Impending fiscal cliff for president and Congress post-election.

Preparing for the 2025 Fiscal Cliff: A Battle Over Taxes

Members of Congress and 2024 presidential candidates are already gearing up for a historic 2025 fiscal cliff that promises a massive showdown over taxes. Whether President Joe Biden secures reelection or loses to the eventual Republican nominee, the incoming White House occupant will face a critical test with expiring tax provisions in 2025, coupled with the end of this year’s debt limit deal. This convergence of political and fiscal circumstances presents a tremendous opportunity for the party in power to shape tax policy for years to come, intensifying what is sure to be a hard-fought election.

The Implications of the Fiscal Cliff

At the heart of the fiscal cliff lie the expiring tax provisions within the 2017 Tax Cuts and Jobs Act, commonly known as the “Trump tax cuts” or “Republican tax cuts.” If Republicans perform well in 2024, holding the White House and both chambers of Congress, they could rewrite and expand these tax breaks. On the other hand, if Democrats secure majorities in Congress, they could enact changes such as increased taxes on the wealthy and a higher corporate tax rate.

Doug Holtz-Eakin, the director of the conservative think tank American Action Forum and former director of the Congressional Budget Office, emphasized the significance of this fiscal cliff. He stated that making all the provisions in the 2017 tax bill permanent would amount to a $3 trillion proposition, making it a major deal for the budget and the economy.

The numbers involved in extending the 2017 tax cuts are staggering. According to the Penn Wharton Budget Model, extending these provisions in 2025 would add over $2.5 trillion to the deficit through 2032. The majority of the budgetary effects would stem from extending or letting expire individual income tax provisions enacted as part of the TCJA, with approximately $2 trillion up for debate.

Key Provisions at Stake

Among the provisions set to sunset are lower individual income tax rates and the 20% deduction for pass-through businesses. Pass-through businesses, which include sole proprietorships, partnerships, and S corporations, are the most common type of business and encompass the majority of small businesses. Additionally, the increased estate tax exemption, which allows individuals to keep more of their inheritance before facing federal taxes, is also on the line. Extending this threshold would cost around $100 billion through 2032.

Another policy on the chopping block is the $10,000 cap on deductions for state and local taxes paid. This cap, introduced by Republicans, primarily affects wealthy individuals in high-tax states. Several Democratic lawmakers have prioritized raising or repealing this ceiling.

The Battle for Tax Cuts

While Republicans will undoubtedly fight to preserve the tax cuts implemented through the landmark 2017 legislation, a Republican victory in the White House, along with control of the House and Senate, could pave the way for more significant changes. However, to overcome the filibuster, the GOP would need a 60-vote majority in the Senate, which is highly unlikely. Instead, they would likely rely on the budgetary process known as reconciliation, allowing for the passage of tax and spending-related provisions with a simple majority in the Senate.

Since gaining the majority, Republicans have already passed or proposed several pieces of legislation that could foreshadow a 2025 reconciliation bill. For instance, the House Ways and Means Committee recently approved the Tax Cuts for Working Families Act, which offers new tax breaks for individuals and businesses. This bill includes increasing the standard deduction for married couples and single filers, providing immediate tax relief.

Furthermore, Republicans aim to raise the threshold for business owners filing 1099 forms, reflecting the cost-of-living increases since the reporting rule was established decades ago. Additionally, they have sought to reduce the funding for the IRS, a move that could be part of the reconciliation agenda if the GOP triumphs in 2024.

Leading contender for the GOP presidential nomination, Governor Ron DeSantis (R-FL), has already outlined plans for a substantial reconciliation bill in 2025. DeSantis envisions using this opportunity to reverse Biden-era economic changes and advance conservative economic priorities. His proposed bill would cover a wide range of measures, including full expensing to boost manufacturing and lower taxes even further.

The Democrats’ Course Correction

Meanwhile, Democrats eagerly anticipate the chance to roll back the 2017 tax cuts. Chuck Marr, vice president for federal tax policy at the left-leaning Center on Budget and Policy Priorities, sees this window as an opportunity to revert the Trump tax cuts and potentially implement additional changes, depending on their electoral success in 2024. Democrats are particularly focused on blocking the extension of higher-income tax cuts, revisiting corporate tax changes, and addressing loopholes that allow the wealthiest individuals to avoid paying income taxes.

Jason Roe, a veteran Republican consultant, believes that the ability to go beyond preserving the 2017 tax cuts and potentially lowering taxes even further could be a significant talking point for the GOP in the 2024 elections. He sees it as a way for Republicans to position themselves as protectors of taxpayers, leveraging the Democrats’ opposition to tax cuts to their advantage.

As lawmakers strategize for the 2025 fiscal cliff, they are aligning as many priorities as possible to expire in that year. This approach allows for a comprehensive package that encompasses a wide range of issues.

Ultimately, the battle over taxes in 2025 will shape the future of tax policy in the United States. Both parties are gearing up for a once-in-a-decade tax debate that will have far-reaching implications for the economy and the American people.