Setting the Stage
Looking ahead to 2025, all eyes are on the sunsetting Tax Cuts and Jobs Act of 2017 (“TCJA”). As written, much of this extensive tax reform bill is set to expire at the end of 2025, unless Congress can extend the provisions or make them permanent. The portions set to return to their previous levels include cuts to individual tax rates, expansions of various deductions and credits, and the significant increase in the federal estate tax exemption.
President-elect Trump campaigned on making all the changes permanent, along with additional tax reductions, such as further decreases to the corporate tax rate and new exemptions for tipped wages and Social Security income. Republican victories in the White House and both chambers of Congress suggest that the president-elect’s campaign promises may come to pass. However, their implementation is not as straightforward as it may seem.
Procedural Limitations
53 Senate seats give the Republicans a majority, but not enough to avoid a filibuster. As such, it is likely that major legislation will have to be pushed through the budget reconciliation process, only requires a simple majority in both the House and Senate. This is a common workaround – the TCJA and 2022’s Inflation Reduction Act were passed in this manner – but the process imposes a few limitations.
Notably, budget reconciliation bills cannot increase deficits after 10 years (this rule explains why the TCJA included sunset provisions) and are specifically prohibited from addressing changes to Social Security. As such, any tax-related provisions added to a reconciliation bill would have to be temporary extensions or paired with significant offsetting tax increases or spending reductions. According to the Congressional Budget Office, a 10-year extension would add $4.6 trillion to the deficit – a fiscal price too high for some legislators.
Competing Priorities in the House
The tight margins within the House may require more bipartisan and in-party negotiations than the Republicans are willing to tolerate. Some proposed cost-cutting targets that may be easier to navigate politically, such as reversing the Inflation Reduction Act’s climate-friendly tax subsidies and additional IRS funding. However, representatives in certain districts may be wary of the political risks associated with other proposed spending reductions that focus on social programs, such as Medicare or the Affordable Care Act, as approximately 70 million Americans rely on these programs. Elsewhere in the House, a group of Republicans from New York, New Jersey, and California have announced they will not support any tax legislation that fails to remove the $10,000 SALT (state and local taxes) deduction cap – a deficit accretive measure.
What We are Watching For
Despite the procedural and budget hurdles, the 119th Congress will prioritize putting a tax bill on the president’s desk before the TCJA expires at the end of 2025. As with everything in the Tax Code, the devil is in the details.
Howland Capital is tracking proposals of particular interest to our clients, including the treatment of certain individual and business deductions, namely the SALT deduction cap and depreciation restrictions.
One key item a tax bill would address is the federal estate tax exemption. The exemption was doubled by the TCJA but will revert to pre-2018 levels (i.e., $5.49 million, adjusted for inflation, which would amount to approximately $7 million) in lieu of congressional action. While many expect the exemption to ultimately remain at its current level, preparing for a potential reversion to the lower amount involves additional estate planning conversations, including the timing and amounts of gifts. As such, we continue to encourage clients who may be adversely affected by a decrease in this exemption to discuss mitigation strategies and options with our team.
