Tax talk 2025 — Policies, provisions and perspectives

Note: This podcast episode was recorded Nov. 20, 2024, and since then, the U.S. House of Representatives races have been called, giving the Republicans 220 congressional members and the Democrats 215. This balance could change depending on potential special elections if some members of the House are appointed to positions within President-Elect Trump’s administration.

In this episode of the AICPA's Tax Section Odyssey podcast, Kasey Pittman, CPA, MST, Director of Tax Policy ­— Baker Tilly US LLP, discusses potential upcoming tax legislation for 2025, focusing on the complexities and challenges of extending the Tax Cuts and Jobs Act (TCJA) and other tax provisions.

What you’ll learn from this episode:

• The potential complexities and challenges of extending provisions of the TCJA and other tax legislation.
• The implications of a unified government and the reconciliation process for passing tax legislation.
• The financial constraints posed by the national debt and the importance of managing the deficit.
• The influence of individual policymakers and the importance of state and local tax (SALT) deductions.
• Potential revenue raisers like tariffs and ending the employee retention credit early, and their impact on the overall tax legislation.

AICPA resources

Planning for tax changes — CPAs need to not only brace for tax law changes such as the TCJA and expiring provisions but also be proactive in planning for them.

Tax advocacy — Advocacy is a core element of our purpose and value proposition. It is a strong mechanism for promoting trust and confidence in the CPA and CGMA credentials around the world.

Transcript

April Walker: Hello, everyone, and welcome back to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section, and I'm here today with Kasey Pittman. Kasey is the director of Tax Policy with Baker Tilly's National Tax Office. Welcome, Kasey.

Kasey Pittman: Thank you for having me.

April Walker: I thought we'd spend a few minutes today setting expectations for tax legislation for 2025. First, a little bit of a spoiler, tax legislation is likely, right, but what it will actually entail is probably a lot more complicated than just a straight status quo extension of TCJA. Kasey, let's set the stage a little bit and talk about what we know about the makeup of the government and what that will mean for upcoming legislation.

Kasey Pittman: I think going into the election, the vast majority of people assumed we were going to wind up in some divided government. We knew it was very likely that Republicans would capture the Senate. The math there was not very good for Democrats, just in terms of how many seats were up, and one of the Democratic-turned-independent retiring senators from a deep red state was almost a certainty to flip. I think the general thinking was that either Democrats would capture the White House or the House, and neither of those things came to fruition. We are sitting here in the 2024 election was a Republican sweep.

We've done a lot of worrying about things that we can let go of, and I think probably we'll touch on that a little bit later in the podcast. But the margins aren't very big. Trump captured the White House actually by a good margin in terms of both electoral votes and total votes in the country. It looks like Senate Republicans will have the majority with a 53-47 split between Republicans and Democrats. The house is currently unknown.

We know that the House has captured 218, and that's what you need for the majority. There's 435 seats. 218 is literally a one seat majority. There are five races outstanding, and probably threeish, maybe four of those are likely to go Republican. We're just waiting on final vote counts. In the House, we're looking at a few vote margin, in the Senate, we're looking at a few vote margin, and that can make legislating really difficult.

One of the themes we touch on here as we go through is reconciliation. When you have a unified government, and a unified government is one where one party has both chambers in Congress, and the White House, which is what we're going into in 2025, there's this process that you can use for certain types of legislation, fiscal legislation called reconciliation. What reconciliation does is it allows you to overcome the filibuster in the Senate. You actually only need a simple majority, like 51 votes in the Senate to pass a bill, but anybody can hold up a bill with a filibuster, and you need 60 votes to end debate and force the vote on the floor. But this type of legislation doesn't require that, so we can move forward with a simple majority.

However, there are a lot of limitations to the reconciliation process. Everything in a reconciliation bill has to be financial. It needs to deal with spending or revenues and it can't be incidentally related to those. That has to be its primary purpose. Tax provisions are perfect for this. It cannot increase the deficit outside of the budget window. The budget window is typically 10 years. Then inside that budget window, you can only increase or decrease the deficit by the amount in the reconciliation instructions.

Reconciliation instructions are set again, by a simple majority on a budget resolution in the House and in the Senate. That number can be hard to define. We also can't touch Social Security, by the way, which is why you never see Social Security in a reconciliation bill. However, that number is really difficult to come to an agreement on sometimes, and I predict that we're going to face some issues just in getting to that budget reconciliation number before we even start to put together the bill.

April Walker: That's a great summary, and we used reconciliation before to actually pass TCJA and some other legislation in the past few years, but it's still not how I grew up learning how law was passed. It's a little bit interesting and that's a great summary. Kasey, I led with saying, we don't think it's going to be a straight extension of TCJA and some of the other proposals that have been thrown out throughout campaigns.

Talk through a little bit about specific provisions, what they're scoring out at, why they may or may not be included in this legislation. Again, I don't think we have to say this. This is all just speculation on our part. We will have to see what we will see once it turns to 2025.

Kasey Pittman: Some of it is really speculative. We're guessing, they are educated guesses based on history and based on what influential policymakers are telling us. For many months, Republicans have really optimistically been planning for reconciliation, hoping to capture both chambers, hoping that Trump would be in the White House. They've been planning. Honestly, there's been a ton of organization inside the House Ways and Means Committee around it.

What I said just a minute ago was that I think we're going to have trouble getting to that number, and here's why. If we want a blanket 10-year extension of the Tax Cuts and Jobs Act, all these taxpayer-favorable provisions, they're mostly taxpayer-favorable and we'll get into that in a second too. It's going to cost $4.6 trillion. Just for benchmarking for everybody, our national debt, which is the sum accumulation of all the deficits we've ever run right now is $35 trillion. That's really impactful because each year, honestly, I believe since Clinton, we've run at a deficit and some of the Clinton years too.

But each year, since I was in middle school, we've run at a deficit, which means we're spending more money than we're bringing in, and part of the reason we're spending more money than we're bringing in is because we have to pay interest on all this debt. It's really come to a head over the last couple of years for two reasons. One, our debt skyrocketed. Recently, TCJA added to it. COVID certainly didn't help it at all. Then additionally, because we've had such high inflation, the Fed has increased interest rates and that's the rate that we pay to service the debt.

In FY 24, which ended at the end of September. This year, we paid over a trillion dollars just to service our debt, not paying down our debt, just paying the interest on our debt. That's more than we spent on defense spending for the entire year. It becomes a liability if our debt is too large. Particularly, we like to compare it to our GDP. This year we ran a $1.8 trillion deficit. Over a trillion of that we could say is attributable to interest costs. Anyway, here we are. We've got $4.6 trillion to extend the TCJA.

Then we've got a whole host of other campaign proposals that Trump made on the trail. No SALT, and we'll get to SALT in a second. No SALT, no tax on tips, no tax on overtime, no tax on Social Security benefits. There's family caregivers credit for home caregivers. There's just a number of things, and some of them are hard to score because there's not a lot of details around the policy yet. They're more on the idea than the actual detailed policy phase at this point but those are a lot and estimates are 8-10 trillion with the Tax Cuts and Jobs Act plus all of the other campaign promises, and that is just wild as compared to our current national debt and the fiscal responsibility that I think a lot of policymakers and Americans really are focused on.

Do I think that Senate Republicans and House Republicans are going to come together and say, let's write a $10 trillion bill that's not paid for at all, that increases the deficit? No, I don't. We still have deficit hawks in the Republican Party, we have people who are really concerned about it and for good reason. That's going to be a struggle. I want to say SALT is really important here. Republicans are fairly united in the general extension of Tax Cuts and Jobs Act. There's a lot of campaigning this cycle on it. It's been a priority where we're fairly unified.

However, that's not where it ends. We're looking again at these small margins in the House and the small margins in the Senate. When we have that, we have individual policymakers who have a lot of influence.

We saw that in 2021- 2022, when Democrats had a big bill and they said, Hey, this is our wish list, and Joe Manchin and Kristen Sinema, who are Democrats, turned independents in the Senate, said, Oh gosh, no, thank you, that's way too big. Here's what we can do. We'll do the Inflation Reduction Act, which was a fraction and a little bit of a different direction on some than the original Democratic priorities. That's what we passed, because again, these two policymakers were able to exert a ton of influence.

Then we saw it in 2023, when I think it was a total of eight house members ousted their speaker, which was the historic moment for Republicans in the House, what we see is a lot of power when we have those small vote margins.

In the House, there's a really strong caucus for repeal of the state and local income tax, a limitation of $10,000. It's bipartisan. But there are a number of Republicans on there, particularly from high tax states, from traditionally blue states, New York, California, Connecticut, New Jersey. There's dozens of them, really, and they've won re election to the House and they've campaigned on this, and this is going to be a priority for them. I think it's really impractical to think we're going to see a tax bill that doesn't have SALT attached to it because this is a pretty strong caucus.

Again, the margins are small, and to fully repeal SALT for 10 years is another $1.2 trillion. Now I'm at $6 trillion April, and that's before the overtime and before the Social Security, which is already system in peril in terms of being able to fund it. It's not quite that simple, and we do have deficit hawks. When we saw Tax Cuts and Jobs Act originally come through in 2017, we used the reconciliation process, Republicans did, and then Democrats used it in 2022 to pass the Inflation Reduction Act. There were many Republicans who wanted much more than TCJA cost.

TCJA eventually they came to an agreement, and they said, We can do $1.5 trillion. 1.5 trillion is what we can sign on for. We can get everybody on board for that. That's what the budget instruction said. You can write a bill that increases the deficit by 1.5 trillion dollar over 10 years and so they did that. But it's not quite that simple. People say, $1.5 trillion, it wasn't 1.5 trillion dollar in tax cuts. It was $5.5 trillion in tax cuts with four trillion dollar in revenue raisers, some of them were pretty simple.

 I replaced these itemized deductions with the standard deductions, they kinda offset, but there were some provisions in there that were just revenue raisers and one of them is 163(j), the business interest limitation. Then additionally, we couldn't see them all through the entire budget window and still hit that mark. When I originally described it literally in 2017, 2018, when I was talking about it, I would say. Hey, look, we've got all these dials, and at the top, we've got this big number, and this is what we've added up to. We want to turn this dial up, but that costs too much money, and that puts us over, so maybe we dial it down on the number of years or maybe we add this revenue raiser.

We're trying to back into this $1.5 trillion number, and that's part of the reason we saw some of these changes that transitioned under TCJA. We're seeing right now the bonus depreciation number come down. We've seen a change in how we calculate ATI for that business interest limitation, and we've changed how we deduct research and experimental expenditures. Honestly, they just couldn't make it all the way through that budget window at that number.

Just a quick note on those things that have already changed, we saw a bipartisan bill sail through the House, sail through 83% vote margin, 357-70, I want to say on January 31 this year, and it died in the Senate. Senate Finance Committee Leader Ranking member, Mike Crapo, said, No, thank you. [He was] really confident that he was going to have a majority in the Senate in 2025 and he does, and he now also is able to have a Republican House to work with.

One of the questions I get a lot is, do I think that we're going to see that bill be taken up in the lame duck session? My answer is no, I do not. I don't see what the incentive is for Republicans to make the concessions in there with Democrats around the refundability of child tax credit because they've got different methodologies on that. I don't see an incentive for them when they know they're going to run the table next year.

April Walker: One thing I know you and I have talked about before, there's in evaluating “pay fors” and revenue raisers, there's the ERC provisions that are in that legislation that you're talking about in the past. I guess that's still potentially on the table ending ERC in January, that's potentially out there. What about tariffs? Tariffs have been suggested as a revenue raiser. How does that work with reconciliation?

Kasey Pittman: There are a couple of revenue raisers that have been widely talked about, and I think there's a lot of bipartisan agreement around ending the employee retention credit early, and that's scored, if they use it from the old bill, that's scored around $77 billion. But you have to think that's drop in the bucket when we're talking about $6 trillion, $8 trillion, $10 trillion dollars. But it helps - every bit helps, obviously right? 

And then there's another one that's clawing back a lot of the IRA provisions, some of those clean energy provisions and semi recently, I think last weekend, President Elect Trump said,"Hey, I'm going to take away this $7,500 EV credit. We're not doing that anymore once I'm president." That's one item, but there are a lot of energy provisions outside of just that. That's the one that I think most individuals know about, but there are a lot of energy provisions outside of that. How they dismantle that is going to be really interesting to me, because there are some proponents who just say kill it all. This is not where our priorities are.

There are others and there was a letter, I want to say to Speaker Johnson in the summer, that came from a number of House Republicans, a dozen or so that said, Hey, these are really beneficial in my district. I really hope that we and the language we've heard a lot of here is take a scalpel and not a sledgehammer. That's the talking point, scalpel and not a sledgehammer, to clawing back some of these provisions.

I do expect some exploration of clawing back those provisions, and then tariffs. President Trump has talked a lot about tariffs and we've heard a number of things between 10 and 20% across the board tariff rate for anything coming into the country, about 60% on China. I believe we've heard 100% on cars coming from Mexico. What we don't know is and I've gotten a ton of questions on this, honestly. What we don't know is how serious he is about those.

Is it an idea? Is it something that he intends to use as a bargaining chip in trade negotiations? Is it something that's going to be applied potentially in a more specific niche, these particular areas? That's what we saw in his first presidency was that it was particular items coming in. We saw it on aluminum, we saw it on steel. Or is it going to really be, does he intend to do it across the board?

The thing is that presidents do not have completely unfettered power here, but they have the ability to enact certain tariffs without the consent of Congress. That being said, unless they find a way to write that into the reconciliation bill, they can't use the money they believe they'll generate from the tariffs as an offset to try to get back into that number.

Because again, TCJA, $5.5 trillion in cuts, $4 trillion in revenue, if we want to include that in revenue, it's going to have to be present in the bill in some fashion. What I have been reading and researching a little bit, does it have to be explicit or does it have prescriptive or does it have to authorize him to move in that area? I'm still doing a little research there. But anyway, it would have to be in the bill in order to be included in the revenue scoring.

April Walker: Lots of items to think about as we're rapidly going towards the end of the year and our listeners are [a  lot of] tax partitioners talking to clients. I think another top question I'm sure you've been getting is, what are we thinking about timing? When is this going to happen? When is legislation going to happen? Because we really think it's going to happen, they're not going to let TCJA expire at the end at 12/31/25. But what are we thinking?

Kasey Pittman: Speaker Johnson has been very bullish on this and saying he would like a bill coming out of the house, not necessarily enacted, but out of the house in the first 100 days of Trump's presidency. Just if we're going from inauguration day of January 20th, that date would be April 30th. That is a really ambitious goal. There's a number, it's ambitious in ideal scenarios. There's a ton of other priorities as well, including government funding, which as of this moment, is not done, and we don't know if it'll be a continuing resolution or if they'll fund the government through the end of the year.

 But there are a lot of priorities for this Congress, and one of them is the confirmation of all of President Trump's picks for various administration positions, which is going to complicate this. Because right now, the House Republicans have the generally accepted number is 218 seats. There are five seats outstanding. They could wind up with a total of 223. That's probably more like 221, 222, maybe 220, but probably 221, 222 (See note above for the final results).

There are three people from the House that President Trump has nominated. They're leaving their seats, assuming they get this job, Matt Gaetz has already left his seat, and that's going to complicate matters. It's not an easy swap. Speaker Johnson will be working with a very tight majority, like a very razor thin majority in the House until all of that is sorted out, and you've got new policymakers in seat. That's going to complicate things as well, and it's going to be difficult to get to that number. Again, I think that there are a lot of different, even within the Republican Party, even though they believe in the TCJA. They believe it was stimulating. They think that they should extend it. Deficit funding for a large number is going to be really difficult.

First, we're going to have to come to that number, and that is going to be a negotiation in and of itself. It's not going to be $10 trillion. It's not going to be, hey, we get everything we want for 10 years. In addition, then they have to figure out how to work with that number. Let's say $2 trillion, I'm just going to throw that out there, $2 trillion, $3 trillion, whatever they've decided on. You can increase the deficit over the budget window by $2 trillion dollars, $3 trillion dollars. I've got 10 years. In my budget window, what am I going to do with it? I could try to find a ton of revenue raisers, and I think it's honestly going to be a mix of these things.

I could try to find a ton of revenue raisers. I could try to reduce government spending. I could not put everything in place for 10 years. We could see a bill that comes out for four years. Even though the budget window could be larger, they could say, hey, they're all going to expire after four years because that's how we can get most of our priorities in, and then we're going to kick this can down the road.

When they crafted TCJA, it was very intentional. The portion that they made permanent was the corporate rate, there's a much longer planning runway for large corporations and businesses than there are for individuals, typically.That was smart. In addition, the things that are expiring are the things that are popular with voters, lower rates, increased child tax credit. It puts political pressure on the extension of these items. They could do that again because the items we're talking about are by and large, popular with voters. Nobody's looking, nobody raises their hand and says, I'd really love you to increase my tax rate. Personally, thank you so much. I'd like my bill to go up every year.

Now, many taxpayers are okay with it and they believe in the methodology of a graduated system, but nobody's personally asking for an income tax increase that I've seen anyway in my practice. They're popular, they could kick it down the road and put pressure on the 2028 election, if they only do it for four years. I'd be interested to see what happens. They could also only enact them partially or phase them out or make other changes. There's a lot to figure out. There are a lot of dueling priorities and there's a lot of money at stake.

April Walker: Lots to think about as we move into 2025, but I so appreciate your sitting down with us today, Kasey, and thinking through the scenarios. Very helpful for me.

In closing, as we wrap up this podcast, I like to take a little bit of a left turn and think about, hey, we're together, we're taking a journey together towards a better profession in doing that, I like to get a glimpse of my guest other journeys outside of the world of tax. Kasey, tell me about a trip you have planned or a bucket list item you've got on the agenda.

Kasey Pittman: Actually, we took our kids out of the country for the first time this summer, and we had a little bit of a larger trip planned and it got delayed because of a couple of years, mostly because of COVID, honestly. It was wonderful. We went to Germany and Austria and London, and we were hoping to add France on there too, but we couldn't because it was the Olympics and it was bananas getting into France. It was absolutely bananas. We are hoping to go, not next summer, but maybe the following summer go back and bring the kids to France. I enjoy traveling a lot, but I think it's so cool to see it through their eyes, too. I think it's really neat because the world.

April Walker: I love to do that, too. Traveling is definitely I didn't do it a ton as a kid, and so I try to do it and get my daughter on the road as much as possible.

Kasey Pittman: But in the short term, April, I'm going to come down your way. Let's see. I want to say it's the first Sunday of December to watch because on Monday, it is the Women's NCAA soccer championship, which will be very exciting. It'll be our third year and it's in Cary. Unfortunately, the next three years, I think, after that are in California, and we're not going to make that trip. It's probably our last year.

April Walker:  Yes, you're always welcome to come down to a lovely North Carolina. Hopefully the weather will cooperate.

Kasey Pittman: Fingers crossed.

April Walker: Thanks again so much, Kasey. Again, this is April Walker from the AICPA Tax Section. This community is your go to source for technical guidance and resources design, especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much. Please feel free to share with a like minded friend. You can also find us at aicpa-cima.com/tax and find our other episodes and get access to any resources we mentioned during this episode. Thank you so much for listening and wishing everyone a happy upcoming holiday season.

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