Will Congress Lower Taxes In 2025?

Will Congress Reform the Tax Code in 2025?

Many experts believe Republicans in Congress may pass major tax legislation through the reconciliation process in 2025. This legislation could pass within the first one hundred days, later in the year, or not at all. Some speculate that there may be two reconciliation bills: one in the first thirty to one hundred days focusing on border security, defense, and energy, followed by a second bill addressing tax reform.

However, the future remains uncertain. No one possesses a functioning crystal ball, and reconciliation is a complicated legislative process. Passing tax legislation through reconciliation will require overcoming significant hurdles.

The Reconciliation Process

To pass major legislation through reconciliation, the following steps must occur:

1. Budget Resolution: The House and Senate must pass a resolution authorizing a specific amount of deficit spending due to the upcoming bill within a specified budget window. For example, the original Tax Cuts and Jobs Act (TCJA) budget resolution in 2017 proposed $1.5 trillion in deficit spending.
2. Deficit Neutrality: To use reconciliation, the deficit cannot increase after the specified budget window. This requirement is critical.
3. Legislation Passage: A bill must pass both the House and Senate. This will be a contentious process due to narrow majorities. The Trump Administration would need to be heavily involved, and President elect Trump would need to sign the final bill.

Cost of Extending the TCJA

On May 8, 2024, the Congressional Budget Office (CBO) updated its projections on the cost of extending the Tax Cuts and Jobs Act from 2025 to 2034. Assuming all provisions are extended for nine years, and bonus depreciation is increased to 100% from 2024 to 2034, the CBO estimates this would add $4.6 trillion to the federal deficit.

Key Tax Reform Provisions Under Discussion

Here are five tax provisions currently being discussed. Each would increase the deficit, with rough cost estimates (rounded and covering 2025–2034):

1. Not Taxing Overtime: $300 billion.
2. Not Taxing Tips: $200 billion.
3. Lowering the Corporate Tax Rate to 15%: $500 billion.
4. Immediate Expensing of Research Expenditures: The TCJA required amortization of research and expenditure costs over five years. Resuming immediate expensing would cost $300 billion.
5. Removing the SALT Deduction Cap: The TCJA limited the state and local tax (SALT) deduction for itemizers to $10,000. Removing this cap entirely would cost $1.2 trillion.

Combined, these provisions would cost approximately $7.1 trillion. However, it is highly unlikely Congress will pass a bill adding this amount to the national debt. Instead, offsets will be included, which will also spark controversy.

Potential Offsets

Offsets could include:

• Ending Existing Energy Credits: $300 billion in offsets.
• Adding Tariffs: $1 trillion in offsets.
• Budget Cuts: Congress often builds budget cuts into these bills but rarely enforces them. Discussions about a “Department of Government Efficiency” (DOGE), led by Elon Musk and Vivek Ramaswamy, suggest $2 trillion in offsets from 2025 to 2034.

In this hypothetical scenario, the bill would still add $3.8 trillion to the deficit by 2034.

The Road Ahead

Congress and President elect Trump will undoubtedly engage in intense and often contentious negotiations. At this point, no one can predict what will happen; however most experts expect some type of tax reform. Special interest groups are already hiring lobbyists, and the legislative process will be closely watched. As a CPA specializing in tax, I will be ready with popcorn to enjoy the show.