December 2024 Policy Pulse

With less than a dozen legislative days left in the 118th Congress, lawmakers are still working through several pieces of must-pass legislation. Over the next two weeks Congress must tackle government funding (which is currently set to lapse on Dec. 20), the National Defense Authorization Act, an extension or renewal of the Farm Bill and a potential disaster relief bill to address the recent hurricanes in the southeast. Additionally, the debt ceiling expires in early January. While Treasury is able to take “extraordinary measures” to avoid a default if the limit isn’t lifted timely, those are only likely to provide a few months of relief.

Despite the tight deadlines and extensive to-do list, Republicans are also dedicating time to strategize around a tax reform package they hope to pass in the early months of 2025.

Election outcome

Republicans swept the 2024 elections capturing the White House, Senate and House of Representatives; however, they will be governing with razor thin majorities.

In the Senate, the Republicans fall short of the 60-seat threshold needed to overcome filibusters. In the House Republicans will control 220 seats), giving them a very slim majority. President Trump’s nomination of three House Republicans to positions within his administration has complicated matters, one of whom, Matt Gaetz, has since resigned from Congress and withdrawn his name for consideration. This will leave Speaker Johnson with just 217 Republican House members at the start of the 119th Congress.

The margins are particularly important because when the controlling party holds a slim majority, it allows individual lawmakers to exert a considerable amount of influence over potential legislation.

Potential tax reform

There’s no shortage of activity or speculation about tax policy or the potential for a Republican tax reform bill in 2025. Republicans have been optimistically planning for this election outcome for months, leaving them well-poised to hit the ground running when the new Congress is seated.

Republicans have been extremely straightforward about their intention to use reconciliation to pass a tax reform bill in early 2025. Reconciliation is a special legislative process that allows certain fiscal legislation to be fast-tracked, avoiding the opportunity for a filibuster in the Senate. However, reconciliation bills come with strict limitations. For more detail on the reconciliation process, see “Tax reform in a united government” in our November Policy Pulse.

The Tax Cuts and Jobs Act

Republicans passed a landmark tax reform bill, the Tax Cuts and Jobs Act (TCJA), via reconciliation in 2017. Because of the inherent limitations of reconciliation, many TCJA provisions are set to expire at the end of 2025. For a history of the TCJA and more detail on expiring provisions please visit 2024 election insights: Tax Cuts and Jobs Act and its impact.

Contents of a potential tax reform bill

Republicans are generally unified in their desire to extend the TCJA. There’s less consensus around whether Congressional Republicans intend to enact any of President Trump’s other campaign tax proposals including removing the SALT cap, excluding tips, overtime and social security from tax (though social security cannot be altered via a reconciliation bill), decreasing the corporate rate to 15% for domestic producers, as well as a number of other business and personal tax changes.

It’s worth noting that the House’s SALT caucus, a bipartisan group of over 30 policymakers advocating for relief from the SALT cap, has already stated they will not vote for a tax bill unless it includes SALT reform. With such a small majority in the House, there doesn’t seem to be a path forward for Speaker Johnson (R–LA) without the votes of the SALT caucus’s Republican members.

While it may appear Republicans are on a clear, simple path to passing another milestone tax reform bill they have a significant hurdle to clear – the cost. The nonpartisan Congressional Budget Office (CBO) has estimated the cost of a blanket extension to be $4.6 trillion over 10 years. A full repeal of the SALT cap would add another $1.2 trillion to the total (though we expect any SALT reform to fall shy of a full repeal). Once the remainder of President Trump’s campaign proposals are factored in, the result is a bill that would cost approximately $10 trillion.

It's unlikely Republicans will be able to build a consensus around deficit financing the full list of priorities, leaving everyone to speculate both what amount the party will agree upon and, subsequently, what priorities will fit into any ultimate bill. There are several methods the Republicans could use if they’re working with a a smaller budget: (1) include revenue raising provisions or decrease other spending measures, (2) limit what TCJA provisions are extended and/or what additional provisions are included, or (3) enact their agenda for a shorter time frame. The last option seems to be the current favored strategy with a potential period of three to five years being discussed. There is also speculation that Republicans could attempt a two bill strategy – one that enacts items with bipartisan support using the normal legislative process (one that will attract 60 votes in the Senate) and one partisan bill containing only Republican priorities passed using reconciliation, though it’s unclear how much support there is for this strategy on either side of the aisle.

Timing of a potential tax reform bill

Speaker Johnson has been bullish about Republicans maintaining the House and using reconciliation to enact tax reform. His publicly stated goal is to have the bill ready within the first 100 days of the new administration. This is commonly regarded as an ambitious goal, particularly considering the long list of other Republican priorities and the thin margins he’ll be working with, but not one that’s unachievable.

Potential new tariffs

President Trump has proposed broad and substantial tariffs that would significantly alter trade relations in an effort to encourage domestic production. Most of Trump’s tariff proposals are introduced in public speeches or on social media platforms and there aren’t accompanying policy proposals, so details are scarce. While we’re uncertain whether Trump intends to implement these broadly, more narrowly or is attempting to use them to develop a negotiating position in forthcoming trade talks, their mere suggestion has injected a substantial amount of uncertainty into the trading system.

Below are President Trump’s noteworthy tariff proposals to date:

*These proposals are tied to the import of illegal drugs and/or open boarders

^BRICS stands for Brazil, Russia, India, China, South Africa. It’s an organization of countries formed in 2009 to advance the interest of emerging economies. In recent years Iran, Egypt, Ethiopia and the United Arab Emirates have joined. The tariff proposal is tied to BRICS attempt to establish a new currency, which would reduce global dependence on the US dollar

The Constitution provides Congress with the power to impose tariffs; however, over the last century, Congress has ceded much of this authority to the executive branch. Should President Trump decide to enact new tariffs, he has several potential sources of legal authority to do so. Industry groups are already preparing legal challenges and lobbying Congress to attempt to limit the president’s power, but it’s unknown how willing the courts or Congress will be to restrict presidential authority over tariffs.

Taxpayers who may be affected by proposed tariffs should keep abreast of developments and consider potential mitigation techniques.

Potential rollback of Inflation Reduction Act

President Trump and several prominent Republican lawmakers have expressed a desire to unravel President Biden’s Inflation Reduction Act (IRA), a breakthrough climate legislation that provided clean energy incentives. This has left taxpayers taking or planning to take advantage of IRA benefits with legitimate cause for concern.

While we do expect Republicans will attempt to do so, it’s too soon to predict which programs will be affected and to what extent. It’s unlikely policymakers will completely dismantle the IRA as the majority of new clean energy investments have been in Republican congressional districts. In August, 18 members of the House Republican Conference wrote Speaker Johnson a letter urging him to “prioritize business and market certainty as you consider efforts to repeal or reform the Inflation Reduction Act.”

We encourage taxpayers who would be affected by changes to the IRA to stay up to date with our credits and incentives insights and reach out to our team with any questions.

Stay tuned!

We’re monitoring the progress of potential tax reform and will be bringing you relevant updates and insights as they develop.

Questions?

If you have questions, please reach out to your Baker Tilly tax advisor to discuss the impact of our tax policy updates.