A tax tussle is brewing and policymakers are engaged in war sessions ahead of next year's $4.6 trillion fiscal cliff.
Lately, much of the focus has been on the tax proposals of the presidential candidates, who are aiming to win votes in November. Congressional lawmakers certainly take cues from their party leaders, but presidents don't write tax laws. Tax committee leaders will be the boots on the ground negotiating, directing and drafting legislation to address the 2025 tax cliff.
(Of course, Congress could choose to do nothing and risk being blamed for raising taxes on every American taxpayer. Color us skeptical that this scenario will play out.)
Each of the four chairmen of the tax-writing committee has provided input on their priorities for the coming year. How empowered or sidelined each is will be decided at the ballot box. With every election result on the table, understanding each leader's priorities is essential to preparing your clients for potential changes to the Tax Code in 2025.
Mayor Smith leans towards populism
The expectation when Rep. U.S. Rep. Jason Smith (R-Mo.) began his first term as chairman of the Ways and Means Committee last year saying he would be just as open to populist proposals like every Republican leader of the tax-writing committee in recent memory. He has not disappointed.
Smith is likely to be more empowered if Republicans take control of Congress and the White House. Even if Democrats control the House and Republicans the Senate, Smith will likely still have a big role to play in bipartisan deals. Forecasters predict slim margins regardless of which party wins the House, and we've all seen how difficult it has been to navigate a Republican conference with diverse and often competing viewpoints for Speakers Kevin McCarthy (R-Calif.) and Mike Johnson ( R-La.).
Smith has advocated for expanding the child tax credit for years and brokered a deal earlier this year with his Senate counterpart, Finance Committee Chairman Ron Wyden (D-Ore.), to do just that. The bill passed the House with broad bipartisan support, but remains deadlocked in the Senate after failing to garner enough GOP support, in part because of its more generous CTC provisions. Still, the Smith-Wyden agreement represents a minor achievement during a Congress that has seen a dearth of bipartisan deals.
Looking ahead to next year, what else can we see Smith the lawyer for? He is opposing calls to eliminate the cap on state and local tax deductions, which would disproportionately benefit taxpayers in high-tax blue states. He is pushing harder than other Republicans to offset at least some of the cost of extending the $4.6 trillion in tax cuts that expire next year, potentially by raising corporate taxes and cutting spending.
Chairman Wyden's Progressive Priorities
Jan. 3, 2025, will mark the 10th anniversary of U.S. Sen. Ron Wyden (D-Ore.) as the Senate's top tax-sponsored Democrat. During President Joe Biden's tenure, Wyden played a central role as chairman in authoring one of his major legislative achievements, the Inflation Reduction Act. Most of the tax changes included are taken directly from proposals previously offered by Wyden, underscoring the fundamental role he plays in Democratic tax policymaking on Capitol Hill.
Wyden would be most powerful on tax reform in the unlikely but still possible event that Democrats win control of both houses of Congress and the White House in November. Given his origins in Democratic tax circles, congressional Democrats and even members of a Harris administration are likely to look to Wyden for input on how to address expiring provisions from the Tax Cuts and Deregulation Act. Work. In this scenario, Wyden is no longer constrained by the Senate's Democratic retirees, who stymied his more progressive tax machinations in previous years.
Notably, Wyden has submitted his own version of a wealth tax that would hit the unrealized gains of the ultra-rich. While the constitutionality of taxing unrealized capital gains remains an open question, Wyden may pursue this plan if he is empowered in tax reform. His other less controversial but still progressive priorities of tax hikes hitting the wealthy and corporations would be on the table in the event of a Democratic purge.
Recently, Wyden negotiated the deal discussed above with his House GOP counterpart, Smith. Through this bipartisan bill and the partisan IRA, which narrowly passed after months of negotiations, Wyden has shown an ability to reach agreement on tax legislation that can galvanize support from across ideological factions. In the scenario of a divided Congress in which Republicans control the Senate, Wyden would have an important role to play in negotiating a deal, as he would be key to wrangling the votes to clear the Senate impasse.
Ranking member Crapo, a more traditional Republican
Republicans rejoice tail winds in their efforts to regain control of the Senate next year, and the ranking member of the Finance Committee. U.S. Sen. Mike Crapo (R-Idaho) knows this. The top Republican tax writer did not support, as did many of his Republican colleagues, the Wyden-Smith tax deal, which could give Senate Republicans a stronger negotiating position next year if bipartisanship is needed to approve the tax law.
If Republicans wrest control of Washington, we expect them to use the same procedure — known as reconciliation — they used in 2017, which allows tax legislation to pass with a simple majority. Although tax legislation must originate in the House, Crapo would still be authorized in that scenario because reconciliation rules are more difficult to navigate in the Senate than across the Capitol in the lower chamber. Expect Crapo to play a big role next year if Democrats don't beat the odds and win control of both houses of Congress and the White House in November.
If Crapo remains in power, as expected, he is unlikely to push to fully offset the budget costs by raising taxes. He has repeatedly said that pro-growth tax cuts, such as the corporate rate cut, should not be paid for and that he would look for opportunities to cut spending rather than raise revenue. Still, it's hard to imagine Congress passing tax legislation that adds trillions of dollars to the deficit without seeking at least some offsets in the Tax Code. Crapo would likely target green energy funding and Biden-era spending, and how successful he might be will depend on whether control of the government is split between the parties.
Member Neal's ranking, a more orthodox Democratic tax ideology
Like his Senate counterpart, Ways and Means Rep. Richard Neal (D-Mass.) has served as House Democrats' tax chief for some time, first taking the post in 2017. If Democrats gain full control of Congress and the White House, Neal would have the chance to go first on tax reform and set a marker for a partisan Democratic product. That would be an influential position that would allow Neal to push for a more traditional revenue-raising package that he has favored in the past, rather than something that hits unrealized gains, as he has proposed. Wyden.
Neal has commented little on the 2025 tax reform, but we can understand his tax advantages by looking at tax package he successfully pushed his committee in 2021 to fund the ultimately doomed Build Back Better Act. Neal's plan would have raised trillions in revenue through a combination of tax increases on the wealthy and corporations. The reforms included creating new income tax brackets for wealthy individuals and increasing the top capital gains rate. Neal is likely to benefit from these revenue raisers instead of some sort of wealth tax if he is given the coveted opportunity to go first on a partisan tax package.
Neal would also be greatly empowered in the event of a divided government in which Democrats control the House, which is the most likely divided government outcome. In this scenario, any bipartisan deal would need his support, giving him a lot of influence over the process.
The future of tax law
It's rare for Congress to open up the Tax Code and consider sweeping changes. But the $4.6 trillion tax cliff guarantees it will happen next year. Whatever lawmakers eventually come together to extend the expired provisions stands to govern the Tax Code for the next decade as the TCJA has done for the past seven years.
For individuals and organizations with a keen interest in tax law, 2025 will be a critical and impactful year, with significant changes to the Tax Code on the table. Outside of the broad scope of the expiring provisions, hitting everything from the SALT deduction cap to the estate tax exemption level, there will be a focus on raising revenue to offset at least some of the costs of extending the provisions that expire. That need for revenue could prompt lawmakers to pursue new revenue-raisers, such as a property tax, or look to other cash pots, depending on which of the above is authorized.
If you haven't already, now is the time to start making sure your clients know the risks and opportunities ahead of them in tax reform next year. We will soon know which of the above tax points will be enforced next year. By looking at their previous positions and approach to tax issues, we can understand what tax reform might look like under their leadership. Sharing this knowledge with stakeholders and clients will prepare them for the tax fight of 2025 and what changes to the Tax Code may come from it.
For more information on tax policy in 2024 and 2025, see “The likely impact of rising populism on tax changes in 2025,” “Setting the table for tax policy this year and next“, and “President Biden releases budget proposal for fiscal year 2025.