Capitol Hill Recap: Tax Bill, Dead or Alive?

Lawmakers in both chambers of Congress are on a two-week recess, allowing those who remain in the city to ponder the fate of the tax bill that overwhelmingly passed the House.

What Went Down:

• D.C. insiders ponder the tax bill’s fate.
• More pondering about the coming 2025 tax debate.

Let’s Get To It:

Tax Bill’s Fate

Suffice it to say, the tax bill’s path to enactment has been hindered (at least partially) since it passed the House in January.

Quick review: The tax legislation overwhelmingly passed the House on January 31^st by a 357 – 70 vote. It includes the following provisions:

• R&D expensing (domestic)
• Expand the 163(j)-interest deduction from EBIT to EBITDA
• Up Bonus Depreciation to 100%
• Increase the amount a taxpayer may expense under section 179
• Enlarged Child Tax Credit
• Restrict the Employee Retention Tax Credit (ERTC) by:
  • Penalizing ERTC promoters for “aiding and abetting understatement of a tax liability,” according to description of proposal.
  • Requiring that no credit or refund of the ERTC shall be allowed or made after January 31, 2024, unless the claim for the refund or credit is filed on or before that date.
• Increase the threshold for information reporting of certain payments, from $600 to $1,000, in a calendar year.

Upon passage in the House the bill traveled to the Senate. It landed in the upper chamber on February 1^st – and has remained stuck ever since. Lawmakers in that chamber have issues with the bill, including:

• The Child Tax Credit is too large (or not large enough).
• The revenue projection for restricting the Employee Retention Tax Credit is not accurate and should be struck from the bill.
• The bill should not provide retroactive tax relief to businesses.

Shortly before leaving town for the two-week recess, Senate Majority Leader Chuck Schumer (D-NY) put the tax bill on the chamber’s calendar. This means the House-passed bill could receive a Senate vote after lawmakers return from recess on April 8^th. (It could also not receive a vote.)

The bill will require 60 votes to pass the Senate, and the rumor is that there are 60-plus Senators who are willing to support it.

Here’s the thing: Politics could get in the way of the bill passing the Senate.

Certain Senators are demanding that the Senate Finance Committee vet the bill and possibly amend it. So far, this request has not been accepted. This means that the lawmakers who are calling for committee action could withhold their support from the bill until their demands are met.

If these members withhold their support (even though they support it), the bill will not have sufficient votes to pass the chamber.

Legislative Outlook: The tax bill’s fate will largely be decided after Senators return from their recess. Basically, the upper chamber will either vote on the legislation – or it won’t.

That might sound like simple results, but nothing in the Senate is simple.

If Senators do not vote on the tax bill immediately after returning from recess, then the legislation will likely enter what is called “purgatory” on Capitol Hill. This means that the bill is not dead. It is also not alive. It’s in between.

When bills enter purgatory, they still capture the attention of the press and lawmakers. But as time goes on that interest begins to wane. As interest declines, it can be hard to whip support for voting on the bill.

As a former reporter who dealt with bills in purgatory, at some point lawmakers stop answering questions about them. This scenario makes it difficult to discern if the bill is actually dead, or merely waiting for action.

This situation is common on Capitol Hill. In fact, there is a saying for it: “All bills are DOA until they pass.” There is also a lesser known saying in Congress that goes: “Some bills stay dead.”

Time will determine which saying describes the tax bill currently stuck in the Senate.

In the year 2025

“If man is still alive…” (Lyric from Zager and Evans song ‘In the Year 2525’ comes to mind. Yes, I’m old.)

But I digress.

If you haven’t already heard, 2025 (perhaps 2026, 2027?) will be a huge tax year.

In 2026, individual tax code measures are scheduled to revert to pre-tax reform levels (most adjusted for inflation). They include:

• Marginal tax rates
• Standard deduction
• Personal exemptions (return of them)
• Child tax credit
• SALT cap (expires)
• Mortgage interest deduction
• Individual AMT
• Pass-thru deduction (expires)
• Limitation on losses for noncorporate taxpayers
• Estate and gift tax

There will be tremendous pressure on lawmakers to extend these and other tax reform measures beyond their 2025 expiration date.

Currently, certain lawmakers who sit on the House Ways and Means Committee are participating in “working groups” to better understand the tax reform provisions. Few of them were on the committee when the legislation passed the House in 2017, and they are educating themselves about the tax measures to better understand how (or if) they should be extended.

A big determination for how the tax debate will go in 2025 will be the outcome of the 2024 elections. However, no matter which parties wins the House, Senate, and White House, there is bipartisan, bicameral support to extend tax reform measures benefiting taxpayers who earn less than $400,000 a year.

Given this fact, the upcoming tax debate will likely be about extending tax provisions benefiting taxpayers who earn over $400,000 a year. This will be an awfully expensive conversation.

When the tax reform bill (known as the Tax Cuts and Jobs Act, or TCJA) was enacted into law in 2017 its provisions (those that were temporary and permanent) were projected to cost roughly $1.5 trillion (2018 thru 2027), according to the Congress’s Joint Committee on Taxation.

Many of the corporate provisions were made permanent in the original bill and do not need to be extended. Individual tax reform provisions, however, expire at the end of 2025 and the cost to extend them is quite a bit more than the original price.

D.C. thinktanks have been crunching the numbers on what it will cost to extend these tax reform measures beyond their 2025 expiration date. Their findings vary, but all are budget-busting for Federal coffers: 

American Enterprise Institute:

We estimate that fully extending the TCJA would reduce revenues by $404.7 billion in 2026 and $3.8 trillion over the 10-year budget window (2026–35). That revenue loss would require an additional $700 billion in debt service costs.

 Committee for a Responsible Federal Budget:

 Extending various income and estate tax provisions of the Tax Cuts and Jobs Act (TCJA) expiring after 2025 would cost $3.4 trillion through 2035. Rather than beginning to discuss how to limit and offset these costs, however, many politicians in both parties are focused on expanding parts of the TCJA. We estimate an expanded TCJA could cost up to $6.4 trillion to extend through 2035.

 Peter G. Peterson Foundation:

Extending all provisions from the TCJA that are set to expire at the end of 2025 would increase deficits by $2.7 trillion from 2024 to 2033, according to CBO and JCT. The largest categories of expirations – nearly all from provisions related to individual income taxes…

There will be pressure on lawmakers to offset at least part of the cost to extend these tax measures. One likely offset option would be to increase the corporate income tax rate from 21 percent to 25 or 28 percent. Lawmakers along both political aisles have discussed this issue.

Also, the state of the U.S. economy will be a factor in offsetting a tax reform extension bill. If the economy is teetering toward a recession, then calls to offset the tax bill will likely be at a minimum. If the economy is going gangbusters, then calls to offset the tax bill will likely be at a maximum.

Legislative outlook: The debate over which tax reform measures should be extended and how their cost should be offset is expected to be a protracted argument that begins in 2025 and could stretch into 2026 – if past is prologue.

Lawmakers have a history of extending tax measures a year after they expire. If they stay true to form, then the debate to extend tax reform provisions will stretch into 2026. Also, 2027 could be involved because the tax reform measures will still be effective for 2025 tax filings in 2026.

If Congress is politically divided after the 2024 elections, then a protracted tax debate is even more likely.

Pardon if this recap missed a monumental moment, but we can recap it next time!

Adios amigos!