Yoopya with The Conversation
Although coverage of the 2024 election was dominated by the economy, taxes didn’t get much attention in the run-up to the vote. That’s a bit of a surprise, since 2025 will be a major year for America’s tax system – in fact, the fate of the most significant tax reform in three decades hangs in the balance.
That would be the Tax Cuts and Jobs Act, which Congress passed during President-elect Donald Trump’s first term in office in 2017. If lawmakers don’t take action, the whole package is set to expire at the end of next year. Western Governors University School of Business tax expert Jim Franklin explains what might be in store for the act, and for taxpayers.
What do the election results mean for Republicans’ ability to advance their tax agenda?
We know there will be a Republican president, and it appears the Republican Party will have the majority in both chambers of Congress. That means Republicans will be able to pass a tax bill along party lines, similar to how Democrats passed the Inflation Reduction Act using budget reconciliation.
This would allow Republicans to pass key policies with a simple majority. The Republican majority is narrow, so it will be interesting to see how the leaders unify their constituent groups.
Republicans have traditionally supported lower tax rates for businesses and individuals, as well as tax incentives to help boost economic activity.
What’s next for the Tax Cuts and Jobs Act?
Currently, the act is set to expire at the end of 2025, but Trump and Republicans favor renewing many of its provisions.
The nonpartisan Congressional Budget Office in May 2024 estimated that extending the act would cost the government US$4.6 trillion, and there’s a split within the party, with one bloc of congressional Republicans calling for a full extension and another asking for the balancing of tax policy and annual federal deficits.
Republicans are likely to fight to keep key components in place, including the higher standard deduction, reduced corporate tax rates, individual rate cuts and an increased estate tax exemption.
There’s even talk of lowering the corporate tax rate further, possibly to 15% for domestic production, which would be a significant move.
What other tax measures are Republicans considering?
Trump mentioned a variety of tax relief ideas on the campaign trail, including exempting tips, Social Security benefits and overtime pay from income taxes, and creating an itemized deduction for auto loan interest.
However, Republicans aren’t entirely unified on tax policy. Some deficit hawks are concerned about revenue losses, so there could be internal pushback on all these points. The real question is whether there will be enough opposition within the party to alter or block certain proposals.
But I expect many parts of the act to be renewed, and we may see some additions. For example, there’s been a lot of pressure around increasing the state and local tax deduction cap, also known as SALT, which has bipartisan support in states with higher state income taxes like New York, California and Illinois. It will be interesting to see if that gains any traction. There’s a lot of pressure among representatives, both Republicans and Democrats, to gain some relief in that area.
Where will they find revenue?
Good question. Observers are indicating that Republicans are likely to look at cutting green energy subsidies from the 2022 Inflation Reduction Act. These could be eliminated to help balance out the cost of their new tax proposals.
Another area to watch is tariffs. There’s talk of raising tariffs on Chinese goods — potentially up to 60% — and even imposing a universal tariff on all U.S. imports at a 20% rate. It will be interesting to see how this plays out. Will it be more targeted? For example, will there be continued tariffs on select imports such as automotive imports from China to protect the U.S. electric vehicle market?
What will you be watching between now and Tax Day?
One factor will be Trump’s cabinet appointments. Whoever he nominates for Treasury secretary, for instance, could have a big influence. They can help shape what the tax bill looks like. Another key factor will be who ends up on the congressional tax committees. The composition of key committees will affect the direction of policy and the specific details.
What do you think will happen with tariffs?
Tariffs are unpredictable: They could be applied broadly, or more selectively. It could be similar to the way that Trump and his first administration placed some tariffs on steel, aluminum and solar panels. Interestingly, many of the tariffs were retained by the Biden administration.
Blanket tariffs could slow down the economy, so there is always a risk. Tariffs impact inflation because they affect the cost of imported goods, which would likely reduce consumers’ purchasing power. Domestic political pressure will play a role, as higher tariffs could raise prices on many goods that are imported, including essential products like medications.
Do you have advice for people struggling to keep up with the latest tax news?
Observers often take every policy suggestion on the campaign trail literally — exempting tips, Social Security benefits, overtime pay, etc. — as if all these proposals will pass exactly as stated. But the details matter, and policies are rarely implemented without adjustments. So it’s wise to read beyond the headlines.
Author:
Jim Franklin | Director of Academic Programs, Western Governors University School of Business