Senate in Session

Overview:

This week, Bloomberg Government held a webinar discussing the expiring provisions of the 2017 Republican tax overhaul and potential changes in 2025. Tax policy is set to be a major issue for lawmakers next year, with uncertainty around the November elections leaving key tax breaks in question. Republicans want to extend these provisions, while Democrats aim to expand tax breaks for lower- and middle-income households. The parties also differ on whether to offset the costs of their policies. The panel explored each side’s priorities, the budget reconciliation process, and possible outcomes based on election results.

Speakers:

Chris Cioffi, Senior Reporter, Bloomberg Tax

Kim Dixon, Deputy Team Lead, Federal Tax, Bloomberg Tax

Danielle Parnass, Deputy Team Lead, Legislative Analysis, Bloomberg Government

Summary:

Wyden-Smith Tax Bill Stalled: The Wyden-Smith Tax Bill is a $78 billion bill that included R&D, bonus depreciation, and full expensing business breaks paired with enhancements to the child tax credit. Partisan disagreement over the CTC’s “lookback” provision in the bill, which accounts for the previous year’s income when determining eligibility, has stalled progress. It is possible that the bill or parts of the bill could return during the lame duck session or after the election.

2017 Tax Cuts and Jobs Act (TCJA) Provisions Expiring at End of 2025:

• Individual Rates: Marginal tax rates for individuals will revert to pre-TCJA levels, including maximum rate of 39.6%, from 37%.

• Standard Deduction: Standard deduction reverts to pre-TCJA levels, adjusted for inflation.

• SALT Deduction: The $10,000 cap on state and local tax deductions will no longer apply. Mr. Cioffi noted there have been bipartisan efforts to get rid of or raise the cap.

• Child Tax Credit (CTC): The maximum credit will drop from $1,000 per child, from $2,000. The phaseout threshold will decrease to $75,000 for individuals and $110,000 for married couples.

• Estate and Gift Taxes: Exemption from estate and gift taxes reverts to pre-TCJA level of around $5 million, adjusted for inflation. The 2024 exemption is $13.6 million.

• Mortgage Interest, Charitable Deductions: The mortgage interest deduction will be limited to $1 million in property value, from $750,000. Charitable contributions will be limited to 50% of AGI, from 60%. Itemized deductions in general will be more relevant with lower standard deduction.

• Pass-Through Income Deduction: 199A Pass-through businesses will no longer be able to deduct up to 20% of qualified income. There is a big lobbying push among S-corps, others are targeting Democrats. Coalitions such as the PROTECT Coalition have formed among business and trade groups who are launching a unified effort to preserve the pass-through tax deduction.

• Business “Trifecta”: Bonus depreciation, R&D, and Business interest deductions under the TCJA will expire.

• BEAT/GILTI/FDII: These formulas will be modified for base erosion minimum tax, global intangible low-taxed income and foreign derived intangible income. Mr. Cioffi noted that the 15% Pillar II minimum income tax structure under the OECD global tax deal does not align with the tax rate under GILTI. He said some companies are calling for alignment between the two policies to ease compliance costs and lucrative tax breaks.

• Corporate Tax Rates: The current corporate tax rate of 21% does not expire, however both parties have expressed an interest in changing it.

• Vice President Harris proposed increasing the corporate tax rate to 28%.

• Former President Trump proposed decreasing the corporate tax rate to 15%.

2024 Presidential Campaign Proposals

Vice President Harris:

• Extend lower tax rates for those making less than $400,000.

• Expand child tax credit to $3,600 from $2,000 per dependent and provide $6,000 credit for newborns; expand Earned Income Tax Credit for workers without kids.

• Extend enhanced premium tax credits under the Affordable Care Act

• Exempt tip wages from federal income taxes; payroll taxes would remain.

• Increase startup deduction to $50,000 from $5,0000.

Harris Campaign Proposed Budget: Vice President Harris endorsed President Biden’s budget proposal, but proposed lower capital gains increase to 28%. Other policies of note include the proposal to impose 25% minimum tax on income and unrealized capital gains for taxpayers with over $100 million in assets or the “Billionaire Tax,” increasing excise tax on corporate stock buybacks to 4% from 1%, and tax carried interest as ordinary income. Ms. Parnass noted that these policies intend to offset other tax cuts but have been especially contentious.

Former President Trump:

• Make expiring individual income tax cuts from 2017 tax law permanent.

• Eliminate taxes on tip wages, overtime, and Social Security payments.

• VP nominee JD Vance floated expanding child tax credit to $5,000.

• Trump advisers have pushed to keep the cap on SALT deduction.

Trump Campaign Proposed Budget: The GOP wants to extend 2017 tax provisions, which is estimated to cost $4.6 trillion over 10 years and has provided a less clear plan to pay for continued tax cuts. Mr. Cioffi explained that Republicans want to roll back significant parts of the Democrats’ clean energy credits, cut IRA modernization funds to the IRS, and narrow eligibility requirements for the electric vehicle credit. He noted that there is likely to be bipartisan pushback against cuts to IRA funding, particularly from states in the South and Midwest that have received major IRA investment. Ms. Parnass added that the Congressional Budget Office (CBO) has said rescinding funding from the IRS would ultimately result in less enforcement and decreasing revenue in the future.

2025 Tax Policy Scenarios:

Differing Policy Outcomes: Ms. Dixon detailed three potential outcomes: 1) either a GOP or a bipartisan long-term extension that addresses expiring tax provisions, 2) a 1–2-year tax break extension that allows more time for negotiations, or 3) TCJA expiration and reversion to pre-TCJA levels. She noted that the third outcome is very unlikely.

Reconciliation Could Be Vehicle for Tax Changes: Ms. Parnass explained that Reconciliation makes it easier to pass bills in the Senate as only a simple majority is required. She noted that proposals must be budgetary in nature and that the deficit cannot be increased outside of a 10-year budget window. She emphasized that margins become important and even one member can hold up the process, which, in the case that there is no clear majority, can lead to more bipartisan approaches.

Congressional Tax Leaders to Remain Regardless of Election: Sen. Ron Wyden (D-OR) will remain the Senate Finance chairman, Sen. Mike Crapo (R-ID) the Senate Finance ranking member, Rep. Jason Smith (R-MO) the Ways and Means Chairman, and Rep. Richard Neal (D-MA) the Ways and Means Ranking Member regardless of the election. Mr. Cioffi observed that Sen. Wyden and Rep. Smith seem to work well together as evidenced by the Wyden-Smith Tax Bill, but to watch for the dynamic between Sen. Wyden, Rep. Smith, and Sen. Crapo as there has historically been more tension amongst the three members.

Tax Policy Predictions Based on Election Outcome:

• Democrats Sweep:

• Extend tax cuts for taxpayers under $400,000, let other tax breaks expire.

• Expand child tax credit, other credits for low-income taxpayers.

• Raise taxes on corporations, capital gains, and high-income taxpayers as offsets.

• Eliminate cap on SALT deduction.

• Trump + Divided Government:

• Will push to extend as many tax cuts as possible.

• Concessions for Democratic support could depend on how tight the margins are in Congress.

• Harris + Divided Government:

• More likely to let tax cuts for wealthiest expire.

• Could agree to some business breaks in exchange for other tax priorities.

• Republicans Sweep:

• Extend tax cuts from 2017 law.

• Eliminate clean energy tax credits from Democrats’ 2022 law.

• Could expand child tax credit, prevent it from dropping back to $1,000/child.

• Corporate tax rate changes could be on the table.

Ms. Parnass noted that Former President Trump also made comments about bringing SALT back. She explained that there is still a lot of uncertainty about the outcome of tax policies in the next year. Regarding federal deficit, Ms. Dixon said that both Democrats and Republicans are being irresponsible with the national debt and deficit and lack plans to address the issue.