increases demand for services and causes longer wait times for truly poor people who need care. And since states get such a large FMAP for the expansion population they do not strictly enforce eligibility rules. One study estimates the federal government pays $37 billion annually on ineligible Medicaid enrollees.

To address these problems, Congress should reduce the expansion FMAP payment to the same level as the traditional population. If that is too difficult politically, it could reduce the 50% FMAP floor that keeps the FMAP for some wealthy states such as New Jersey, Massachusetts, and California artificially high. These savings could be used to offset other pro-growth tax reforms or to decrease the deficit.

The reconciliation process is a difficult one, requiring compromises and tradeoffs. Congress is moving in the right direction, but flaws in the current bill will reduce its impact on economic growth. Maintaining the $10,000 SALT cap, reforming Medicaid FMAP payments, and making full expensing permanent would improve the reconciliation bill and increase the likelihood that Trump achieves his economic goals.