Members of Congress and 2024 presidential candidates are already working to prepare for a historic 2025 fiscal cliff that will feature a massive battle over taxes.
Whether President Joe Biden wins reelection in 2024 or loses to the eventual Republican nominee, the White House occupant will be immediately tested by a number of expiring tax provisions in 2025, along with this year’s debt limit deal ending at the start of 2025. The confluence of political and fiscal circumstances will afford the party with the upper hand a huge opportunity to shape tax policy for years to come — adding further pressure to what will undoubtedly be a hard-fought election.
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At the center of the fiscal cliff are expiring tax provisions within the 2017 Tax Cuts and Jobs Act, more commonly referred to as the “Trump tax cuts” or “Republican tax cuts.” If Republicans overperform in 2024, holding the White House and both chambers of Congress, they could rewrite and expand those tax breaks. If Democrats amass majorities in Congress, though, they could achieve such wish-list changes as more taxes on the wealthy and a higher corporate tax rate.
Doug Holtz-Eakin, the director of the conservative think tank American Action Forum and the former director of the Congressional Budget Office, told the Washington Examiner that this fiscal cliff has major implications for several reasons. He said that making all the provisions in the 2017 tax bill permanent is a $3 trillion proposition.
“I think from the perspective of the budget and the economy, it’s just a very big deal,” Holtz-Eakin said.
The numbers involved in extending the 2017 tax cuts are quite large. If the provisions are extended in 2025, doing so would add more than $2.5 trillion to the deficit through 2032, according to the Penn Wharton Budget Model, which uses data sourced from the Congressional Budget Office. Most of the budgetary effects will come from extending, or letting expire, individual income tax provisions enacted as part of the TCJA — with about $2 trillion up for debate.
Among the provisions that will sunset are lower individual income tax rates and the ability for pass-through businesses to take a 20% deduction. Pass-through businesses, which are not subject to the corporate income tax, are the most common type of business and include sole proprietorships, partnerships, and S corporations, meaning most small businesses.
The 2017 tax law also doubled the estate, or death, tax exemption. That allowed people to keep more of their inheritance before being hit by federal taxes. Extending the increased threshold would cost about $100 billion through 2032.
Additionally, the $10,000 cap on deductions for state and local taxes paid is among the swath of policies set to expire. The cap was introduced as a pay-for by Republicans, as the deductions largely benefit wealthy people in high-tax states. Several Democratic lawmakers have made raising or repealing the ceiling a top priority.
While Republicans will undoubtedly fight to preserve the tax cuts that were part of the landmark 2017 legislation — if the party ends up winning the White House, keeping the House, and winning back the Senate — bigger changes could be on the horizon. To push changes through beyond the filibuster, the GOP would have to win a 60-vote majority in the Senate. Because a filibuster-proof majority is highly unlikely, the GOP would plan to use the budgetary process known as reconciliation, which allows for the passage of tax and spending-related provisions with only a simple majority in the Senate.
Since entering the majority in January, Republicans have passed or proposed several pieces of legislation that could be harbingers for a 2025 reconciliation bill. Most recently, the House Ways and Means Committee approved the Tax Cuts for Working Families Act, which would provide new tax breaks for individuals and businesses.
The bill would increase the standard deduction by $4,000 for married couples and $2,000 for single filers between 2024 and 2025. Currently, the standard deduction is $27,700 for married couples and $13,850 for single filers. The standard deduction is the part of a taxpayer’s income not subject to taxes. The standard deduction can be claimed if taxpayers choose not to itemize their deductions.
Additionally, the GOP wants to raise the threshold for business owners filing 1099 forms. The IRS requires that a form be filled out if a business pays a nonemployee a minimum of $600 during a taxable year for business purposes. A recent Republican proposal would raise the threshold from $600 to $5,000 to reflect the cost-of-living increases since the reporting rule was enacted decades ago.
Republicans have also worked to gut the Biden administration’s massive infusion of funding for the IRS, which was passed last year. Clawing back that funding could be another agenda item for reconciliation should the GOP win in 2024.
Gov. Ron DeSantis (R-FL), a leading contender for the GOP presidential nomination, said his team is already plotting a big reconciliation bill for 2025. During a radio appearance on the Hugh Hewitt Show, the Florida governor said he would use the moment to claw back Biden-era economic changes, as well as use the cliff to push through conservative economic priorities.
DeSantis said the theoretical reconciliation bill he would spearhead would be expansive. “We are going to repeal Biden’s disastrous economic policies, his Green New Deal. And we’re going to have things that are going to help jump-start this economy, things like full expensing so that we have more ability to produce manufacturing,” said DeSantis, a House member from coastal north Florida for nearly six years before being elected governor. “But we are going to have a huge package for reconciliation. It’s going to cover a lot of different things.”
What DeSantis was referring to with full expensing is allowing businesses to deduct immediately the cost of investments from their taxable income rather than over the course of years according to complicated depreciation schedules. Many economists said such policies boost investment and growth, and the Trump tax cuts implemented it on a temporary basis. Republicans are pushing to make full expensing permanent.
One thing some lawmakers are also doing is making sure as many things as possible line up to expire in 2025, according to Holtz-Eakin. That is because more and varied priorities can be lumped together in one big package.
Meanwhile, Democrats are salivating at the opportunity to dial back the 2017 tax cuts. Chuck Marr, vice president for federal tax policy at the left-leaning Center on Budget and Policy Priorities, told the Washington Examiner that Democrats see this window as a way to revert the Trump tax cuts and perhaps even more — depending upon electoral success in 2024. “It’s big. It’s one of these once-in-a-decade tax debates,” Marr said. “From our perspective, it’s a chance for a course correction.”
Marr said Democrats are eyeing several different things. Principally, they want to block the extension of the higher-income tax cuts stemming from the 2017 overhaul — the top rate, the pass-through deduction, the weakened estate tax, etc. He also said there should be a revisiting of the corporate tax changes.
The corporate tax rate sat at 35% from 1993 until it was lowered to 21% in 2017 as part of the Republican TCJA. Biden had tried unsuccessfully to raise the corporate tax rate from 21% to 28%, which would undoubtedly be revisited should he and Democrats prevail in 2024.
“For the Democrats, and for a lot of Republicans outside of Washington in the public generally, that’s not really the most important thing to do,” Marr said of cutting the corporate tax rate. Marr said one of the biggest flaws in the tax code is that some of the wealthiest people in the United States are able to sidestep paying annual income taxes. He said that might be another area in the tax code Democrats will home in on.
Jason Roe, a veteran Republican consultant, told the Washington Examiner that he thinks the ability to go even beyond keeping the 2017 tax cuts in place and possibly lower taxes, even more, could be a big talking point for the GOP heading into the 2024 elections. “I think it could be a central theme of the campaign for Republicans this cycle,” Roe said.
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“It gives Republicans a huge advantage to say, ‘We’re going to continue to protect taxpayers because there is no way the Democrats are going to go along with it,’ and so I think it creates a real wedge that will be beneficial to Republicans,” Roe said.
