Setting the Table for Tax Reform in 2025

Due to several Tax Cuts and Jobs Act (TCJA)¹ provisions expiring at the end of 2025, next year is shaping up to be what some are already calling the Super Bowl of Tax.

Earlier this year, Senate Finance Committee Chairman Ron Wyden (D-OR) and House Ways and Means Chairman Jason Smith (R-MO) struck a rare bipartisan compromise on tax legislation to move forward with the Tax Relief for American Families and Workers Act (H.R. 7024). This legislation would extend the enhanced Child Tax Credit along with several of the TCJA's expiring business provisions and would offset these extensions by sunsetting and beefing up the IRS's enforcement tools relating to the COVID-era Employee Retention Credit.

But the Wyden-Smith bill that sailed through the House with more than 350 votes has stalled in the Senate and the path forward remains uncertain heading into an election season with limited legislative vehicles leaving the station before the end of this Congress to get the tax package over the finish line.

This is only putting more pressure on Congress to enact significant tax legislation next year as Congress works against the deadlines in the TCJA that sunset several tax provisions at the end of 2025.

The tax reform process on Capitol Hill has already started with the tax writing committees beginning to hold hearings and develop working groups focused on key issue areas. The Ways & Means Committee announced a comment portal where stakeholders can submit feedback on the TCJA tax provisions. Stakeholders should begin engaging Congress now to get their priorities to the head of the table or protect their provisions from being on the menu.

TCJA's Expiring Provisions

When the TCJA was passed in 2017, only some of the provisions were made permanent and several of provisions were set to expire at the end of 2025 (or, for some provisions, even earlier). Unless Congress acts, individual taxpayers and businesses may see a tax increase due to the TCJA's expiring provisions:

Key Individual Provisions

• Lower marginal tax rates revert to pre-TCJA levels, with the highest tax rate returning to 39.6%.
• Increased standard deduction returns to pre-TCJA levels.
• Enhanced Child Tax Credit reverts to pre-TCJA levels.
• Estate tax exemption returns from $10 million per decedent to $5 million per decedent.

Key Business Provisions

• Expiration of the Qualified Business Income Deduction under section 199A that allows sole proprietors, S corporations, and partnerships that would otherwise be taxed at the individual income tax rates to deduct up to 20% of their qualified business income to align the tax rates for these entities with the TCJA's reduced corporate tax rates for C corporations.
• 100% Bonus Depreciation under section 168(k) that allowed full expensing through 2022 before phasing down through the end of 2026.
• Business Interest Deduction under section 163(j) that limited the amount of net interest a business could deduct to 30% of adjusted taxable income (ATI). From 2018 to 2021, depreciation and amortization were added back to taxable income to calculate ATI. Adding these back typically resulted in a higher ATI, which increased the total amount of business interest that could be deducted. For the 2022 tax year and after, the TCJA removed the requirement to add back deductions for depreciation and amortization and the business interest deduction was reduced.
• At the end of 2026, the Qualified Opportunity Zones under section 1400Z that were created under the TCJA to allow the deferral of capital gains taxes on certain new investments in economically distressed areas are also set to expire.

Everything Is on the Table

The outcome of the 2024 Presidential and Congressional elections and the balance of power will determine the focus, process, and scope of any potential tax legislation in 2025.

Several political pundits and current political polling suggests that Democrats could flip control of the House and Republicans could control the Senate in 2025. Divided government will require bipartisan cooperation but bipartisan tax legislation has been infrequent over the last several Congresses. The last two tax significant tax bills, the TCJA in 2017 and the Inflation Reduction Act² (IRA) in 2022, were passed using the budget reconciliation process that avoids the Senate filibuster and under one-party control.

However, the Protecting Americans from Tax Hikes (PATH) Act of 2015 that was signed by President Obama after striking a deal with a Republican-controlled Congress to expand and make permanent several expired tax provisions for businesses and individuals may serve as a model.³

Congress previously considered tax legislation annually, particularly as several temporary "tax extenders" for R&D, clean energy, and other business tax credits needed to be extended each year. Additional tax provisions were often included within this legislation but several of these tax extenders have been made permanent or provided with long-term extensions and, in recent years, tax legislation has been a rare commodity.

As a result, opening up the tax code for changes is rare and due to the infrequency of tax legislation, both Republican and Democratic members will be focused on developing tax provisions within and outside the scope of the TCJA's expiring provisions to include within any potential tax legislation next year.

Republicans are likely to focus on making permanent the TCJA's lower individual tax rates and expanded standard deductions, extending the increased estate tax exemption, extending the TCJA's corporate tax provisions, and repealing or modifying some of the IRA's clean energy tax credits. Another area of Republican focus that is outside of the TCJA may be the tax-exempt status of colleges and universities. This trend began in 2017 when the TCJA imposed a tax on the endowments of several private colleges and universities.⁴ Any tax legislation in 2025 may be another opportunity for Republican members of Congress to increase their scrutiny of colleges and universities stemming from campus protests related to the Israel-Hamas war.

Democrats are likely to focus on extending the enhanced Child Tax Credit, protecting the IRA's clean energy tax incentives, and extending several of the current individual tax rates but raising the rates on those earning more than $400,000 annually. In addition, Democrats are likely to focus on increasing the corporate tax rate, one area of the TCJA that was made permanent (and which President Biden has also proposed raising in his Fiscal Year 2025 Greenbook).⁵

Revenue Raisers

The cost of these tax provisions will also be a focus of policymakers. A full extension of the TCJA's expiring provisions is estimated to cost more than $4 trillion.⁶ Due to the growing federal deficit and continued budget imbalance, lawmakers may be hesitant to expand the TCJA's expiring provisions without enacting further policy reforms or changes.

Members of Congress will face tough choices to address these concerns and will need to consider either broadening the tax base by eliminating certain industry or politically favored tax exclusions, deductions, or credits, or raising individual or corporate rates, or by finding another revenue source altogether (such as a carbon tax). With control of Congress potentially divided next year, finding agreement among both parties on revenue raisers to offset the cost of any extension or modification of the TCJA will likely be a focus for members of Congress.

After undertaking a multi-year effort, former Ways and Means Chairman Congressman Dave Camp (R-MI) introduced a draft tax reform proposal in 2014.⁷ The Camp Draft includes several revenue raisers that, at the time, were supported by Congressional Republicans and could gain support from Democrats today. These offsets include:

• 10% surtax on joint filers earning more than $450,000⁸
• 25% corporate tax rate⁹
• Impose an excise tax on large banks¹⁰
• Repeal of the Last In, First Out (“LIFO”) accounting method¹¹
• Repeal of like-kind exchanges¹²
• Limits on cash method accounting¹³
• Tax carried interest as ordinary income¹⁴
• Increase capital gains tax rates¹⁵ 
• Limit certain deductions¹⁶

More than a decade later, some Congressional Republicans (and potentially even some Democrats) do not support many or all of these provisions but the Camp Draft may serve as starting point for negotiations.

Tax Reform Is Starting Now

With potential tax legislation on the horizon in 2025, stakeholders are now beginning to develop their policy priorities for consideration next year.

The House Ways and Means Committee kicked off the 2025 tax reform discussions in mid-April with a hearing titled "Expanding on the Success of the 2017 Tax Relief to Help Hardworking Americans" intended to examine the TCJA and other proposed tax legislation to address the expiring provisions.¹⁷ In what is likely to be an early preview of the debate next year, Democrats and Republicans spent the hearing relitigating the benefits of both the TCJA and the IRA. Ways and Means Chairman Smith highlighted the cost of the IRA's clean energy tax incentives and urged Congress to consider the TCJA as a model for tax reform in 2025. Ways and Means Ranking Member Richard Neal (D-MA) and other Democrats on the Committee questioned the effects of the TCJA on workers and families compared to corporations and urged an extension of the Child Tax Credit.

The House Ways and Means Committee is expected to hold several more hearings through the year focused on the impact of the 2017 tax bill, with testimony from business owners highlighting the TCJA's business tax provisions.

These hearings, along with the recent rollout of tax reform "Tax Teams" indicate the Ways and Means Committee Republicans are beginning to develop a blueprint for any potential tax legislation in 2025.

Similar to previous tax reform working group efforts over the last decade, the House Ways and Means Committee has organized "Tax Teams" that will each focus on policy areas that will be affected by the expiring TCJA provisions.¹⁸ In April, Chairman Smith (R-MO) and Tax Subcommittee Chairman Mike Kelly (R-PA) announced the formation of 10 Tax Teams that are comprised of Ways and Means Republican members:

• American Manufacturing
  • Chair: Rep. Buchanan (R-FL)
• Working Families
  • Chair: Rep. Fitzpatrick (R-PA)
• American Workforce
  • Chair: Rep. LaHood (R-IL)
• Main Street
  • Chair: Rep. Smucker (R-PA)
• New Economy
  • Chair: Rep. Schweikert (R-AZ)
• Rural America Chair
  • Chair: Rep. Smith (R-NE)
• Community Development
  • Chair: Rep. Kelly (R-PA)
• Supply Chains
  • Chair: Rep. Miller (R-WV)
• US Innovation
  • Chair: Rep. Estes (R-KS)
• Global Competitiveness
  • Chair: Rep. Hern (R-OK)

The Senate Finance Committee may undertake a similar Tax Team process. Senate Finance Committee Ranking Member Crapo (R-ID) recently stated he was "working on a similar approach" as Chairman Smith with "more to come" soon.¹⁹ It is unclear if the Democrats on the tax-writing committees will join these working groups or develop their own process heading into 2025. Senate Finance Committee Chairman Wyden noted that he "plans to speak with current members of the panel to hear their perspectives on that structure."

In previous tax reform efforts, the working groups met with various industries and organizations or developed a working paper submission process to consider policy ideas or receive feedback. These working groups often issue a working group report intended to help shape the larger tax reform legislation.²⁰ Similar to these previous working groups, the House Ways and Means Committee Republicans launched a comment portal where stakeholders can submit information and identify potential legislative solutions to address the expiring TCJA provisions. The Committee will accept comments through October 15, 2024.

The early timing and lack of details makes early engagement in the process by taxpayers essential. Engaging the Chairs and members of these Tax Teams will be an important step for socializing any new tax policy provisions, particularly technical definitions or rules, or defending existing tax provisions from potential attack during the legislative process.

Endnotes

¹ See Pub. L. No. 115-97, 131 Stat. 2054 (2017).

² See Pub. L. No. 117-169, 136 Stat. 1818 (2022).

³ See Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, Division Q, 129 Stat. 2242 (2015).

⁴ See 26 U.S.C. § 4968(a).

⁵ Department of Treasury, General Explanations of the Administration’s Fiscal Year 2025 Proposals (the "Greenbook"), 10 (Mar. 11, 2024), https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf

⁶ Congressional Budget Office, Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues (May 2024), https://www.cbo.gov/system/files/2024-05/60114-Budgetary-Outcomes.pdf

⁷ See Tax Reform Act of 2014, H.R. 1, 114^thCong. (2014), https://www.congress.gov/bill/113th-congress/house-bill/1

⁸ H.R. 1, 114^thCong. § 1001 (2014).

⁹ Id. at § 3001. It is important to note that a 25% corporate tax rate would have been reduction from the then 35% corporate rate in place in 2014 but would be an increase from the current 21% corporate tax rate.

¹⁰ Id. at § 7004.

¹¹ Id. at § 3310.

¹² Id. at § 3133.

¹³ Id. at § 3301.

¹⁴ Id. at § 3621.

¹⁵ Id. at § 1002.

¹⁶ See, e.g. H.R. 1, 114^thCong. § 1402 (2014) (limiting the mortgage interest deduction to $500,000 of debt).

¹⁷ Press Release, Hearing on Expanding on the Success of the 2017 Tax Relief to Help Hardworking Americans (Apr. 11, 2024), https://waysandmeans.house.gov/event/hearing-on-expanding-on-the-success-of-the-2017-tax-relief-to-help-hardworking-americans/

¹⁸ See Press Release, Ways & Means Chairman Smith and Tax Subcommittee Chairman Kelly Announce Tax Teams to Avert 2025 Tax Cliff (Apr. 24, 2024), https://waysandmeans.house.gov/ways-means-chairman-smith-and-tax-subcommittee-chairman-kelly-announce-tax-teams-to-avert-2025-tax-cliff/

¹⁹ Doug Sword, Crapo Considering TCJA Working Groups 183 Tax Notes Federal 1087 (May 6, 2024), https://www.taxnotes.com/tax-notes-today-federal/tax-cuts-and-jobs-act/crapo-considering-tcja-working-groups/2024/05/02/7jh15

²⁰ See, e.g., Press Release, Finance Committee Bipartisan Tax Working Group Reports (July 8, 2015), https://www.finance.senate.gov/chairmans-news/finance-committee-bipartisan-tax-working-group-reports