It’s been a busy few weeks in Washington, D.C. On Capitol Hill, Republicans continued to strategize around a tax reform reconciliation bill. Meanwhile, in the White House, President Trump has issued nearly 50 executive orders, impacting a wide range of both domestic and foreign policy.
Status of tax reform
House Republicans met in Miami last week for their annual legislative retreat, the centerpiece of which was strategizing around reconciliation plans. Leadership left without establishing a concrete path for moving forward.
Overall, Republicans are united in their desire to use the reconciliation process to pass tax reform this year; however, there are several discrepancies within the conference that make negotiations challenging:
- Cost: The largest point of contention among Republicans is how much of the tax bill, if any, should be deficit-financed. Per the latest Congressional Budget Office (CBO) estimate, the cost to extend the Tax Cuts and Jobs Act (TCJA) for 10 years totals almost $5 trillion. Some members aren’t as concerned with the cost or adding to the national debt; however, others are hoping to pass a reconciliation bill that decreases federal deficits on a net basis. Recently, Rep. Andy Harris (R–MD), House Freedom Caucus (HFC) chair, stated that the HFC would like a budget resolution that calls for $3 trillion in deficit reduction over 10 years.
- Margins: As we discussed in our January Policy Pulse, Republicans are working with extremely tight margins, especially in the House. Republicans captured 220 of the 435 House seats in the November 2024 election; since then, two members have resigned and a third is about to step down, leaving Speaker Mike Johnson (R–LA) with a 217 – 215 majority until special elections are held to fill the three vacancies. This scenario gives each individual policymaker a great amount of influence over the legislative process. We’re currently seeing this dynamic at play with demands from the HFC for meaningful deficit reduction and the State and Local Tax (SALT) caucus for relief from the $10,000 individual SATL cap.
- Format: Congressional Republicans have yet to agree to a strategy for passing their tax reform agenda. Senate Republicans and HFC members continue to support a two-bill strategy, with an early reconciliation bill addressing the border, defense and energy and a later bill tackling tax reform. Speaker Johnson and House Ways and Means Chair Rep. Jason Smith (R–MO) prefer a single reconciliation bill and view the inclusion of border and other policies in the same bill as essential components to garner enough votes to ensure passage. Senate Majority Leader John Thune (R–SD) noted last week that the budget blueprint for his two-bill plan is “ready to go” and indicated that the Senate is waiting to see what the House does. He noted there is “a point at which we will decide to pull the trigger,” adding fuel to the notion that if the House doesn’t deliver on a single bill approach soon, the Senate will attempt to proceed with their preferred strategy. That point may be quickly approaching, as on Feb. 4, Senate Budget Committee Chair Lindsey Graham (R-SC) and Senate Finance Committee member Ron Johnson (R-WI) publicly expressed frustration over the House’s inability to coalesce around a path forward and made calls for the upper chamber to move on its own plans.
- Trump: President Trump added pressure at the retreat, reiterating his desire for a reduction of the corporate tax rate from 21% to 15% and the exclusion of tip income, overtime income and social security income from income tax. A single reconciliation bill that includes all of President Trump’s tax and border priorities could add upwards of $10 trillion to the deficit over a 10-year period.
- Revenue Raisers: On Jan. 17, Punchbowl News released a menu of potential policy provisions created by House Budget Committee chair, Jodey Arrington (R–TX). The list created significant consternation on K Street and prompted renewed lobbying efforts against some of the policy options listed. It’s important to note that there is no consensus within the Republican party on many of these proposals and some are extremely unlikely to be implemented; however, they do provide some insight into possibilities Republicans are considering.
There are reports of Speaker Johnson easing off his original goal of passing a reconciliation bill by April and now looking to May as a best-case scenario. We’ll continue to monitor and report on developments as Republicans work through internal disputes on their tax reform strategy.
New baseline
On Jan. 17, the CBO released a new 10 year budget projection, or baseline. The forecast estimates the United States will run a deficit of $1.865 trillion in FY25, which represents approximately 6% of the forecasted Gross Domestic Product (GDP). Over the 10-year period total deficit creation is estimated to be $21 trillion, with annual amounts ranging from a low of $1.7 trillion to a high of $2.6 trillion. The percentage of U.S. debt held by the public is projected to increase from 98% of GDP to a high of 119% of GDP. The estimates are based on current law (not current policy) so they assume the expiring TCJA provisions are not extended.
Tariffs
Uncertainty over U.S. trade policy ratcheted up this week as President Trump issued sweeping tariffs only to delay most of them hours before they took effect. On Feb. 1, 2025, Trump announced 25% tariffs on imports from Canada and Mexico and a 10% increase to tariffs on imports from China. On Feb. 3, less than a day before the tariffs were set to become effective, he announced a one-month delay for Canadian and Mexican imports.
President Trump declared a national emergency under the International Emergency Economic Powers Act (IEEPA), citing threats from immigration and drug trafficking, which allowed him to impose the new tariffs. This is the first time the IEEPA has been used to implement tariffs. There are sure to be legal challenges to Trump’s use of executive power but those will take time, and their likelihood of success is currently unknown.
While most of the new tariffs are currently on hold, significant uncertainty remains as to the fate of these and other proposed levies. The imposition of tariffs on foreign goods was a central theme of Trump’s campaign – for their ability to influence foreign policy, encourage domestic manufacturing and their revenue impact. We expect continued volatility while U.S. trade policy remains in flux.
Executive orders
President Trump began his new administration with a flurry of executive orders (EOs), reshaping numerous government priorities. While none of the orders had an immediate impact on tax policy, several may impact the tax landscape:
- America First Trade Policy: This order outlined Trump’s trade priorities. It orders various government agencies to investigate and report on U.S. trade policy, including unfair trade practices, trade relations with China and additional economic security measures. Reports, which could be used to justify the implementation or expansion of tariffs, are due in April.
- The OECD Global Tax Deal: This order announced the current administration will not abide by any commitments made by the prior administration in relation to the Organization for Economic Cooperation and Development’s (OECD) Global Tax Deal and that it has “no force or effect in the United States.” It also directs Treasury to investigate and provide options for protective measures to combat “any foreign countries are not in compliance with any tax treaty with the United States or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies.”
- Unleashing American Energy: This order directs federal agencies to pause disbursements of certain funds under the Inflation Reduction Act and Infrastructure Investment and Jobs Act and mandates. Read our tax alert for more details.
- Regulatory Freeze Pending Review: This order issued a regulatory freeze on all executive departments and agencies, barring them from proposing or issuing a rule until it is reviewed and approved, requiring any rules that have been sent to the Office of the Federal Register but not yet published be withdrawn, and postponing rules that have been published but not yet enacted for a period of 60 days.
- Hiring Freeze: This order freezes the hiring of federal civilian employees. It directs several government agencies to submit a plan for reducing the size of the federal government within 90 days, at which point the order will expire for all executive departments and agencies, with the exception of the IRS.
Internal Revenue Service
IRS Commissioner Danny Werfel stepped down on Jan. 20, 2025, after President Trump announced he intended to replace him with former Rep. Billy Long (R–MO). If Long is confirmed, he would serve out the remainder of Werfel’s term, which runs until Nov. 12, 2027. Long has met significant resistance from Democrats, who are concerned with his qualifications and his involvement in promoting the Employee Retention Credit.
Along with new leadership, we’re anticipating a shift in priorities within the agency to align with the new administration. President Trump’s regulatory freeze has blocked the IRS and other federal agencies from issuing new rules for 60 days, effectively blocking any action before more of Trump’s appointees are in seat.
In addition, the IRS may also see decreased funding, particularly in the enforcement area; since Democrats passed the Inflation Reduction Act (IRA) in 2022 which provided the IRS with an additional $79 billion in funding, Republicans have been attempting to claw that back. Only $58 billion of the original total remains and $20 billion of that is frozen under the current continuing resolution.
Finally, staffing at the IRS has come into question amid Trump’s return to office mandate, hiring freeze and “deferred resignation program” offer. Approximately half of IRS employees work remotely and 63% either are or will become eligible for retirement within six years (with 18% currently eligible). A significant decrease in staffing would certainly impact IRS functions, including tax practitioner and taxpayer interactions.
Beneficial ownership information reporting
On Thursday, Jan. 23, the Supreme Court issued a stay of a nationwide injunction which banned enforcement of the Corporate Transparency Act’s (CTA) beneficial ownership information (BOI) reporting. The Supreme Court ruling did not decide the case; the ruling only applies to the injunction while the case is appealed in the Fifth Circuit court. However, the Financial Crimes Enforcement Network (FinCEN) is still prohibited from enforcing the CTA as another federal court has also issued a nationwide injunction, which was not covered by the Supreme Court’s ruling. For the time being, submission of BOI reports is voluntary.
Visit and bookmark our new developments in beneficial ownership information reporting page to keep up with the latest information on the status of BOI requirements.
Questions?
If you have questions, please reach out to your Baker Tilly tax advisor to discuss the impact of our tax policy updates.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
