As we’ve noted, the outcome of the 2024 election will have an extraordinary impact on the future of tax policy, including the unprecedented fiscal cliff the United States is facing in 2025. Below we discuss the results and what they mean for potential tax reform.
Election results
Several Congressional races remain unresolved, leaving the fate of the House up in the air:
Presidency – Former President Trump has captured the 270 electoral votes needed to win the presidency.
Senate – As expected, Senate control will flip to Republicans in the 119th Congress. Democrats lost seats in West Virginia, Montana, and Ohio. Results are still outstanding in the battleground states of Arizona, Pennsylvania and Michigan. Going into the 119th Congress, Republicans will hold a majority of at least 52-48
House of Representatives – Republicans have performed well in many key races, flipping several important seats. However, there are several races that are still too close to call; those will determine the balance of power in the House.
The future of tax reform hinges on the outcome of a few House races. If Republicans are able to retain control of the chamber, they will be able to use reconciliation to extend the Tax Cuts and Jobs Act (TCJA). If Democrats become the majority party, any tax reform will likely need to be a bipartisan effort.
The stakes for tax policy and the need for immediate tax reform
The imminent need for tax reform in 2025 is largely due to expiring TCJA provisions. The impact of a potential lapse would be significant and widespread, affecting almost all individual and business taxpayers. Sen. Mark Warner (D-VA) referred to the situation as “Tax Armageddon.”
Absent Congressional action:
Individual taxpayers will see a fundamental change in their tax regime, resulting in meaningful increases in tax liabilities for the majority of taxpayers.
Businesses will continue to grapple with the trio of recently altered TCJA provisions that were addressed in
Potential solutions to the impending cliff are limited by the prohibitive cost of extending TCJA policies. The nonpartisan Congressional Budget Office estimates a blanket TCJA extension would cost $4.6 trillion over 10 years; a figure that’s more than three times the initial estimated cost of the TCJA when it was enacted.
Some Republicans, who are largely in favor of extending the TCJA, argue a continuation of current tax policy does not need to be “paid for” by tax increases or decreases in spending. Other Republicans and nearly all Democrats disagree, citing swift and concerning increases in annual deficits, which increase the national debt, over the last several years.
In fiscal year 2024 (FY24) the United States government brought in $4.92 trillion in revenue but spent $6.75 trillion, resulting in a $1.83 trillion deficit. Each year the government runs a deficit, it must borrow funds, which increases the national debt. In FY24, the United States spent over $1 trillion on gross interest to service the national debt, a record high.
Given numerous Republicans’ reluctance to the deficit-financing of a substantial tax reform bill and the slim margins the majority will hold in the 119th Congress, we expect any tax reform bill will be at least partially “paid for.” However, it is worth noting there are unanswered questions on the extent to which a president can unilaterally impose tariffs without Congressional oversight. As tariffs were a prominent part of Trump’s tax policy campaign, whether he attempts to change the current regime and how much revenue such an action may generate, is currently unknown.
Tax reform possibilities
Tax reform in a unified government
If Republicans capture the House, we will have a unified government – when one party controls the White House and both chambers of Congress. When this occurs, the controlling party can use budget reconciliation to pass a tax bill. Reconciliation bills can be passed quickly, as they are not subject to Senate filibuster rules. The last two major tax-only bills were passed using reconciliation - Republicans passed the TCJA in 2017, and Democrats passed the Inflation Reduction Act (IRA) in 2022.
Reconciliation bills are subject to significant restrictions, including:
Only allow provisions related to revenue and spending, nothing with “merely incidental” budgetary effects can be included
Can only increase or decrease the federal deficit by the amount specified in the budget reconciliation instructions
Can’t increase the federal deficit outside the budget window
Can’t make changes to social security
Passing legislation via reconciliation, when only the votes of a single party are needed, may seem simple; however, finding consensus among party members can prove difficult. When a party has slim majorities, each individual policymaker has a considerable amount of influence. Republicans will need to craft a deal that almost the entire party will support, as Democrats are extremely unlikely to support a reconciliation tax bill under these circumstances. That may be a challenge as there are policies where Republicans are not aligned; one such issue is the state and local tax (SALT) cap. Assuming a slim margin in the House, Republicans from high-tax states are likely to leverage their support for a bill in exchange for its inclusion of a modification to the SALT cap, which would be an expensive policy change.
Republicans have not been shy about their desire to pass a TCJA extension using reconciliation; for months they’ve been strategizing on the potential contents of a tax reform bill. While there isn’t a framework or legislative text, Republicans are generally aligned on a tax policy platform. To learn more visit 2024 election insights: Comparing tax policy platforms. Republican leadership is hoping to move quickly, setting the ambitious goal of passing tax reform in the first 100 days of Trump’s presidency.
Tax reform in a divided government
If Democrats gain control in the House, we will have a divided government – when one party controls the White House and a different party controls at least one chamber of Congress. Under these circumstances, passing legislation must be a bipartisan effort.
Democrats and Republicans will need to work together to craft a solution to the looming fiscal cliff. However, finding consensus among the parties may be a daunting task for policymakers, as bipartisan tax legislation has been uncommon in recent years. The last two major tax-only bills (disregarding pandemic-relief legislation and a combined pandemic-relief and omnibus spending bill; both were passed by a divided government in 2020, and both of which included major tax provisions) were passed during unified governments, when one party controlled the White House and both chambers of Congress; the TCJA was passed in 2017 by Republicans and the Inflation Reduction Act (IRA) was passed in 2022 by Democrats.
The 118th Congress hasn’t provided much in the way of muscle memory for bipartisan tax agreements to build upon. The current divided government has been plagued by partisanship, resulting in one of the least productive sessions in modern history. An early 2024 tax compromise that sailed through the House of Representatives with overwhelming bipartisan support, couldn’t get past a procedural vote in the Senate.
There are sharp contrasts between Democratic and Republican approaches to tax policy, as well as variances in priorities and principles within each party. However, there is general agreement on the largest portion of the largest expiring provision – ensure there is no increase in income tax for individuals making under $400,000 (and married individuals filing jointly making under $450,000). For additional details on party priorities visit 2024 election insights: Comparing tax policy platforms.
Policymakers are likely to face challenging negotiations on what many will consider the biggest “must pass” bill of 2025. While the shape and duration of any potential tax reform is still unknown, if we have a divided government, we will be able to eliminate some of the more partisan proposals originating on both sides of the aisle. It’s possible we could see a substantial and permanent bipartisan tax bill; however, it’s more likely Congress will find consensus around shorter-term compromise that will run through the midterms or next presidential election cycle. Still, while the ramifications of a TCJA expiration should force legislative action, taxpayers should also prepare for the possibility Congress will be gridlocked, unable pass any tax reform bill before the expirations take effect.
The power to tax
It's important to note that Congress, not the president, has the power to tax. Once Congress drafts and passes a bill, it goes to the president for their signature or veto. Congress is not obligated to consider or enact any presidential campaign platforms or any provisions from the president’s annual budget.
This is especially important to note in light of the numerous tax proposals President Trump discussed on the campaign trail. As noted above, the TCJA expirations alone are projected to cost almost $5 trillion. Enacting other Trump-supported provisions such as exempting tips, social security, overtime pay and military and first responder pay from income tax, eliminating the SALT cap, making car loan interest deductible, providing new credits and reducing the corporate income tax rate would create an even more significant deficit. It’s unlikely Congress will be able to incorporate many of these ideas into a tax reform bill without additional offsets or “pay for.” However, Ways & Means Chair Jason Smith (R-MO) told Punchbowl News that he believes Republicans will “be able to deliver on the overall themes of what [President Trump] is asking for” though he noted “the devil is in the details.”
The next two months
Congress will return next week, on Nov. 12, for the “lame duck” session, where they face several major deadlines. In the 20 days both chambers are scheduled to be in session (with an additional four for the House) policymakers must address:
Government funding – in September, Congress passed a continuing resolution that funded the government at FY24 levels through Dec. 20, 2024. Congress will need to pass all 12 appropriations bills (potentially combing them into omnibus or minibus measures) or another continuing resolution to avoid a government shutdown.
The National Defense Authorization Act – this annual defense funding bill, is considered a “must pass” legislation. The Senate and House have both advanced their own versions of the NDAA and now must reconcile them.
Farm bill – while the farm bill, which sets agriculture policy, technically expired on Sept. 30, 2024, most benefits are funded through the end of the calendar year. Though the bill is typically renewed in five-year increments, Congress could choose to authorize a shorter-term extension.
Debt ceiling – the Fiscal Responsibility Act of 2023 suspended the federal debt ceiling through Jan. 1, 2025. On Jan. 2, 2025, the debt ceiling will be reinstated and, absent Congressional action, the government won’t be authorized to borrow any additional funds to meet its existing obligations. The Treasury department may take “extraordinary measures” to avoid a government shutdown, but those measures only provide temporary relief.
Disaster relief – there are growing calls to provide the Federal Emergency Management Agency (FEMA) with additional funding in the wake of hurricanes Milton and Helene.
Regardless of the outcome in the House, we don’t see significant prospects for passing or negotiating changes to the 2024 bipartisan tax compromise during the lame duck session. If Republicans claim the House, they will get to work developing a more detailed plan for the passage of a tax reconciliation bill. We expect the Republican supported priorities in this bill will be incorporated into their broader tax reform efforts. If the Democrats claim the House, it’s unlikely there will be significant progress in the immediate aftermath of the election. We expect any tax reform would be pushed to 2025.
Stay tuned
The impending fiscal cliff is creating instability in tax policy, hindering taxpayers’ ability to make long-term decisions. Understanding the tax policy landscape, including major factors influencing policymakers’ decisions and tracking developments, is critical to navigating this uncertainty and planning for potential changes.
Over the coming weeks and months, we’ll bring you additional news and insights on tax policy, focusing on what they may mean for both individual and business taxpayers.
Questions?
If you have questions, please reach out to your Baker Tilly 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.
