I. Intro: 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 our outstanding group here at Washington Council EY. In this episode the past is really going to be our guide as we take a closer look at the Tax Cuts & Jobs Act, a big portion of which is slated to expire next year and probably bring a reconsideration of the current US tax system along with it. This will happen at the end of 2025 so we’re also looking into the future, with a big unknown ahead of us before we get there – of course, the 2024 presidential and congressional elections. Until we get to November 5th, only so much can be known about the political environment in which that deadline will fall, and the biggest factor clearly is who will be in control of the government.
Taking a step back, the TCJA appeared to come together quickly in the fall of 2017, but it actually had been under development for several years prior to that, when much of the focus was on the then-35% corporate tax rate as well as international tax. Regarding the latter, there was near-universal dissatisfaction with the worldwide system and the associated base erosion and profit-shifting, the lockout effect of companies keeping profits offshore, and the wave of corporate inversions – a system that many called at the time, an “accidental territorial” tax system or, less charitably, a “dumb territorial” tax system. Former Ways & Means Chairman Dave Camp, who I was fortunate enough to have worked for, released an international tax reform draft in 2011 proposing a corporate rate of 25% and a move toward an international territorial tax system with anti-abuse rules to ensure companies do not avoid paying a reasonable amount of US taxes. Issues regarding the placement of intellectual property had been on the radar for a while, which the Obama administration responded to with what at the time were considered punitive proposals. The comprehensive tax reform bill that Chairman Camp introduced in 2014 proposed a broader rewrite of the international tax system that served as the basis for the TCJA international tax provisions enacted in 2017.
Democrats didn’t necessarily oppose reforming the international tax rules – at least at a high level – and were also calling for a corporate rate cut. Both tax-writing committees established bipartisan tax reform working groups in the years preceding the 2017 TCJA: 2013 in the House, and 2015 in the Senate. But the two parties could never agree on the details to get tax reform done during those years in divided government, years which also included some bruising fiscal showdowns.
That all changed with the red wave in the 2016 elections. The Trump administration and Republican leaders in Congress looked back to prior proposals and pledged even deeper cuts to corporate and individual taxes. After a policy detour to push for border adjustability and the failure of the Senate to repeal the Affordable Care Act, with the late Senator John McCain’s memorable thumbs-down on the Senate floor, Republicans turned their attention to tax reform. However, they did not include Democrats in the negotiations, much to their chagrin.
II. For more on that, let’s bring in my Washington Council colleague Ryan Abraham, who was on the Senate Finance Committee Democratic staff when the TCJA passed in 2017. So, Ryan, what was the reaction to being shut out of the development of the TCJA?
RA: Well, Ray, thanks for having me, I’d say not good. There had been a lot of bipartisan work on tax issues prior to that time including through bipartisan working groups. On the Finance Committee, the 2015 international working group chaired by Senators Rob Portman and Chuck Schumer proposed a framework that called for proposals eventually reflected in the TCJA like a territorial system, base erosion measures to include a potential minimum tax, and interest deduction limitations. While some bipartisan elements were included, Republicans ultimately opted to go it alone in a way that Democrats did not support.
RB: So, what does that all-Republican process mean now, years later, for the 2025 tax cliff?
RA: I would say a few different things. Republicans used the budget reconciliation process to pass the TCJA with just Republican votes – namely, to pass the Senate with a simple majority – and that put some limitations on the bill, including that the individual and passthrough provisions sunset and created the fiscal cliff in the first place. And because they did it on their own, Republicans own the bill and the responsibility of extending it, much like Democrats – who, in fairness, passed the Affordable Care Act (ACA) with only Democratic votes – and are responsible for defending their law.
RB: So, lots of comparisons there, but one difference is that Democrats don’t want to completely repeal the TCJA, is that right?
RA: Yes, that’s right. Rather than falling off the cliff entirely, President Biden and Congressional Democrats have said they support extending the tax cuts for families with incomes under $400,000 and would pay for the continuation of those tax cuts by raising the corporate rate along with raising taxes on wealthy individuals and businesses. On the corporate and international side, while there is not a cliff to fall off at the end of 2025, there are some international tax changes set to happen: the effective GILTI rate is scheduled to increase from 10.5% to 13.125%, the FDII rate from 13.125% to 16.4%, and the BEAT rate from 10% or 11% to 12.5% or 13.5%.
Now, Ray, Democrats in Congress have their own ideas on how to change the international tax system such as calculating GILTI on a country-by-country basis and increasing the rate, and changing the GILTI foreign tax credit rules by allowing foreign tax credit carryforwards, reducing the haircut, and turning off expense allocation rules that limited foreign tax credits. Meanwhile, the President has his own ideas, proposing to replace FDII and BEAT entirely. As a general matter, it’s worth noting that Democrats failed to raise the corporate rate or make changes to the international tax code when they had complete control in the last Congress. It’s also worth noting that Senators Manchin and Sinema won’t be in Congress next year, they are both retiring, so it’s unclear whether there will be other gatekeepers against rate increases and international tax changes.
III. RB: So, Ryan, what are the some of the scenarios for how the TCJA extension could be addressed?
RA: Well, in the case of a red or blue wave in the election – in other words, if one party sweeps – it’s easier to see how this could play out. Both parties would be expected to use reconciliation to advance their vision for tax and other issues, which, in the case of Democrats, it would probably be close to what I just laid out – tax cuts preserved for lower- and middle-class families that is mostly or entirely offset. And for Republicans, they would support extending the provisions of their signature law across the board but there is some disparity among them for the need to find revenues. Republican Senators appear inclined to rely on economic growth and the potential for that for tax cuts, while House Republicans are more open to offsets. House Ways & Means Committee Chairman Smith has said some Republicans might want to increase the 21% corporate tax rate, and that other offsets beyond that may be necessary. And of course we have seen some right-leaning think tanks offering their own suggestions for pay-fors.
Now Ray, for divided government, I think there is significant gray area and it would significantly matter how the government is divided. It is unclear what combination of extensions and raisers could amount to a deal. There are plenty of levers and dials in the system, and there is also the question of when these changes could occur. Despite the expiration of the TCJA at the end of 2025, there is always the possibility of a temporary extension until after the 2026 midterms or later. Ray, you’ll recall when we both spent our New Year’s Eve at the end of 2010 cutting a deal to temporarily extend for two years (through 2012) the expiring Bush tax cuts from 2001 … tax cuts that were also created through a reconciliation bill.
Probably the most unlikely scenario is for nothing to happen at all — that is, just drive off the cliff like Thelma and Louise. I think that regardless of election outcomes and political configuration in Washington next year, the incentive to do something will be high. Remember, if Congress does nothing, middle- and low-income families and small businesses will face significant and, in fact, historic tax increases.
RB: So, Ryan, it sounds like the question of offsets is a big one. It would have been hard to imagine, even a few years ago, Republicans openly talking about a corporate rate increase and other revenue raisers. In 2017, I remember Senator Corker agreeing to spend $1.5 trillion on the TCJA, and Republicans pretty uniformly saying the economic growth potential was worth the investment. Some Senators are still singing that tune but, as you mentioned, House members are more open to offsets. That said, the TCJA did have about $5.5 trillion in gross tax cuts offset with about $4 trillion in base broadening.
RA: And it now may take about that much just to pay for an extension! The latest Congressional Budget Office (CBO) estimates showed that, with another year of expiration in the budget window, TCJA extensions are higher than last year’s estimates and total about $4t over 10 years (and that’s before taking into account increased interest costs). And debt and deficit concerns are much more at the forefront now than they were in in 2017. We are looking at projected deficits of $1.5 trillion or more each year over the budget window and the debt is quickly approaching 100% of GDP, which in the past was kind of a doomsday number that always seemed years away. Well, now it’s here.
IV. RB: What else is different now than in 2017?
RA: Well, the makeup of close to half of Congress. This is by no means the same group of lawmakers that passed the TCJA in 2017 because of the turnover of members in recent years. That’s especially true of House Republicans. Only five members of Ways & Means Committee were on the Committee when the TCJA was enacted, and a dozen current Committee members weren’t even in Congress then. And about half of the current members of the full House and a quarter of the current Senate weren’t yet in Congress in 2017. It makes the process more difficult to predict because so many members aren’t invested in a 2017 vote that they didn’t even take. If anything, the turnover at the staff level has been even greater and, as you and I both know, it’s the staff that gets things done in Congress.
RB: Yes we did and yes they do, Ryan. And just to amplify your point, there are going to be even more new members next year after the election. As elected officials are sometimes fond of saying, elections do have consequences. And the parties clearly have different – sometimes very different – views on not only what do with expiring and changing TCJA provisions, but the US international tax regime in general, and other items such as the provisions of the Inflation Reduction Act. But for now, it’s a conversation, not a negotiation. And if we aren’t going to know the team on the field and who has the ball until after the elections, what are we going to see between now and then?
RA: Education. We are likely to see robust efforts to educate members and frame the debate, which we are already seeing in Ways & Means Republican tax teams and Finance Committee Republican working groups. Interesting to note that these are Republican-only, unlike those working groups I mentioned that you and I staffed years ago, which may reflect their thinking that they may likely be in the driver’s seat in 2025, or at least want to ensure their members are calling from the same playbook. It also simply may reflect the reality that the baseline for discussion now is the partisan TCJA vs. the pre-TCJA tax code that we all agreed at some level desperately needed reforms. On the Democratic side, Finance Chairman Wyden said he wants to assemble a menu of options for his members. There are also plenty of outside groups weighing in. The Senate Finance Republican effort is “very much setting the table,” according to Senator Bill Cassidy (R-LA), invoking an often-used analogy for preparing Washington for major legislative events like the tax cliff.
RB: So if we’re going to start firing up the cliches, Ryan, there’s no better time for the well-worn tax axiom that that my old boss Chairman Camp liked to say a lot, which is if you’re not at the table, you’re on the menu — and it’s well-worn because it happens to be true. It’s worth resurrecting now because the TCJA cliff really is right around the corner, its being talked about constantly now on the Hill and tax conferences around town are talking about it constantly, and companies need to be engaged because, as I often like to say, it’s never too early but often too late to get engaged.
One last thing before we go, Ryan – what should we call the 2025 TCJA expiration event? Of course, we’re not going to call it that, which sounds like The Washington Football Team, but we have to come up with something better than The Commanders. “Fiscal cliff” got worn out in 2012, but we’ve already seen that come back in talking about the TCJA “pre-cliffs” on sections 174, 163(j), and bonus depreciation that are stuck in the Senate.
RA: There’s also “Tax-mageddon” and, if TCJA provisions and probably most other tax provisions are on the table, some members have taken to calling it the “Super Bowl of tax.” We all know that sports analogies are popular in Congress, and there’s probably going to be plenty of opportunity to talk about goal lines and maybe even punting in this process.
RB: Right, football is always a good one, but with the vast number of TCJA provisions that are set to expire and the Paris Olympics now upon us, I might prefer the “Olympics of tax” because this will involve several sporting events, not just one. Anyway, it’s safe to say there’s going to be a lot more talk about the 2025 tax cliff on the Hill and off probably well into 2025 and beyond, and I know we’ll be talking about it over several episodes here in the months ahead, but that’s all for now. For WCEY and with thanks to my colleague Ryan Abraham for joining me today, I’m Ray Beeman and this has been DC Dynamics.
