Government building doors
Article

June 2024 Policy Pulse

Last month Congress passed the Federal Aviation Administration (FAA) reauthorization bill, effectively wrapping up all must-pass legislation through the summer. The next critical deadline lawmakers face is in late September, when government funding will need to be renewed.

With the FAA bill completed, hopes for the bipartisan tax bill are all but gone. Lawmakers’ priorities are shifting away from legislation and toward campaign politics as election season heats up; accordingly, we’re not expecting any significant tax legislation before the November general election. However, we are seeing increased focus on potential tax reform from policymakers and candidates as U.S. tax policy faces a major inflection point in 2025.

In this month’s edition of the Policy Pulse, we explore the Tax Cuts and Jobs Act’s (TCJA’s) expiring provisions and their impact on future tax policy, which are laying the groundwork for potential tax reform.

TCJA overview

The TCJA, which was signed into law in late 2017 and generally became effective as of 2018, implemented significant and pervasive tax reform. Key features of the bill include a reduction in the overall corporate tax rate, up to a 20% reduction in income for qualifying pass-through entities, reductions in individual tax brackets, a doubling of the estate tax exemption and various other changes to business and personal deductions.

Republicans were able to pass the TCJA without any assistance from Democrats using a process called reconciliation. Lawmakers typically use reconciliation when a single party controls the House of Representatives, the Senate and the White House. Reconciliation bills can be passed quickly and are not subject to the Senate’s filibuster rules, needing only a simple majority to pass the chamber. However, reconciliation bills have limitations, including disallowing provisions unrelated to revenues and spending and prohibiting an increase in the federal deficit beyond a certain period.

Because of the limitations on reconciliation bills, some of the tax provisions included in the TCJA were enacted on a temporary basis, mainly those affecting individuals, estates and pass-through entities. While several of the TCJA’s temporary provisions have already expired or begun phasing out, the bulk will sunset, or expire, on Dec. 31, 2025.

TCJA expiring provisions

The bipartisan tax bill addressed a trio of business tax provisions that have already changed or begun to phase out as a result of the TCJA, including:

  • Expensing of domestic research and experimental expenditures (section 174) – change in treatment after Dec. 31, 2021
  • Changes to the calculation of the business interest deduction limitation (section 163(j)) – change in treatment after Dec. 31, 2021
  • Immediate expensing of qualified property, commonly referred to as “bonus depreciation” (section 168(k)) – began phasing out after Dec. 31, 2022, and will completely phase out after Dec. 31, 2026

As it’s highly unlikely Congress will address the bipartisan tax bill before the election, these provisions are likely to become part of the larger tax reform negotiation, along with the items scheduled to sunset in 2025.

Some of the more noteworthy provisions set to expire in 2025 include:

Provision  Anticipated Change 
Business Provisions 
Qualified Business Income (QBI) Deduction  The QBI deduction, which provides a benefit of up to a 20% reduction in income for qualifying passthrough businesses, will expire. 
Individual Provisions 
Individual Income Tax Brackets & Rates  Individual income tax brackets and rates will reset.  This will decrease some bracket sizes and increase 5 of the 7 rates including changing the 12% rate to 15%, the 22% rate to 25%, the 24% rate to 28%, the 32% rate to 33%, and the 37% rate to 39.6%. 
Standard Deduction & Personal Exemptions  The standard deduction will be reduced by nearly 50%.  Personal exemptions will return for taxpayers and their dependents.  
Child Tax Credit (CTC)  The CTC will be reduced from $2,000 to $1,000 and phase-out thresholds will be reduced. 
Itemized Deductions  There will be several changes to itemized deductions including, but not limited to: a repeal of the $10,000 limitation on state and local income taxes, the return of miscellaneous itemized deductions, an increase in the cap on home mortgage interest deductions, and the allowance of personal casualty and theft losses. 
Individual Alternative Minimum Tax (AMT)  The AMT exemption and exemption phaseout thresholds will revert, lowering the exemption amount and substantially decreasing the phaseout threshold. 
Estate and Gift Tax Provisions 
Estate Tax Exemption  The estate tax exemption will be reduced by 50%. 
International Provisions 
Base Erosion and Antiabuse Tax (BEAT)  The BEAT tax rate will generally increase from 10% to 12.5% 
Global Intangible Low-Taxed Income (GILTI)   The GILTI deduction will decrease from 50% to 37.5%.  This will effectively increase the GILTI rate from 10.5% to 13.125%. 
Foreign-Derived Intangible Income (FDII)  The FDII deduction is scheduled to decrease from 37.5% to 21.875%.  This will effectively increase a company’s tax rate from 13.125% to 16.406%. 

The cost of extension

In May, the Congressional Budget Office released a report estimating the cost to extend all expiring TCJA provisions would be $4.6 trillion over 10 years (from 2025 through 2034). The breakout of the cost is as follows:

Provision Category  Cost to Extend 
Individual Provisions (including QBI deduction)  $3.723 trillion 
Estate and Gift Tax Provisions  $189 billion 
100% Bonus Depreciation Provision  $469 billion 
International Provisions  $197 billion 

The $4.6 trillion figure was an increase of $1.1 trillion over the previous year’s estimate. It’s important to note that 2025, a year in which many of the TCJA’s provisions remain in place, is included in the most recent estimate. The estimated cost for the ten years following the expiration of many of the TCJA’s provisions, 2026 through 2035, is certain to cost even more.

Impact on the national debt

The national debt is the amount of money the federal government has borrowed to cover budget shortfalls. The U.S.’s total debt has ballooned in recent years and is now approaching $35 trillion. For reference, the debt amount now measures over 120% of current U.S. Gross Domestic Product (GDP). The extension of all TCJA provisions without any new income offsets would add $4.6 trillion, or over 13%, to the U.S. debt level.

U.S. debt sustainability is a complex and tenuous political issue, currently exacerbated by the increased borrowing costs associated with high interest rates. Policymakers, even those within the same party or caucus, are divided on whether future tax reform should increase or decrease national debt levels.

Political platforms

Republicans, constrained by the inherent limitations in using the budget reconciliation process, had to make some of their tax policy priorities temporary to include them all in the TCJA. Many of the phase-outs and sunsets were never intended to take effect; Republicans hoped to make these provisions permanent in a subsequent legislation.

While much of our discussion above centers around the TCJA’s expiring provisions, it’s important to understand all tax policy could be on the table in upcoming negotiations, including the corporate tax rate. Below we provide a high-level overview of the party platforms.

Republican platform

Generally, Republicans have expressed a desire to extend the TCJA, making as many provisions permanent as possible. However, there are a few areas where Republicans diverge:

  • Corporate tax rate – While most Republicans seem to be in favor of retaining the 21% corporate tax rate, some have called for further reductions in the rate. Meanwhile, others have expressed they would be open to a modest increase.
  • State and local tax (SALT) deduction – The TCJA limited the SALT deduction to a maximum of $10,000 per taxpayer. This is generally supported by Republicans; however, representatives from higher income tax states like California, New York and New Jersey are advocating for increases to or a full repeal of the limitation.
  • Deficit creation – Some Republicans, concerned with increasing national debt levels, are hoping to have some or all TCJA extensions offset by revenue raisers. Others are less concerned about adding to the national debt and/or don’t believe Congressional Budget Office (CBO) scoring of revenue and expenses created by a legislation are accurate, specifically noting they don’t account for the additional output from economically stimulating policies.*

Former President Trump has made several tax policy comments supporting an extension of the TCJA but has not yet revealed his campaign tax platform. Congressional Republicans are beginning to define their tax policy priorities, which we discuss in more detail below.

*While tax cuts do typically have a positive macroeconomic impact, most economists agree that the policies do not pay for themselves.

Democratic platform

Democrats seem to be coalescing around President Biden’s tax policy platform, which centers around increasing taxes on large businesses and high-income individuals and maintaining current tax rates for low- and middle-income families. Overall, the president’s plan would raise net tax revenues, helping to decrease the national deficit.

Biden has pledged not to increase taxes for any taxpayer making less than $400,000 per year; however, the implementation of this plan could be both logistically difficult and costly. Experts have noted limiting items, such as the QBI deduction, which is calculated based on the activity of a pass-through business but reported on an individual tax return, would be logistically challenging. Of the CBO’s $3.723 trillion estimate to extend individual TCJA provisions, about half of the cost is attributable to households under the $400,000 threshold.

Biden’s plan calls for a number of revenue raisers, including:

  • Business tax reform ($2 trillion) – the bulk of the additional revenues come from increasing the corporate tax rate from 21% to 28%.
  • Increasing taxes on high-income individuals ($1.8 trillion) – these include an increase in the top tax rate, an expansion of the net investment income tax and a new minimum tax, among other changes.
  • International tax reform ($600 billion) – the majority of this stems from changes to the global minimum tax regime, limitations on inversions and other related reforms.

For more detail on Biden’s tax platform please see: Treasury releases fiscal year 2025 Green Book: Details on Biden Administration’s tax proposals

Recent activity

Over the last several weeks, Republicans have hit the ground running on 2025 tax policy. As we discussed in May’s Policy Pulse, House Ways and Means Chair Jason Smith (R – MO) recently formed ten Republican Tax Committee Teams. Ranking Senate Finance Committee Member Sen. Mike Crapo (R – ID) is following suit, launching Senate working groups.

At the moment, Republicans seem to be focused on education and creating tax policy wish lists. Education is particularly important as only five of the current 25 House Ways and Means Republicans were on the committee when the TCJA was written.

Democrats have yet to show much interest in establishing their own tax policy working groups. Recently, Ways and Means ranking member Richard Neal (D – MA) noted there are subcommittee systems already in place to address these issues.

The 2024 election

The result of the 2024 election will determine the future of tax policy, including the treatment of the TCJA’s expiring provisions:

  • Unified government – if one party controls both chambers of Congress and the White House, the controlling party may attempt to use the budget reconciliation process to pass a tax reform bill. Though this may seem simple, it can be extremely complex and, as discussed above, the reconciliation process has limitations. Additionally, if the controlling party has slim majorities, individual lawmakers can exert significant influence.
  • Divided government – if the White House and at least one chamber of Congress are controlled by different parties any tax reform bill would need to be a bipartisan, bicameral effort. As we saw with the bipartisan tax bill, finding consensus among both political parties and chambers of Congress can be challenging.

Regardless of the election’s outcome, the next Congress will face a looming tax cliff at the end of 2025. Without Congressional action, the TCJA’s provisions will expire, resulting in increased tax burdens for the majority of taxpayers.

Stay tuned

Baker Tilly will continue to provide tax policy updates and insights through the 2024 election and tax reform negotiations.

Questions?

If you have questions, please reach out to your Baker Tilly tax advisor to discuss the impact of our tax policy updates.

Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms.

Kasey Pittman
Director

Related sections

Next up

Sorry not sorry, says the IRS on refunds of qualified transportation balances