A tax brawl is brewing, and policymakers have been engaged in sparring sessions ahead of next year’s $4.6 trillion fiscal cliff.
Lately, much of the focus has been on presidential candidates’ tax proposals, which are aimed at winning votes in November. Congressional lawmakers certainly take cues from the heads of their parties, but presidents don’t write tax laws. Tax committee leaders will be the boots on the ground negotiating, steering and crafting legislation to address 2025’s looming tax cliff.
(Congress could, of course, opt to do nothing and risk being blamed for raising taxes for every American taxpayer. Color us skeptical that this scenario will come to pass.)
Each of the four tax-writing committee leaders has offered clues about their priorities next year. How empowered or sidelined each will be decided at the ballot box. With every election outcome on the table, understanding each leader’s priorities is crucial to preparing your clients for possible Tax Code changes in 2025.
Chairman Smith Leans into Populism
The expectation when U.S. Rep. Jason Smith (R-Mo.) began his first term as chair of the Ways and Means Committee last year was that he’d be as receptive to populist proposals as any Republican tax-writing committee leader in recent memory. He hasn’t disappointed.
Smith would likely be most empowered if Republicans sweep control of Congress and the White House. Even if Democrats control the House and Republicans the Senate, Smith will likely still have a major role to play in bipartisan dealmaking. Forecasters predict slim margins no matter which party wins the House, and we’ve all seen how difficult navigating a Republican conference with diverse—and often competing—viewpoints has been for Speakers Kevin McCarthy (R-Calif.) and Mike Johnson (R-La.).
Smith has championed expanding the Child Tax Credit for years and brokered a deal earlier this year with his Senate counterpart, Finance Committee Chair Ron Wyden (D-Ore.), to do just that. The bill passed the House with broad bipartisan backing but remains stalled in the Senate after failing to draw sufficient GOP support, partly due to its more generous CTC provisions. Nevertheless, the Smith-Wyden agreement represents no small feat during a Congress that’s seen a dearth of bipartisan dealmaking.
Looking ahead to next year, what else could we see Smith advocate for? He’s pushing back against calls to eliminate the cap on state and local tax deductions, which would benefit taxpayers in high-tax blue states disproportionately. He’s pressing harder than other Republicans to offset at least some of the cost of extending the $4.6 trillion worth of tax cuts that expire next year, potentially by raising corporate taxes and cutting spending.
Chairman Wyden’s Progressive Priorities
Jan. 3, 2025, will mark U.S. Sen. Ron Wyden’s (D-Ore.) 10th anniversary as the top Democratic tax writer in the Senate. During President Joe Biden’s tenure, Wyden played a central role as chair in authoring one of its major legislative accomplishments, the Inflation Reduction Act. Much of the tax changes included were taken directly from proposals Wyden previously offered, underscoring the foundational role he plays in Democratic tax policymaking on Capitol Hill.
Wyden would be most empowered in tax reform in the unlikely but still possible event that Democrats win control of both chambers of Congress and the White House in November. Given his pedigree in Democratic tax circles, congressional Democrats and even members of a Harris administration would likely look to Wyden for input on how to address the expiring provisions from the Tax Cuts and Job Act. In this scenario, Wyden is no longer constrained by retiring establishment Senate Democrats who stymied his more progressive tax machinations in previous years.
Notably, Wyden has put forward his version of a wealth tax that would hit the unrealized gains of the ultra-wealthy. While the constitutionality of taxing unrealized capital gains remains an open question, Wyden could pursue this plan should he be empowered in tax reform. His other less contentious but still progressive tax hike priorities hitting the wealthy and corporations would be firmly on the table in the event of a Democratic sweep.
Most recently, Wyden negotiated the deal discussed above with his House GOP counterpart, Smith. Through this bipartisan bill and the partisan IRA, which narrowly passed after months of negotiations, Wyden has shown an ability to reach deals on tax legislation that can elicit support across ideological factions. In the scenario of a divided Congress in which Republicans control the Senate, Wyden would have an important role to play in negotiating a deal as he would be key to wrangling the votes to clear the Senate filibuster.
Ranking Member Crapo, a More Traditional Republican
Republicans enjoy tailwinds in their effort to reclaim control of the Senate next year, and Finance Committee Ranking Member. U.S. Sen. Mike Crapo (R-Idaho) knows it. The top Republican tax writer withheld support, as did many of his GOP colleagues, for the Wyden-Smith tax deal, which may give Senate Republicans a stronger negotiating position next year if bipartisanship is necessary to enact tax law.
If Republicans sweep control of Washington, we expect them to use the same procedure—known as reconciliation—they used in 2017, which allows tax legislation to pass with a simple majority. Even though tax legislation must originate in the House, Crapo would still be empowered in that scenario because reconciliation rules are more difficult to navigate in the Senate than across the Capitol in the lower chamber. Expect Crapo to play a major role next year unless Democrats beat the odds and win control of both chambers of Congress and the White House in November.
If Crapo remains influential, as expected, he’s unlikely to push to completely offset budget costs by raising taxes. He’s said repeatedly that pro-growth tax cuts, like slashing the corporate rate, don’t need to be paid for and that he’d seek opportunities to cut spending rather than raise revenues. Still, it’s hard to imagine Congress passing tax legislation that adds trillions of dollars to the deficit without looking for at least a few offsets in the Tax Code. Crapo would probably target green-energy funding and Biden-era spending, and how successful he can be will depend on whether control of government is divided between the parties.
Ranking Member Neal, a More Orthodox Democratic Tax Ideology
Like his Senate counterpart, Ways and Means Ranking Member Richard Neal (D-Mass.) has served as House Democrats’ chief tax writer for some time, first assuming the post in 2017. If Democrats win complete control of Congress and the White House, Neal would have the chance to go first in tax reform and lay down a marker for a partisan Democrat product. This would be an influential position enabling Neal to push for a package of more traditional revenue raisers he has favored in the past rather than something hitting unrealized gains, as Wyden has proposed.
Neal has commented little on 2025 tax reform, but we can get a sense of his tax priorities by looking at the tax package he successfully ushered through his committee in 2021 to fund the ultimately doomed Build Back Better Act. Neal’s plan would have raised trillions in revenue through a combination of tax increases on the wealthy and corporations. The reforms included creating new income tax brackets for wealthy individuals and raising the top capital gains rate. Neal would likely draw from these revenue raisers instead of some type of wealth tax if given the enviable opportunity to go first on a partisan tax package.
Neal would also be very empowered in the event of a divided government in which Democrats control the House, which is the most likely divided government outcome. In this scenario, any bipartisan deal would need his backing, affording him much influence over the process.
Future of Tax Law
It’s rare for Congress to open the Tax Code and consider fulsome changes. But the looming $4.6 trillion tax cliff guarantees that will occur next year. What lawmakers ultimately cobble together to extend the expiring provisions stands to govern the Tax Code for the next decade as the TCJA has for the last seven years.
For individuals and organizations with a keen stake in tax law, 2025 will be a critical and impactful year where significant changes to the Tax Code are on the table. Outside of the broad scope of the expiring provisions, hitting everything from the SALT deduction cap to the estate tax exemption level, there will be a focus on raising revenue to offset at least some of the costs of extending the expiring provisions. This need for revenue could have lawmakers pursuing novel revenue raisers, such as a wealth tax, or looking at other pots of money, depending on who of the above is empowered.
If you haven’t already, now’s the time to start ensuring your clients know the risks and opportunities before them in tax reform next year. We’ll soon know which of the tax leads above will be empowered next year. Looking at their previous positions and approach to tax issues, one can glean what tax reform may look like under their stewardship. Sharing these insights with stakeholders and clients will prepare them for the looming 2025 tax brawl and what changes to the Tax Code could come from it.
For more information on tax policy in 2024 and 2025, see “The Potential Impact of Rising Populism on Tax Changes in 2025,” “Setting the Table for Tax Policy This Year and Next,” and “President Biden Releases Budget Proposal for Fiscal Year 2025.”
