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Key Takeaways
- Lawmakers start talking publicly about the upcoming tax fight in 2025.
- House passed disaster tax relief bill, which might become law.
- House tax-writers debated if Opportunity Zones should be expanded beyond their 2026 expiration dates.
- Senate tax-writers discussed how to provide tax-advantaged saving opportunities for children and their families.
- Tax preparer bill in the works.
A handful of lawmakers spent time this week speaking about the upcoming tax fight next year, which will likely be a slog and could extend well beyond 2025.
What Went Down:
- Lawmakers start talking publicly about the upcoming tax fight in 2025.
- House passed disaster tax relief bill, which might become law.
- House tax-writers debated if Opportunity Zones should be expanded beyond their 2026 expiration dates.
- Senate tax-writers discussed how to provide tax-advantaged saving opportunities for children and their families.
Let’s Get To It:
Upcoming Tax Fight
A handful of lawmakers talked publicly this week about the coming tax battle next year. It seems this topic is becoming top-of-mind for some elected officials.
For those who might not know, most individual tax cuts enacted in the 2017 tax reform bill, the Tax Cuts and Jobs Act (TCJA), will expire at the end of next year. The following tax measures are included in this expiration:
- Pass-thru deduction.
- Current marginal tax rates.
- Current Standard Deduction.
- SALT cap.
- Current estate and gift tax exemption levels.
- Current phase-out level for the personal Alternative Minimum Tax.
- Opportunity Zones (in 2026).
- An expanded Child Tax Credit.
Modifications to international tax measures (BEAT, FDII, and GILTI) will also occur after 2025.
The fate of these tax measures will likely depend on the outcome of the 2024 elections.
Legislative outlook: Whatever party is considered to win the 2024 elections will have the upper hand when it comes to the fate of TCJA provisions. Still, the most important election regarding the tax bill’s fate will be the candidates seeking a seat in the House of Representatives.
Under congressional law, the House of Representatives is where tax legislation must start. This means that the political party in charge of the House will have the first pass on tax legislation that could become law. The Senate can amend the House-passed bill, but those changes must be approved by the House. In other words, the House will be instrumental in how TCJA provisions are modified beyond 2025 (assuming they are modified).
If Democrats win control of the House, lawmakers within that party have said that they will extend TCJA tax cuts benefiting taxpayers earning $400,000 a year or less. It will be extremely hard to ensure that taxpayers earning less than $400,000 a year will not incur a tax increase due to the interconnectedness of the tax code.
Democrats support taxpayers earning above this threshold incurring a tax increase.
A Democrat TCJA extension bill would also likely include a larger expansion of the Child Tax Credit than what was passed in 2017.
If Republicans win control of the House, lawmakers within that party have called for all expiring TCJA measures to be extended - quickly.
Before you object, we fully understand that Trump isn’t a lock to win the presidency. And Republicans aren’t guaranteed to keep the House or take the Senate. But all that said – Scalise appeared at a breakfast and lunch today [Wednesday] to discuss his plans for reconciliation, which would allow Republicans to pass an extension of the Trump tax cuts with 51 votes in the Senate.
Extending all TCJA tax cuts is an expensive proposition, like multiple trillions of dollars over ten years. Such an extension could trigger the need to offset this cost (actually, what Democrats seek to propose would also need cost offsets).
Former House Ways and Means Chairman Kevin Brady (R-Texas) stressed the need for cost offsets when speaking this week on Capitol Hill at a tax event sponsored in part by the Tax Foundation.
“[Members] will craft a tax package that is revenue neutral – or close to it,” Brady said, adding, “don’t be afraid of revenue neutrality.”
Brady chaired the tax-writing committee and headed the tax reform effort in 2017. The bill he shepherded through Congress was not revenue neutral. It was projected to increase deficits by nearly $1.5 trillion between 2018 and 2027, according to the Congressional Budget Office.
Costs that trigger deficits can be prohibitive when deciding which tax cuts get extended. If costs force Republicans to limit their extension of tax cuts, then their top priorities could be to extend the pass-thru deduction and the current marginal tax rates. The rest would likely be a distant second.
No matter which political party runs the House, expect discussions for upping the 21% corporate income tax to either 25% or 28%. The SALT cap could also be extended as some Democrats oppose its expiration.. Republicans also support extending the cap.
As lawmakers start discussing the fate of the TCJA, Republicans on the tax-writing House Ways and Means Committee this week released a “portal” for taxpayers to comment on how they would like to see the TCJA amended.
Also, it was stressed several times this week that the debate over extending TCJA provisions will likely stretch into 2026 and possibly 2027.
Disaster Tax Relief
The House this week approved the “Federal Disaster Tax Relief Act of 2023” by a vote of 382-7.
Last week’s Recap projected passage and provide an overview of the bill:
Legislative outlook: This bill could become law – eventually. The Senate could be slow to act on it.
The disaster tax relief bill was included in the tax legislation that the House approved on January 31st. Besides disaster relief, that piece of legislation included R&D expensing for domestic firms, expanded the 163(j)-interest deduction, upped Bonus Depreciation to 100%, modified and expanded the Child Tax Credit, as well as other provisions. It is currently stalled in the Senate.
Regarding the disaster relief bill, Senate Finance Chairman Ron Wyden (D-Ore.) has delayed a Senate vote on the bill until the upper chamber approves the House-passed tax bill. If the Senate approves the House tax bill, then there will be no reason to pass a stand-alone disaster tax relief bill because it will be included in the tax bill approved by the Senate.
However, the Senate is not expected to take-up the House-passed tax bill. Wyden could eventually withdraw his opposition to a vote on a stand-alone disaster tax relief bill. If the disaster relief legislation gets a Senate vote it will likely pass and become law.
Opportunity Zone Hearing
The House Ways and Means Tax Subcommittee held a field hearing this week in Erie, Pennsylvania, that examined Opportunity Zones and other tax provisions.
Opportunity Zones provide tax incentives for investments in distressed areas in the United States. Investors put money in “qualified opportunity funds” (QOFs), which are created to invest in designated, distressed Zones. Investors with qualified gains can defer tax on those gains until 2026 by investing into a QOF. And if QOFs are held for ten years with all other requirements met, there is no tax on capital gains from the zones.
The ability to invest into a QOF will expire at the end of 2026 if the tax measure is not extended. Opportunity Zones were created in the Tax Cuts and Jobs Act. Most witnesses who testified at this week’s hearing asked that these Zone be extended beyond their 2026 expiration date.
The discussion among Republicans participating in the hearing was how these Zones should be extended and could be expanded to address more areas in need of development. There was talk of creating Opportunity Zones for rural areas. The Zones are currently associated with distressed urban areas.
The sole Committee Democrat who attended the field hearing argued that the Opportunity Zone tax benefits overwhelming go to wealthier taxpayers, and therefore these Zones should expire in 2026. That being said, there is a small number of Democrats who support extending these Zones.
Legislative outlook: Any extension or modification to Opportunity Zones will likely be decided by which political party comes out on top of the 2024 elections.
Child Savings Hearing
The Senate Finance Committee held a hearing this week titled “Child Savings Accounts and Other Tax-Advantaged Accounts Benefiting American Children.”
Several saving vehicles were mentioned during the hearing, like 529 accounts, health savings accounts, flexible spending accounts (like Dependent care FSAs), and ABLE accounts. The Child Tax Credit was also mentioned, as were Universal Savings Accounts (USA), which can provide tax-advantaged savings that can be used for many things.
Senator Bob Casey (D-Penn.) used the hearing to talk about his “401Kids Savings Act” bill. The legislation creates children’s savingsaccounts that families, non-profits, employers, foundations, and others could contribute to.
Several Senators seemed supportive of these savings vehicles. However, if these pieces of legislation amend the tax code, they must start in the House. In other words, a Senate tax bill is a nonstarter for enactment.
There was also some discussion during the hearing on how lowering corporate, capital gains, and estate taxes would benefit families and children. There was not widespread agreement among the Senators about lowering these taxes.
Legislative outlook: This hearing was likely a “messaging hearing,” which means legislation is unlikely to be enacted stemming from this hearing. If it was not a messaging hearing, then it was the first hearing in what will likely be a series of legislative steps to create a bill.
Senate Finance Chairman Wyden ended the hearing saying that creating savings vehicles for children has been a goal of his since he entered the Senate – in 1996. He suggested that creating these accounts remain a work-in-progress.
Wyden also stressed that immediate tax relief could happen if the Senate passed the House-approved tax bill.
“What’s on offer today is something that will help now,” he said. “And that is the bipartisan effort that passed the House of Representatives… The research and development effort, bonus depreciation; these are smart kinds of efforts… I just wanted to leave this morning and say there’s something we could do right now.”
The Senator was referring to the tax bill that the House approved on January 31st. The legislation includes R&D expensing for domestic firms, expands the 163(j)-interest deduction, ups Bonus Depreciation to 100%, modifies and expands the Child Tax Credit, and other provisions. It passed the House with resounding, bipartisan support, but has stalled in the Senate. In fact, some Senators have recently said that the House-approved tax bill is “dead” in the Senate.
Tax Preparers
Senate Finance Chairman Ron Wyden is reportedly working on a proposal that would set minimum standards for tax preparers, according to Bloomberg ($). There will be more on this subject if it develops into a real story.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!