Sometimes you need to look back to stay ahead because history can often contextualize the present. Next year, Congress will be considering major changes to the Tax Code as many provisions begin to expire. To understand how these 2025 tax reform efforts will play out, contrasting the current environment with the one that produced the Tax Cuts and Jobs Act of 2017 (TCJA) can be instructive. You may be surprised how much has changed in the economic and political landscape that will shape the contours of this looming effort.
To understand what’s at stake for taxes, it helps to reflect on 2015, when then-presidential candidate Donald Trump began outlining his vision for the Tax Code.1 Republicans would soon win a majority in both chambers of Congress and take back the White House—ushering in what’s known as a “trifecta” in Washington. Trump and congressional Republicans promised tax relief for businesses and individuals,2 and they delivered.
Political constraints led the congressional authors of the Republicans’ TCJA to set expiration dates for many of its provisions. These expiration dates have brought us to today. Absent congressional action, trillions of dollars of tax relief will end on Dec. 31, 2025. In the lead-up to a big tax package to address those expiring provisions, expect some curveballs, fresh ideas and well-intentioned, but hastily crafted, bills to be elevated, largely due to significant changes in the United States’ economic landscape and substantive shifts in the makeup of Congress.
Different Economic Landscape
The biggest shifts in our current economic landscape arose from the pandemic, which forced Congress’ hand. The public health emergency in 2020 led Washington to inject $4.6 trillion into the economy3 and caused disruptive and expensive supply chain issues that pushed inflation to heights unseen since the early 80s.4 The Federal Reserve responded by aggressively hiking interest rates,5 helping to drive federal deficits skyward. And while prices seem to be stabilizing for now, polls show that voters remain unhappy with the economy.6 Indeed, the economy could weaken, especially if geopolitical developments escalate to crimp supply chains7 and drive up the price of goods.8
It wasn’t always this way. In the lead-up to 2017’s tax reform, before the pandemic ballooned our deficits, public debt was about 100% of gross domestic product.9 It’s 120% today. Interest rates were nearly zero, meaning servicing this debt was far cheaper. Back then, we had almost 20 years until the Social Security trust fund would run dry, triggering across-the-board benefit cuts. Now we have nine years. Today, we have about 7 million more Social Security beneficiaries,10 and Social Security spending has risen nearly 50% as a consequence.11
Slashing taxes was far more digestible in the lead-up to the TCJA. Today, lawmakers are feeling less bullish about staving off hiking taxes on individuals (worth $1.8 trillion), shrinking the standard deduction ($700 billion) and reviving the 28% alternative minimum tax and Internal Revenue Code Section 199A deduction for pass-through businesses (worth a combined $1.6 trillion).
Smaller (in revenue impact), but for some even more important, provisions are also in the mix for Congress to decide in 2025. They include the expiring cap on state and local tax deductions and the temporarily lower cap on mortgage interest deductions.
Washington is keyed into these figures. Calls to address the debt have grown,12 and budget scorekeepers have tallied the cost of extending all of the TCJA’s tax provisions (hold your nose: almost $4 trillion).13 But with stakes this high, tough economic realities won’t be the only factor influencing how Congress acts on tax in 2025.
Different Political Landscape
The politics around tax cuts will also play an essential role in 2025, and the political landscape in Washington—both with respect to the players and the substance—has evolved significantly since lawmakers last took a whack at tax reform.
Recent elections yielded major turnover in Congress, and long-standing tax policy wonks on Capitol Hill, including those crucial to the crafting of the TCJA—like Paul Ryan and Kevin Brady—have since retired.
In the House, 141 lawmakers (nearly a third of the chamber) have been in their seats for three years or less, and 27 senators are in their first term.14 Over half of the House has been in Washington for seven years or less, meaning they weren’t around for the TCJA. This Congress is green, and the next one is set to get greener. Dozens of lawmakers have announced they’re not seeking re-election, including tax-writing senator Debbie Stabenow (D-Mich.) and representatives Brad Wenstrup (R-Ohio), Dan Kildee (D-Mich.) and Earl Blumenauer (D-Ore.).
With all these departing members goes institutional knowledge acquired over years of crafting and adjusting our tax laws. A solid grasp of complex issues, trusting relationships with stakeholders and lobbyists and expert aides help lawmakers understand the nuances of tax law changes and their impact. As lawmakers leave and are replaced, so too are their staff. Many staffers for the tax-writing committees departed Capitol Hill following passage of the TCJA, which enshrined years of their work into law. This has contributed to a brain drain on Capitol Hill and consequently the current need for education campaigns around the nuances and politics of many of the expiring provisions.
Departing lawmakers aren’t always replaced by moderates who are keen to strike deals. Both parties have moved apart in recent years. This is driven in part by the maps our elections are decided on. Political handicapper Cook Political Report deems just over 10% of 2024 House races as “competitive.”15 As recently as 2018, the figure was close to double, sitting just above 17%.16 Each party has a good idea of which districts and states it will control, so candidates focus instead on winning primaries, which usually favor those who campaign on partisan issues.
The departure from the middle has consequences. In this Congress, because of the Democrats’ slim control of the Senate and a narrow Republican majority in the House—dynamics that used to encourage bipartisanship—we’ve seen next-to-no legislation advance.
Instead, Congress’ ability to govern has effectively diminished in recent years—especially during times of divided government—often blowing past deadlines and waiting until the last minute to act. For example, lawmakers have repeatedly punted on must-pass legislation like government funding over the past few months. The 118th Congress is on track to be one of the least productive in decades, with far fewer bills signed into law than the 114th Congress that preceded tax reform.17
It’s true, the House was able to recently pass, by a wide margin, a bipartisan tax package with benefits for businesses and enhancements to the child tax credit this January. But the House package was limited in scope and consisted of mostly uncontentious provisions that lawmakers in both parties supported. It took more than a year of negotiations to produce a relatively narrow product that could eventually expire in 2025 alongside other TCJA provisions, throwing more logs on an already sizable fire. As of the date of this writing, the Senate is dragging its feet on this bill, and it remains to be seen if it makes it to the President’s desk for signature.
That’s just this year. Next year’s politics could very well be even more difficult to navigate.
Cross-Party Alliances
Ideologically, more and more lawmakers are breaking with their parties’ long-held positions and embracing more populist positions. This growing affinity for populism by both parties is leading to some surprising cross-party alliances and curious legislative proposals.
For example, progressive Sen. Elizabeth Warren (D-Mass.) paired up with ardent Trump-supporting Sen. J.D. Vance (R-Ohio) to introduce legislation last year that would crack down on banks that fail.18 In another episode, Sen. Ted Cruz (R-Texas) walked over to Sen. Bernie Sanders (I-Vt.) and gave him a fist bump on the Senate floor after breaking party ranks to vote for providing railroad workers with paid sick leave.19 On a current issue, Vance responded to anger directed at colleges’ and universities’ actions (or inaction) after the attacks on Israel on Oct. 7, with a bill to increase taxes on certain higher education endowments by 2,500%.20
Often in these cases, we’re seeing lawmakers from opposite sides of the political spectrum coming together to target a common foe, like perceived greedy banks or large corporations. When it comes to tax reform, we could see this politically expedient maneuvering applied to other groups, like the wealthy, especially as the public appears more open to those proposals.
In polling conducted in 2022, 52% of respondents, including 47% of independents, said the government should pursue tax policies that reduce the wealth gap.21 That same poll found strong support for a proposal that would impose a 20% tax on households earning $100 million or more, with 61% of respondents, including 46% of Republicans, endorsing the idea. Democratic Congressmen Don Beyer (Va.) and Steven Cohen (Tenn.) introduced legislation last year to do just this, but at a 25% tax rate.22 That proposal, which garnered 60 Democratic co-sponsors, would apply to unrealized capital gains and levy a tax on the appreciated portion of a transferred asset, even if it’s given to charity or as a bequest.
These are the types of proposals that could very well crop up come 2025—wealth taxes, taxing unrealized capital gains, taxes on endowments —to offset the costs associated with extending the expiring tax relief provisions amid a more challenging economic climate. Keep in mind, should lawmakers seek to address other issues beyond those in TCJA, like affordable housing, they’ll likely need to raise additional revenue.
What’s at Stake
Where will this leave us in 2025? Predicting the future is hard, but we expect new proposals to tax wealth, which have grown more popular, to continue to be elevated. Both parties will continue to discuss strategies to offset the costs of tax cuts.
Endnotes
1. www.taxpolicycenter.org/taxvox/trump-would-slash-taxes-top-01-percent-average-13-million-add-nearly-10-trillion-debt.
2. https://time.com/4686621/trump-congress-address-transcript/.
3. www.usaspending.gov/disaster/covid-19.
4. https://fred.stlouisfed.org/series/FPCPITOTLZGUSA.
5. www.cnbc.com/2023/07/26/fed-meeting-july-2023-.html.
6. www.nytimes.com/2023/11/20/upshot/economy-voters-poll.html#.
7. www.bloomberg.com/news/articles/2024-01-23/red-sea-news-how-yemen-s-houthi-attacks-impact-the-global-supply-chain.
8. www.cnn.com/2024/01/19/economy/davos-inflation-red-sea-middle-east/index.html.
9. https://fred.stlouisfed.org/series/GFDEGDQ188S.
10. www.cnbc.com/2023/02/01/why-2022-was-the-real-year-of-the-great-resignation.html.
11. www.ssa.gov/oact/STATS/table4a3.html.
12. https://thehill.com/business/budget/4331685-momentum-builds-special-commission-tackle-debt/.
13. www.crfb.org/blogs/tax-cut-extensions-cost-over-33-trillion#:~:text=Extending%20the%20TCJA%20in%20full,6.8%20percent%20under%20current%20law.
14. www.govtrack.us/congress/members.
15. www.cookpolitical.com/ratings/house-race-ratings.
16. www.cookpolitical.com/analysis/house/house-overview/final-house-ratings-75-competitive-races-ten-rating-changes.
17. www.axios.com/2023/12/19/118-congress-bills-least-unproductive-chart.
18. www.politico.com/news/2023/07/05/j-d-vance-senate-banks-00104432.
19. https://thehill.com/homenews/senate/3760382-hawley-cruz-rubio-emerge-as-champions-of-gop-populism-amid-trumps-decline/.
20. www.vance.senate.gov/press-releases/senate-democrats-block-vance-legislation-to-tax-large-university-endowments/#:~:text=Senator%20Vance%27s%20College%20Endowment%20Accountability,billion%20in%20assets%20under%20management.
21. https://today.yougov.com/politics/articles/43956-most-americans-support-raising-taxes-billionaires?redirect_from=%2Ftopics%2Fpolitics%2Farticles-reports%2F2022%2F10%2F04%2Fmost-americans-support-raising-taxes-billionaires.
22. https://beyer.house.gov/news/documentsingle.aspx?DocumentID=6037.