It remains busy in Washington, D.C. as Republicans continue laying the groundwork for legislation to enact tax reform and other components of the president’s agenda. Meanwhile, a critical deadline to keep the government funded looms, as Congress must act by March 14 to avoid a shut down.
Status of tax reform
Competing budget resolutions
Over the past two weeks, the Senate and House of Representatives passed separate, differing budget resolutions. On Feb. 25, the House advanced a budget by a 217-215 vote that would incorporate the bulk of the president’s priorities, including tax reform, into a single budget reconciliation legislation. Passage was very much in doubt earlier the same day, as four Republicans indicated to Speaker Mike Johnson (R-LA) an unwillingness to vote in favor of the measure. Ultimately, party leadership was able to convince three of the four holdouts to vote “yea,” with Rep. Thomas Massie (R-KY) being the only Republican to join all Democrats in voting against the resolution. However, this underscores the critical issue the GOP faces in its incredibly narrow margins, as discussed in our January and February Policy Pulses.
The budget resolution notably authorizes the House Ways and Means Committee to increase the federal deficit by $4.5 trillion over a 10-year period, seemingly paving the way for extending the Tax Cuts and Jobs Act (TCJA). However, a $4.5 trillion allowance would be insufficient to address the near $5 trillion cost of extending the TCJA for 10 years as most recently estimated by the Congressional Budget Office. Further, as reported in our February Policy Pulse, President Trump has held fast to additional tax policy promises he made on the campaign trail, including a reduction of the corporate tax rate and the exempting of tip, overtime and social security income from income tax. He again rallied for the exemptions from the aforementioned items from income tax during his address to Congress on March 4. Indeed, additionally enacting these provisions would come at a cost that the House’s budget does not accommodate.
The resolution calls for mandatory spending cuts of $1.5 trillion, with the Energy and Commerce Committee, which covers Medicaid, being called on to account for $880 billion of those savings. While the resolution does not specifically name Medicaid, it still has created consternation amongst the party as making cuts to Medicaid would be a politically contentious move; however, achieving the aforementioned required savings will prove difficult absent such measures. The savings instructions include an unconventional measure whereby to the extent actual spending cuts exceed $2 trillion, the excess will be added to the $4.5 trillion spending allowance allotted to the Ways and Means Committee; the amount by which the overall cuts fall short of $2 trillion in savings would be subtracted from the $4.5 trillion figure.
The House’s budget significantly deviates from the Senate’s, which it passed on Feb. 21, reflecting a two-bill strategy that would first address defense, energy and border security initiatives, leaving tax to be addressed in a separate legislative package. This was not altogether unexpected as leadership from the respective chambers have advocated for the one- and two-bill tracks since the aftermath of the 2024 election. The House’s strategy is rooted in wanting to avoid exposing their narrow margins to votes on two separate bills, whereas the Senate has aimed for a quick win on the president’s priorities that are less controversial within the party and to leave more time to navigate the challenges of tax reform.
Path forward
Before any budget reconciliation legislation can be drafted, let alone pass, the House and Senate must agree on a one- or two-bill strategy, which will be a difficult task given the chambers’ competing priorities and narrow margins. After the House passed its budget resolution, a number of Republican senators, including Majority Leader John Thune (R-SD), indicated that changes would be required for it to pass the upper chamber. Principally, the Senate is advocating for making the TCJA provisions permanent, which would generally require that any ultimate bill is scored using a “current policy” baseline, a highly unconventional methodology.
The House’s budget calls for use of the generally standard “current law” baseline, which accounts for provisions set to expire by statute, and associates a cost with extending them. The “current policy” baseline however presumes expiring provisions will be extended in accordance with current policy, therefore they have no associated cost in terms of how a bill is scored. How this accommodates the marriage of tax reform, and a budget reconciliation bill is critical – as we have previously discussed, under Senate rules, reconciliation bills cannot increase the federal deficit either by more than the amount allowed under the budget instructions, or beyond the budget window. Since a current law baseline would associate a cost with extending expiring provisions, practically speaking, making the TCJA permanent would run afoul of both rules. While use of a current policy baseline conceivably could circumvent these prohibitions, the Senate parliamentarian must approve of this approach, over which some Republican House members, namely Ways and Means Chairman Jason Smith (R-MO), have expressed doubt over said approval. It is also uncertain whether deficit hawks within the Republican party would go along with this strategy – with House members Chip Roy (R-TX) and David Schweikert (R-AZ) recently expressing strong objections to its employment.
Timing
Senate Majority Leader Thune earlier this week indicated he doesn’t intend to bring the House’s budget bill up for a vote before the Senate’s recess that is currently scheduled to begin after March 14. This would mean that the earliest a vote would be scheduled under current timelines is March 24, when senators return to the capitol. The House is expected to begin drafting of the actual reconciliation bill on March 10 and 12. However, this assumes a government funding deal is timely reached by March 14 (discussion below), which is far from assured. House Speaker Mike Johnson most recently had privately targeted May as a best-case scenario for tax reform if a one-bill track is ultimately agreed to, however, that goal given the outstanding issues may be ambitious. That said, Chairman Smith doubled down on this timing, stating, “Our plan in the House has always been put it on the president’s desk by Memorial Day.” If a two-bill track is pursued, budget rules would prohibit tax reform from passing until the next governmental fiscal year (begins Oct. 1, 2025), as only one budget reconciliation bill that addresses spending, revenue and the federal debt limit can be passed each fiscal year, and the first legislation encompassing defense, energy and border security would include spending provisions.
Even if a budget resolution is agreed to in the near term, we would expect negotiations and drafting of a major tax bill may take months before enactment based on previous history. Challenges will include changes to the state and local tax (SALT) deduction cap (which as we have previously reported in this space, the bipartisan SALT caucus has demanded in exchange for their votes), whether to allow immediate deductions for research and experimental expenditures, as well as how to define tip income for possible exclusion from taxation. The cost of a full repeal of the SALT cap alone is projected at $1.2 trillion over the next 10 years.
Government funding
The continuing resolution currently in place funds the government through March 14, meaning Congress must pass another continuing resolution or pass all 12 appropriations bills, to avoid a government shutdown on March 15. In all likelihood, time only allows for the former route, but it is important to note that government funding legislation will require 60 votes to pass in the Senate, meaning a bipartisan agreement will be required. Democratic support is also likely to be needed in the House due to the very slim majority the Republicans hold and expectation that not all Republican lawmakers will support the continuing resolution. The sides have long appeared far apart as there is disagreement over whether funding legislation should address the debt limit and include provisions to prevent further cuts by the Department of Government Efficiency (DOGE) of previously appropriated funds to government programs.
Tariffs
As discussed in our February Policy Pulse, on Feb. 1 the president issued 25% tariffs on Canadian and Mexican imports, and a 10% increase on existing tariffs on Chinese imports. Days later, he delayed the Canadian and Mexican tariffs by a month; these tariffs are now in effect as of March 4, with the tariffs on Chinese goods being doubled to 20%. China and Canada retaliated immediately, with the former issuing levies of 10-15% on various U.S. imports and subjecting more U.S. entities to export controls; the latter levying 25% tariffs on $155 billion of American goods, with the duties on $30 billion of goods being imposed immediately, the remaining $125 billion over the coming 21 days if the U.S. tariffs remain in effect. Mexico intends to announce its response on March 9. Commerce Secretary Howard Lutnick did say the president will “probably” announce a compromise with Canada and Mexico, which could scale back his new 25% tariffs on top U.S trading partners. On March 5, the president granted a one-month reprieve to U.S. automakers from the tariffs on Canadian and Mexican imports. It is critical to note this situation remains very much in flux.
This indeed represents a fluid situation that has created significant market volatility. From a tax lens, taxpayers should be aware that tariffs may impact their computation of costs required to be capitalized to inventory under Internal Revenue Code section 263A and consult their tax advisors.
IRS
Turnover remains a significant issue at the IRS, between the abrupt retirement of acting Commissioner Douglas O’Donnell, and thousands of employees being fired in connection with DOGE’s government-shrinking initiatives. It is also estimated by the National Treasury Employees Union that between four to five thousand IRS employees accepted the Office of Personnel Management’s buy-out offer (though employees who took the offer but are deemed critical to the tax filing season are required to work until May 15. Further, various outlets, citing unnamed sources, have reported that the IRS intends to reduce its workforce by half by year-end.
Melanie Krause takes over in the interim for O’Donnell as Trump nominee Billy Long has yet to be confirmed by the Senate to his position of commissioner. It certainly stands to reason this turmoil will adversely impact the current tax filing season, though the extent to which remains to be seen.
Beneficial Ownership Information reporting
On March 2, the Treasury Department announced the suspension of enforcement of the Corporate Transparency Act (CTA) against U.S. citizens and domestic reporting companies. The CTA was part of the Anti-Money Laundering Act of 2020. Treasury further advised it would issue a proposed rulemaking that would limit Beneficial Ownership Information (BOI) reporting requirements to “foreign reporting companies only.” Such a rule may be difficult to develop within the scope of the legislation that was target money laundering by foreign criminals using domestic companies. Taxpayers should take a wait and see approach as to how these rules and exceptions continue to evolve.
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.
