Federal Tax Reform Timing Is Still Uncertain

Business Tax

Following the January inauguration, a flurry of executive orders, and Senate confirmations rolling in, the timing of when federal tax reform will take place still appears to be undecided amongst the Republican party. Federal tax reform will include the extension of tax provisions provided under the Tax Cuts and Jobs Act that are set to expire on Dec. 31, 2025. If federal tax reform cannot be passed, the vast majority of individual and private businesses federal income taxes will significantly increase.

While President Trump’s campaign promised to extend the TCJA sunsetting provisions, the Republican party seems divided on the timing to address the federal tax reform in Congress. During the evening of January 5, President Trump took to social media to announce, “Members of Congress are getting to work on one powerful Bill that will bring our Country back and make it greater than ever before”, which would include a focus on securing the border, rolling back restrictions around American energy, and renewing the Trump tax cuts. In addition, President Trump has also stated that the Republicans should use their newfound leverage resulting from the needed disaster relief funding for the Los Angeles wildfires. However, recent comments from GOP Congressional leaders reflects uncertainty on the appropriate timing of a federal tax reform bill.

How Will Federal Tax Reform Be Presented In Congress?

Congress intends to pass federal tax reform, as well as border security bills, through a process called budget reconciliation. A budget reconciliation process is addressed in the Federal’s annual budget resolution process. In its annual budget resolution, Congress sets total spending, revenues, and the surplus or deficit. The budget resolution may also include reconciliation instructions. Budget reconciliation instructions direct one or more committees to amend existing law to achieve specified changes in spending, revenues, deficits, and/or the debt limit, which can include changes to tax law.

The budget reconciliation process is desirable to the Republican-controlled Senate as it avoids the general 60-vote threshold necessary to adopt legislation. Under reconciliation, only a simple majority is needed. This would allow the Senate to enact tax legislation this year without the support of any Democrats or Independents.

Since 1980, the budget reconciliation process has resulted in 23 enacted bills, with both parties taking advantage of the process. Democrats most recently used it in 2022 to lower the cost of prescription drugs and health care and invest in cleaner energy. Republicans last utilized the bill in 2017 to approve the TCJA.

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So, what’s the catch? The Budget Committee only provides a specific dollar amount for increases to the federal budget deficit over a 10-year budget window. For example, when passing TCJA, the budget resolution allowed Republicans to increase the budget deficit by $1.5 trillion over 10 years. Deficits outside the budget window are not allowed, which resulted in the TCJA sunsetting most of the individual and pass-through provisions as of December 31, 2025. These sunsets and the potential tax increases they pose to individuals and pass-through businesses is the reason Congress is intent on acting quickly.

Congress will be able to pass a budget reconciliation bill twice during the 2025 calendar year, one to adopt the FY 2025 budget and another to adopt the FY 2026 budget. Therefore, federal tax reform could be included in the FY 2025 budget resolution process in the first months of 2025 or be delayed until late 2025 or even early 2026 when approving the FY 2026 budget.

Congress Divided

Several senators, including Majority Leader John Thune (R-S.D.), have called for using the reconciliation process to address two challenges — the expiration of the TCJA tax provisions and the funding needed to strengthen our immigration policies. They would prefer two bills, the first reconciliation package focused on border security and defense and a second reconciliation bill addressing federal tax reform.

House Speaker Mike Johnson (R-La.), on the other hand, outlined a plan on Fox News, Sunday, January 5 where federal tax reform would be included in the first reconciliation bill and was quoted that it would be on Trump’s desk “certainly by May” or “in the worst-case scenario by Memorial Day.”

The challenge for Speaker Johnson is that the House majority has dwindled from five Republicans to only three. The resignation of Representative Matt Gaetz (R-Fla.) and the appointment of Rep. Michael Waltz (R-Fla.) as National Security advisor decreased the GOP House seats to 218. In addition, the appointment of Elise Stefanik (R-N.Y.) as U.N. Ambassador will also require her House resignation, although it is expected that special elections in both Florida and New York will eventually restore these seats for Republicans.

This historically narrow majority limits Speaker Johnson’s ability to pass a reconciliation bill as, without any Democratic support, he can only lose one to three Republicans depending on when the bill is considered. As a reference, 12 Republicans opposed the TCJA budget reconciliation in 2017, with no Democratic support.

Factions within the Republican conference are weighing in. For example, the 31-member House Freedom Caucus on January 16 expressed their desire for a two-bill approach that includes significant spending cuts. As Representative Chip Roy (R-Texas) told Politico: “They are counting on the ability to try to take border [funding], put it in reconciliation with tax cuts and roll us on spending. That ain’t gonna fly. So they should probably get religion now, or it’s gonna be a really long year.”

The Freedom Caucus’ statement supporting two separate bills requires the first bill to generate 10-year savings of between $361 and $541 billion. In exchange, the caucus would support a $4 trillion increase in the federal debt ceiling before June 5, the estimated timeline provided by Janet Yellen, the Secretary of Treasury, as to when the extraordinary measures to keep the government operational will be gone, requiring Congress to act to prevent the U.S. from defaulting.

President Trump has acknowledged the difficulty facing the House. On January 23, per a White House press release: “We have to get Democrats to approve it. But, you know, if the Democrats didn’t approve it, I don’t know how they can survive with about a 45% tax increase, because that what it would be. And so, I think they’re going to be. We’ve been working along with them pretty well.”

Pushing tax reform to the fall of 2025 could result in further complications. As Ways and Means Committee Chair Jason Smith (R-Mo.), pointed out recently, Congress only has 149 legislative days left in 2025 to address the expiration of the TCJA provisions. While many may have assumed that a Republican sweep would streamline the federal tax reform process, all current indicators suggest actually enacting federal tax extensions will become increasingly challenging as the year progresses.

This article was originally published by Lynn Mucenski-Keck in Forbes on January 28, 2025.

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