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June 2024 Policy Pulse

June 6, 2024

Last month Congress passed the Federal Aviation Administration (FAA) reauthorization bill, effectively wrapping up all must-pass legislation through the summer. The next critical deadline lawmakers face is in late September, when government funding will need to be renewed.

With the FAA bill completed, hopes for the bipartisan tax bill are all but gone. Lawmakers’ priorities are shifting away from legislation and toward campaign politics as election season heats up; accordingly, we’re not expecting any significant tax legislation before the November general election. However, we are seeing increased focus on potential tax reform from policymakers and candidates as U.S. tax policy faces a major inflection point in 2025.

In this month’s edition of the Policy Pulse, we explore the Tax Cuts and Jobs Act’s (TCJA’s) expiring provisions and their impact on future tax policy, which are laying the groundwork for potential tax reform.

TCJA overview

The TCJA, which was signed into law in late 2017 and generally became effective as of 2018, implemented significant and pervasive tax reform. Key features of the bill include a reduction in the overall corporate tax rate, up to a 20% reduction in income for qualifying pass-through entities, reductions in individual tax brackets, a doubling of the estate tax exemption and various other changes to business and personal deductions.

Republicans were able to pass the TCJA without any assistance from Democrats using a process called reconciliation. Lawmakers typically use reconciliation when a single party controls the House of Representatives, the Senate and the White House. Reconciliation bills can be passed quickly and are not subject to the Senate’s filibuster rules, needing only a simple majority to pass the chamber. However, reconciliation bills have limitations, including disallowing provisions unrelated to revenues and spending and prohibiting an increase in the federal deficit beyond a certain period.

Because of the limitations on reconciliation bills, some of the tax provisions included in the TCJA were enacted on a temporary basis, mainly those affecting individuals, estates and pass-through entities. While several of the TCJA’s temporary provisions have already expired or begun phasing out, the bulk will sunset, or expire, on Dec. 31, 2025.

TCJA expiring provisions

The bipartisan tax bill addressed a trio of business tax provisions that have already changed or begun to phase out as a result of the TCJA, including:

• Expensing of domestic research and experimental expenditures (section 174) – change in treatment after Dec. 31, 2021
• Changes to the calculation of the business interest deduction limitation (section 163(j)) – change in treatment after Dec. 31, 2021
• Immediate expensing of qualified property, commonly referred to as “bonus depreciation” (section 168(k)) – began phasing out after Dec. 31, 2022, and will completely phase out after Dec. 31, 2026

As it’s highly unlikely Congress will address the bipartisan tax bill before the election, these provisions are likely to become part of the larger tax reform negotiation, along with the items scheduled to sunset in 2025.

Some of the more noteworthy provisions set to expire in 2025 include:

The cost of extension

In May, the Congressional Budget Office released a report estimating the cost to extend all expiring TCJA provisions would be $4.6 trillion over 10 years (from 2025 through 2034). The breakout of the cost is as follows:

The $4.6 trillion figure was an increase of $1.1 trillion over the previous year’s estimate. It’s important to note that 2025, a year in which many of the TCJA’s provisions remain in place, is included in the most recent estimate. The estimated cost for the ten years following the expiration of many of the TCJA’s provisions, 2026 through 2035, is certain to cost even more.

Impact on the national debt

The national debt is the amount of money the federal government has borrowed to cover budget shortfalls. The U.S.’s total debt has ballooned in recent years and is now approaching $35 trillion. For reference, the debt amount now measures over 120% of current U.S. Gross Domestic Product (GDP). The extension of all TCJA provisions without any new income offsets would add $4.6 trillion, or over 13%, to the U.S. debt level.

U.S. debt sustainability is a complex and tenuous political issue, currently exacerbated by the increased borrowing costs associated with high interest rates. Policymakers, even those within the same party or caucus, are divided on whether future tax reform should increase or decrease national debt levels.

Political platforms

Republicans, constrained by the inherent limitations in using the budget reconciliation process, had to make some of their tax policy priorities temporary to include them all in the TCJA. Many of the phase-outs and sunsets were never intended to take effect; Republicans hoped to make these provisions permanent in a subsequent legislation.

While much of our discussion above centers around the TCJA’s expiring provisions, it’s important to understand all tax policy could be on the table in upcoming negotiations, including the corporate tax rate. Below we provide a high-level overview of the party platforms.

Republican platform

Generally, Republicans have expressed a desire to extend the TCJA, making as many provisions permanent as possible. However, there are a few areas where Republicans diverge:

• Corporate tax rate – While most Republicans seem to be in favor of retaining the 21% corporate tax rate, some have called for further reductions in the rate. Meanwhile, others have expressed they would be open to a modest increase.
• State and local tax (SALT) deduction – The TCJA limited the SALT deduction to a maximum of $10,000 per taxpayer. This is generally supported by Republicans; however, representatives from higher income tax states like California, New York and New Jersey are advocating for increases to or a full repeal of the limitation.

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