As power changes hands in Washington this month, we’ll be watching and reporting on developments regarding potential tax reform. Though many Republicans are united in their desire to extend the expiring provisions of the Tax Cuts and Jobs Act (TCJA), most of which only remain in place through Dec. 31, 2025, enacting legislation is liable to be a complicated task. Below we provide some recent developments and a look ahead at the 119th Congress.
Recent updates
Government funding
Congress narrowly averted a government shutdown by passing a continuing resolution (CR) on Dec. 20, 2024, mere hours before funding expired. It was a turbulent process with Speaker Johnson’s (R-LA) third attempt at a bill ultimately passing. The first version Johnson negotiated, a compromise with Democrats, was derailed by criticism from president-elect Trump. Johnson’s second attempt was a much simpler bill that included a debt ceiling suspension through Jan. 1, 2027, at Trump’s request. This attempt failed as 38 Republicans defected, citing concerns around fiscal responsibility. The third version, a “clean CR” that did not address the debt ceiling, passed with the help of Democrats, with 34 Republicans continuing to vote against the bill. The CR in place continues to fund the government through March 14, 2025, at fiscal year 2024 (FY24) levels and included $110 billion in disaster aid as well as a one-year farm bill extension.
The chaos surrounding this process highlights the difficulty Republican leaders will face as they attempt to balance the demands of a diverse conference. The House Speaker and his team will have to govern with a razor-thin margin in the 119th Congress, complicating the prospects for potential legislation, including tax reform.
The 119th Congress seated
The 119th Congress was seated at noon on Jan. 3. In the Senate, the new majority leader, Sen. John Thune (R–SD) gave an opening speech where he committed to defend the filibuster. The Senate’s filibuster rule effectively creates a 60-vote threshold for passing legislation, other than bills passed via reconciliation. Thune told Punchbowl this includes discouraging members from attempting to overrule the Senate parliamentarian on any unfavorable rulings on a reconciliation bill as “that’s totally akin to killing the filibuster.” For more information on the reconciliation process see the “Tax reform in a united government” section in our November Policy Pulse.
In the House, Speaker Mike Johnson (R–LA) narrowly won re-election, earning the votes of all but one Republican in the chamber. While Johnson technically won on the first ballot, it was in dramatic fashion as two Republican holdouts switched their votes at the last minute after personal intervention by Trump. Though Johnson holds the gavel, his speakership is somewhat tenuous. Shortly after the final vote, 11 conservative House members issued a letter expressing their reservations about his previous performance and demanding, among other things, that any reconciliation bill reduce spending and the deficit.
The 119th Congress: A look ahead
Balance of power in Congress
Republicans swept the 2024 election, maintaining control of the House of Representatives and recapturing the Senate and White House. Here’s a look at the makeup of the 119th Congress:
House
Republicans have a 220 – 215 seat majority in the 119th Congress, just a five-seat majority, which means the speaker can only lose two votes.
However, Republicans will be governing with an even narrower majority for several months. Rep. Matt Gaetz (R–FL) has already resigned his seat and Reps. Elise Stefanik (R–NY) and Mike Waltz (R–FL) are expected to resign early in the session to accept nominations for positions within President Trump’s administration. Republicans will spend several months with just a 217 – 215 majority; in this scenario, the Speaker can’t lose a single vote, as a tie vote is a loss and there is no option for a tie-breaker, as there is in the Senate.
Senate
Republicans have a 53 – 47 seat majority in the Senate and they also have the option of a tie-breaking vote from the Vice President of the United States, who also serves as the president of the Senate.
The 2025 calendar
Jan. 1: In accordance with the TCJA, bonus depreciation has phased down to 40% for 2025.
Jan. 2: The debt ceiling (also referred to as the debt limit), which is the maximum amount of money the U.S. Treasury can borrow, was reinstated; the limit was set to equal the amount of debt existing at the end of the day on Jan. 1. Unless Congress raises or suspends the limit, Treasury will not be able to borrow additional funds and will need to use extraordinary measures to prevent the U.S. from defaulting.
Jan. 3: The 119th Congress kicked off at noon, with both the House and Senate gaveled into session. Speaker Johnson was reelected on the first ballot, after a little excitement that resulted in two Republican holdouts changing their votes. New Senate majority leader Thune, in his opening speech, vowed to uphold the Senate filibuster.
Jan. 17: The Congressional Budget Office (CBO) will release The Budget and Economic Outlook: 2025 to 2035 which will include its 10-year budget and economic projections. The report presents a baseline which is used to score the impact that proposed legislation would have on federal revenue and spending. This year, the CBO’s forecast will be shorter to accommodate an earlier release date; over the following weeks additional information will be provided. The updated estimate for a 10-year extension of the TCJA (for 2026 through 2035) is likely to exceed the previous estimate of $4.6 trillion (for 2025 through 2034).
Jan. 20: Trump will be inaugurated as the 47th President at noon. Once Trump has taken office, he can formally submit nominees for his administration and the Senate can confirm them; though several key nominees may have pre-inaugural hearings, which speeds up the confirmation process, none can be confirmed before the president is in office. Additionally, Trump may choose to use his executive authority to implement tariffs. For more information on tariffs please see the “Potential new tariffs” section in our December Policy Pulse.
March 14: The last day government funding is authorized under the current CR. Congress must either pass all 12 appropriations bills (separately, in packages known as “minibuses,” or in one large package known as an “omnibus”) or another CR; without Congressional action on or before this date, the government will shut down on March 15.
April 1: Florida will hold special elections to replace Rep. Matt Gaetz (Florida 1st Congressional District) and Rep. Michael Waltz (Florida 6th Congressional District). Before these elections Republicans will hold a 217-215 majority. If they win both seats, which is likely, they will hold a 219-215 majority once the new members are sworn in.
Estimated in spring: New York will need to hold a special election to replace Rep. Elise Stefanik (New York 21st Congressional District). The date has yet to be set but New York requires the election to take place within 90 days of her departure. If Republicans win this seat, along with the two Florida special elections, they will hold a 220-215 majority.
April 30: The 100th day of Trump’s presidency. This date has taken on symbolic significance and is often used to measure a president’s early success. During the election cycle, Speaker Johnson stated he hoped to pass a tax reform bill by this date.
Estimated in summer: Experts estimate that the U.S. Treasury will be able to prevent default through the use of extraordinary measures, even if the debt ceiling isn’t raised or suspended, until sometime during the summer of 2025. The date the U.S. will no longer be able to meet its obligations, referred to as the “X-date,” is often a moving target, particularly when it’s several months out.
Sept. 30: This is the last day of fiscal year 2025 (FY25). This is the government funding deadline and the last day to pass a FY25 reconciliation bill. Without passing the 12 appropriations bills or a continuing resolution, the government will shut down. If Republicans can’t pass a reconciliation bill before this date, they’ll need to attempt to pass it in fiscal year 2026 (FY26).
Dec. 31: This is the last day many TCJA provisions are in effect. Absent Congressional action, numerous tax provisions affecting individuals, pass-through entities, trusts and estates will expire. For a more comprehensive look at what may change please see the “Tax Cuts and Jobs Act: Expiring provisions” section in our 2024 election insights.
Headwinds for tax reform
Despite having control of Washington, Republicans face several headwinds in crafting a tax reform bill, with the cost of extending the TCJA and the House’s razor thin margins creating a very delicate set of circumstances.
In 2024, the nonpartisan CBO estimated the cost of extending the TCJA for a 10-year period to be $4.6 trillion. This estimate is almost certain to rise when the CBO updates its baseline later this month as it will now cover the years 2026 through 2035 (rather than the previous estimate which covered 2025 through 2034, the first year of which most TCJA provisions were set to remain in place). While Republicans are generally unified in their desire to extend the TCJA, party members are not unified in how much deficit financing the bill should contain. Several members seem unconcerned with borrowing money to pay for the extended and additional tax cuts, citing the favorable economic impact of pro-growth policies. On the other end of the spectrum are Republican deficit hawks – members who believe that government spending should be paid for with government revenues, not additional borrowing. With Democrats all but guaranteed to vote against a partisan tax reform bill, Republican leaders will have to balance the desires of their diverse conference to get the legislation across the finish line.
As we discussed above, Speaker Johnson will likely be governing with a 220 – 215 margin for most of this Congress, which will only allow him to lose two votes on any given legislation. When a chamber of Congress has such tight margins, individual policymakers can wield a tremendous amount of influence. There are two caucuses that have commented on their positions early in hopes of setting the tone of potential tax reform efforts:
- The State and Local Tax (SALT) caucus: this bipartisan House caucus, which is primarily advocating to remove the SALT cap and restore the SALT deduction, has eight returning Republicans. Caucus member Rep. Mike Lawler (R–NY) has publicly stated he and some of his colleagues will not support a tax bill unless it lifts the SALT cap. Completely abolishing the SALT cap without any corresponding change to AMT, would cost an additional $1.2 trillion, putting additional pressure on the cost dynamics surrounding the potential tax reform bill.
- The House Freedom Caucus (HFC): this Republican House caucus is generally composed of hardlines conservatives whose general goal is to move the Republican party further to the right. The HFC is not afraid to block legislation in the House if it doesn’t align with their priorities. Generally, HFC members believe in fiscal responsibility and would like to see any reconciliation bill fully paid for by revenue-raising provisions and spending cuts. In recent weeks, Rep. Chip Roy (R–TX) has made waves as a vocal opponent of Speaker Johnson and led many Republicans to vote against the December CR.
Republicans will also need to determine which of the president-elect’s tax proposals they would like to include in the reconciliation bill. On the campaign trail, Trump suggested he’d like to reduce the corporate rate to 15% for domestic manufacturers, exclude tips, overtime and social security income from tax, and alter or create various other deductions and credits. Each of these items is likely to decrease federal revenues, which further exacerbates the challenges associated with the cost of a tax reform bill.
House and Senate leadership will need to determine how to score a tax bill, which measures the impact of tax reform on the economy. There are differing proposals related to:
- Determining the baseline: The baseline is a 10-year projection of federal revenue and spending, issued by the CBO. It provides a benchmark that can be used to measure the financial impact of potential legislation. Currently, the baseline is calculated using a current law. Since many of the TCJA provisions are set to expire at the end of 2025, those expirations are included in the current baseline projection. Senate Finance Committee leader Mike Crapo (R–ID) has been championing a current policy baseline (rather than a current law baseline), meaning he’d like the baseline calculation to assume current policy is continued. Using a current policy baseline would result in an extension of the TCJA appearing to have no impact on the federal budget. A change in scoring methodology would be significant, require both chambers to agree, and could be subject to review by the Senate parliamentarian.
- Dynamic versus static scoring: Dynamic scoring takes into consideration the macroeconomic impacts provisions have on the economy. Static (or conventional) scoring does not; rather, it assumes the economy remains constant. Republicans are generally proponents of dynamic scoring as many of their pro-growth policies will receive lower scores using dynamic scoring.
The final major question is one of where a tax bill falls on the priority list. There is a disagreement within the Republican party on whether they should use a one or two bill strategy:
- Two-bill approach: this would allow Republicans to achieve an early political win by passing a reconciliation bill focused on border security, defense and energy policy within the first couple months of Trump’s presidency. Under this strategy, a tax bill would follow later in the year. This plan was laid out by Senate majority leader Thune and is supported by some of his Senate colleagues and a number of HFC members.
- One-bill approach: this bill would include the bulk of Republican priorities. This strategy has been championed by Ways & Means Chairman Jason Smith (R–MO) and is supported by many House Republicans. After the government funding fiasco in December and with even slimmer margins in the House this session, a single bill may contain enough incentives to get the required 218 House members and 51 Senate members on board. Smith has also noted that it is rare that a Congress passes more than one reconciliation bill in a single session.
House Republicans met over the weekend at Fort McNair to strategize on plans for a reconciliation bill. There, Speaker Johnson announced Trump favors passing one large-scale reconciliation bill that would include the bulk of his priorities, including tax reform. President Trump publicly announced his support on a social media post over the weekend, while also reiterating his campaign pledge to eliminate tax on tips and increase tariffs. However, he softened his language on Monday admitting he prefers a single bill but will consider other options. Speaker Johnson has stated, for the time being, they are working under the assumption they will pursue the one-bill approach.
Ultimately, Republicans have a fine needle to thread. We’ll continue to bring you details and relevant insights on the progress of potential tax reform.
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.
Related sections
Article Tags
