Reconciling Reconciliation

On Feb. 7, the Senate Budget Committee released a budget resolution bill under reconciliation procedures addressing border security, defense, and energy, which leaves tax, including provisions of the TCJA scheduled to expire at the end of 2025 and other presidential tax agenda items, for a second reconciliation bill later in the year.

Meanwhile, the House released a budget resolution on Feb. 12, which includes a single reconciliation bill to address all Republican legislative agenda items, including border security, defense, the deficit, and tax. The House was supposed to release its budget resolution the week of Feb. 3, but the process was delayed because some House members want to see more spending cuts and deficit reduction.

Crowe observation

The two-bill approach in the Senate and single-bill approach in the House are indicative of how difficult it could be to garner consensus in the GOP around tax legislation.

Tax issues in the mix

When enacted, the TCJA cost $1.5 trillion over 10 years. Numerous TCJA provisions, mostly affecting individuals, are scheduled to expire at the end of 2025, which would affect the following changes:

• Marginal tax rates will revert to the higher pre-TCJA rates.
• The standard deduction will revert to the lower pre-TCJA amounts, adjusted for inflation.
• The personal exemption will be reinstated to its pre-TCJA amount, adjusted for inflation.
• The child tax credit and the threshold for eligibility will revert to lower pre-TCJA levels.
• Rules for itemized deductions generally will revert to pre-TCJA rules, including elimination of the $10,000 cap on the deduction for state and local taxes (SALT).
• The individual alternative minimum tax exemption and phase-out will revert to the lower pre-TCJA levels, adjusted for inflation.
• The estate and gift tax exemption will revert to the lower pre-TCJA amount, adjusted for inflation.
• The Section 199A pass-through deduction will expire.

In 2024, it was estimated that extending all expiring TCJA provisions will cost $4.6 trillion over 10 years. While the price tag of extending all expiring provisions is high, simply letting the provisions expire would result in significant tax increases for individuals across the board.

The president has said that he wants to extend expiring TCJA provisions, eliminate the SALT cap, lower the corporate tax rate from 21% to 15%, and eliminate taxes on tip income. Other provisions that are going to be part of the discussion include rolling back amortization and capitalization of the research and experimental deduction under Section 174, narrowing the Section 163(j) business interest limitation, bringing back 100% bonus depreciation, and repealing the stock basis buy-back tax and the corporate alternative minimum tax. Enacting these provisions would further increase the cost of the tax bill.

To offset the cost of the tax bill, the president has put forth the following tax proposals:

• Clawing back the remaining multiyear funding the IRS received under the Inflation Reduction Act (IRA)
• Repealing the clean energy incentives under the IRA
• Eliminating the preference for carried interests and sports team owners
• Increasing tariffs

Other ways to reduce the cost of a tax bill include changing the rules for how cost is figured, basing cost on current policy rather than current law, which could reduce to zero the cost of extending expiring provisions, and including the positive effect of legislation that promotes economic growth to offset the cost of the provisions.

Looking ahead

Republicans in Congress lack consensus on how to move forward with their legislative agenda for 2025. Regarding tax specifically, there is a lack of consensus regarding whether tax should be addressed in a single reconciliation bill or a second, later reconciliation bill. There is also a lack of consensus regarding which issues should be addressed in a tax bill and how much a tax bill should cost. For instance, there is not agreement regarding whether the SALT cap should be extended, and some Republicans focused on reducing the deficit have expressed concerns regarding the potential cost of tax reform and the budgeting mechanism that has been suggested to reduce these costs. What steps the U.S. will take on tariffs and the Organization for Economic Cooperation and Development’s Pillar 2 framework are also unclear.

In its first few weeks, the administration has issued numerous orders and taken action to carry out its broad agenda. The overall disruption in Washington only adds to the uncertainty around the future of tax policy. It is still unclear how these actions will be resolved and what effect they will have on the U.S. Department of the Treasury, the IRS, and tax policy. Businesses and individuals should consult with their tax advisers to keep abreast of the latest developments and evaluate how possible changes could affect them.