- RB: This is DC Dynamics, a podcast about what’s coming up in US tax policy, with a look to the past as our guide. I’m Ray Beeman and I lead Washington Council Ernst & Young. A Republican-only reconciliation bill headlined by extensions of Tax Cuts & Jobs Act provisions expiring at the end of 2025 has been a focus in Washington since last year’s elections, when the GOP sweep of the House, the Senate, and White House made the reconciliation process available to them. Under reconciliation Republicans don’t have to compromise with Democrats to advance tax cut extensions, because a budget reconciliation bill can pass with a simple-majority vote in the Senate. But, as we often say, Republicans do have to compromise among themselves. This is what went on during the leadup to the House passing its bill and will continue as the Senate puts its stamp on a reconciliation tax bill while keeping the political constraints of the House in mind. Then the two chambers will need to come together to agree to the same bill.
- By anybody’s measure, House Speaker Mike Johnson did a masterful job in patiently allowing members to air their grievances and threading the political needle that took the bill over the finish line by a 215-214 vote around 7 a.m. on May 22. Johnson balanced the interests of various factions of members, some of whom felt deficit reduction provisions (both tax increases and spending cuts) were too little and others who thought they were too much. Speaker Johnson and other leaders relied upon a manager’s amendment of changes, including to the energy credits and Medicaid, and brought President Trump in as the closer. Trump told members not to change Medicaid any further and, as a New Yorker, encouraged members of the New York delegation to take the deal on the SALT deduction cap. Johnson then cut off negotiations after weeks debating specifics and months of laying the groundwork.
- Of course, the primary goal of the bill is extending the TCJA tax cut provisions, and the House bill would generally make those permanent, structured to boost the economy with a higher standard deduction and Child Tax Credit for 2025 through 2028 and inflation relief for rates below the 37% rate that could put more money in taxpayers’ pockets in early 2026.
- International changes in the manager’s amendment were seen as trying to head off objections in the Senate reconciliation process to the so-called Byrd Rule, which requires provisions to have a revenue effect. The House bill reflects modest tweaks to rates under the three major TCJA international tax provisions:
- The global intangible low-taxed income (GILTI) deduction is reduced under the bill from 50% (10.5% rate) to 49.2% (10.668% rate).
- The foreign-derived intangible income (FDII) deduction is reduced from 37.5% (which is a 13.125% rate) to 36.5% (13.335% rate).
- And finally, the base erosion and anti-abuse tax (BEAT) rate is increased from 10% to 10.1%.
- The current policy baseline that will be used by the Senate, which doesn’t count the cost of tax cut extensions, is seen as the best and maybe only opportunity to make expiring provisions permanent under Senate reconciliation rules, which prohibit increasing the deficit beyond the budget window. Congress typically sunsets tax cuts to meet reconciliation requirements, and the 2001 and 2003 Bush tax cuts and the 2017 TCJA are well-known examples, though there were sufficient revenue increasing provisions toward the end of the budget window to keep the corporate tax rate reduction to 21% in the TCJA from sunsetting.
- The Senate Finance Committee has $1.5 trillion in additional tax cut leeway outside of the TCJA extensions under their budget resolution, and since the baseline doesn’t count the cost of those extensions, the total tax cut number is about $5.3 trillion. In addition, the expectation is that, rather than the five-year extension under the House bill, the Senate will propose to make permanent the so-called TCJA pre-cliffs, which would restore R&D expensing, the EBITDA calculation for interest deductibility, and bonus depreciation. Finance Committee Chairman Mike Crapo and Senate Leader John Thune want to make those provisions permanent. Now, because the House is using a current law baseline that does count the cost of the TCJA extensions, the House opted to afford itself only $4 trillion in net tax cuts, vs. the $5.3 trillion number in the Senate.
- House Republican leaders also found agreement on an increase in the state and local tax deduction (or SALT) cap to $40,000 per household for incomes under $500,000, with both the cap and income threshold set to grow 1% each year. This resolved an issue that had long vexed the prospects for passing the reconciliation bill.
- The next main category is President Trump’s tax cut proposals, all of which are temporary in the bill and many subject to income limitations. These include:
- Accelerated depreciation for factories
- No tax on tips
- No tax on overtime
- An enhanced deduction for seniors, in lieu of the no tax on Social Security benefits proposal which could have run afoul of reconciliation rules
- And finally, no tax on car loan interest for US manufactured cars
- There are also numerous changes to savings accounts for health and education and new Trump accounts for children, with distributions for education, business, or home needs taxed at the preferential capital gains rate.
- One main category of revenue offsets in the bill, raising over $500 billion, rolls back energy tax credits enacted under the Biden administration that Republicans have long criticized. Inflation Reduction Act (or IRA) provisions cut off several energy-related credits in short order, including for electric vehicles (EVs) and energy-efficient homes, and terminate clean electricity credits under Sections 45Y and 48E for facilities that have not begun construction 60 days after date of enactment and have not been placed in service by the end of 2028. IRA rollback has long been controversial because while the credits have been a target for Republicans almost since the day they were enacted, a lot of the projects that benefit from those credits are located in GOP districts.
- As a general matter, a fair amount of the revenue offsets contemplated for businesses were omitted from the plan in favor of tax increases elsewhere, and House members opted not to target carried interest despite the President’s urging. The bill overall sets as targets for revenue political foils of President Trump and Republicans generally, including: universities, with a significant increase in the endowment tax; sports team owners; immigration-based revenue offsets and fraud, waste, and abuse provisions for federal credits and programs, including the premium tax credit; and other countries that are targeting US companies with tax increases pursuant to the OECD-led global tax agreement.
- Of course, not all the controversy has been on the tax side. Achieving $1.5 trillion in mandatory spending cuts as was required of the House is no small feat. Some Senate Republicans have concerns about Medicaid changes resulting from the $880 billion in spending cuts that was required of the Energy and Commerce Committee. Senators Josh Hawley (R-MO), Lisa Murkowski (R-AK) and others are already expressing concerns about Medicaid work requirements and other aspects of the bill.
- But it’s a catch-22 because while some members won’t back deep spending cuts, some deficit conscious Republicans say they won’t support tax cut extensions without significant savings.
- There has been some speculation that the bill may skip the committee process in the Senate, in the interest of expediency. Leader Thune has said, “There are certain things the Senate wants to have its imprint on,” and that House and Senate committees have been working closely to try and identify potential Byrd Rule violations. Similar to the narrow leeway for defections that House leaders faced, the Senate can only lose the votes of three GOP members. Senators are telegraphing that the Senate will make significant but not drastic changes, wary of the delicate balance struck by House leaders even though, for example, there aren’t Republicans in the Senate representing states where the SALT deduction cap is a big issue. Even more moderate members who are wary of spending cuts recognize that a bill got through the House, the president wants “one big, beautiful bill,” and Republicans hold a majority in the Senate, so a big tax bill seems inevitable to many people. But several members are eager to lessen the impact of the IRA energy credit changes, in particular, and possibly strip some of the other tax revenue offsets.
- All of these issues and more are going to be up for discussion as the bill marinates in the Senate. It’s going to take a lot of calculations to get all the pieces of the puzzle in place for this year’s tax bill, and it remains to be seen if it can happen by the Fourth of July or, perhaps more likely, the end of July up against the congressional August recess.
- There are a lot of questions to think about and few answers at this point. So, continue to stay tuned, but that’s all for now. I’m Ray Beeman and this has been DC Dynamics.
