Could Republicans Federal Tax Overhaul Occur in 2025?
Will the U.S. Congress Reduce Taxes in 2025?
Many analysts speculate that Republican legislators may enact substantial tax reforms via the reconciliation method in 2025. This legislation might be passed within the first hundred days, later in the year, or never materialize. Some speculate the possibility of two reconciliation bills: one focused on border security, defense, and energy within the first thirty to hundred days, followed by a second bill addressing tax reform.
However, the future remains unpredictable. No one has a functioning crystal ball, and reconciliation is a complex legislative process. Implementing tax reforms through reconciliation calls for surmounting significant obstacles.
The Reconciliation Procedure
To pass notable legislation through reconciliation, the following steps must be executed:
- Budget Resolution: The House and Senate must pass a resolution approving a specified amount of deficit spending due to the upcoming bill within a designated budget period. For instance, the initial Tax Cuts and Jobs Act (TCJA) budget resolution in 2017 allocated $1.5 trillion in deficit spending.
- Deficit Neutrality: To employ reconciliation, the deficit must not exceed the specified budget period. This is a crucial requirement.
- Legislation Approval: The bill must obtain approval in both the House and Senate. This process will be challenging due to narrow majorities. The Trump Administration would need to play a prominent role, and President elect Trump would need to sign the final bill.
Estimated Costs of Extending the TCJA
On May 8, 2024, the Congressional Budget Office (CBO) updated their projections on the cost of extending the Tax Cuts and Jobs Act from 2025 to 2034. If all provisions are extended for nine years, and bonus depreciation is escalated to 100% from 2024 to 2034, the CBO estimates this would amplify the federal deficit by $4.6 trillion.
Nine Potential Tax Reform Proposals
Here are nine tax provisions currently being considered. Each would contribute to the deficit, with approximate cost estimates (rounded and covering 2025–2034):
- Neglecting Overtime Taxation: $300 billion.
- Neglecting Taxation of Tips: $200 billion.
- Reducing the Corporate Tax Rate to 15%: $500 billion.
- Instant Expensing of Research Expenditures: The TCJA mandated amortization of research and expenditure costs over five years. Restoring instant expensing would cost $300 billion.
- Removing the SALT Deduction Cap: The TCJA restricted the state and local tax (SALT) deduction for itemizers to $10,000. Eliminating this cap entirely would cost $1.2 trillion.
Combined, these provisions would cost approximately $7.1 trillion. However, it is highly improbable that Congress will approve a bill adding this amount to the national debt. Instead, offsets will be integrated, sparking controversy.
Potential Offsets
Offsets could include:
- Abolishing Existing Energy Credits: $300 billion in offsets.
- Implementing Tariffs: $1 trillion in offsets.
- Budget Reductions: Congress often incorporates budget reductions into these bills but seldom enforces them. Discussions about a “Department of Government Efficiency” (DOGE), led by Elon Musk and Vivek Ramaswamy, suggest $2 trillion in offsets from 2025 to 2034.
In this hypothetical scenario, the bill would still amplify the deficit by $3.8 trillion by 2034.
The Future
Congress and President elect Trump will undoubtedly engage in intense, often contentious negotiations. At this point, no one can predict what will occur; however, most analysts expect some form of tax reform. Special interest groups are already retaining lobbyists, and the legislative process will be closely monitored. As a CPA specialized in taxation, I will be prepared with popcorn to observe the spectacle.
In light of the potential tax reform proposals, the Republican legislators might need to find ways to cover the estimated costs, such as abolishing existing energy credits or implementing tariffs. Despite these measures, substantial taxes might still need to be increased to balance the budget.
With the expected tax overhaul, the government might collect more money in taxes, but this depends heavily on the specific policies enacted and their impact on the economy.
