With the Treasury Department reporting a $1.8 trillion budget deficit for fiscal year 2024, and interest on the federal debt exceeding $1 trillion, policy experts say lawmakers will be particularly conscious of costs in any post-election tax reform efforts.
Treasury released its final fiscal year 2024 monthly statement on October 18, revealing the record federal debt. A major driver of the deficit is net interest, which the statement showed exceeded both Medicare outlays and defense spending for the year.
As lawmakers consider post-election and 2025 tax reform options, “deficits are going to rear their head, and they’re going to cast a big shadow,” according to Arshi Siddiqui, former policy advisor and counsel to Speaker of the House Nancy Pelosi (D-CA). Two things will be the focus of discussions, she predicted — baselines and pay-fors.
Sage Eastman, a former senior Republican counselor to the House Ways and Means Committee, agreed, adding that the question with any tax reform will be “how big is the negative number.” That number can be obscured “by choosing different baselines,” he explained. Eastman added that on the Republican side, he expects a push to look at things that will “have an economic driving effect and actually lead to tax revenue.”
Siddiqui and Eastman shared their predictions on the road ahead for tax reform during an October 21 Tax Policy Center webinar.
Timeline.
As far as timing, both were skeptical of anything happening during the lame-duck session, but they had higher hopes for 2025.
Siqqiqui said she doesn’t think that the Tax Relief for American Families and Workers Act (H.R.7024) — this year’s bipartisan package put together by Senate Finance Chair Ron Wyden (D-OR) and House Ways and Means Chair Jason Smith (R-MO) — will pass “as-is,” but rather “serves as a base of discussion.”
Eastman predicted that legislation cutting taxes for next year ultimately will move forward. The bigger question for him is whether it will be a “grand bargain” with bipartisan support. He was “highly skeptical” that a single party could “do both tax and spending at the same time to tackle the deficit.”
What goes in, what’s out?
As far as what might go into a broad tax bill next year, Siddiqui said that “when you look at the individual policies, there is a lot of bipartisan support for them.” She added that “on the Democratic side, there is robust and complete alignment that the Child Tax Credit is a really critical policy.”
Though the Child Tax Credit was the sticking point for Senate Republicans in this year’s Wyden-Smith bill, Eastman said there might be hope for next year. “Chairman Smith leaned way in and convinced his conference, and did a great job getting an overwhelming majority of the Republicans in the House to go along with a fairly robust Child Tax Credit,” he explained.
On the corporate income tax rate, Siddiqui predicted that “regardless of what happens and who’s in power, the economy is going to be a critical driving factor” in that discussion. “There’s going to be a balancing in terms of how members and the White House look at finding that sweet spot on what makes a competitive U.S. economy, and at the same time addresses fiscal concerns,” she explained.
Eastman predicted that “some of the extenders are in trouble because … the business community has lived without them for some period of time.” He specifically called out research and development (R&D) provisions — the 2017 Tax Cuts and Jobs Act (P.L. 115-97) ended immediate expensing for R&D under Code Sec. 174 to pay for other tax cuts. Siddiqui seconded those concerns, noting that “the drum beat from those who were really pushing” for extending the R&D provisions is not “as intense as you might think.”
Eastman also was skeptical about any retroactive tax cuts, explaining that “there is a very traditional conservative thought, which is, we don’t incentivize past behavior.” Doing so, he said, is “literally handing out free money for things people did beforehand, which is great when you have it, but not so great when you don’t have the money.”
However, Eastman suspects that some Inflation Reduction Act green energy credits will stick around, because they will be tough “to toss out” for some Republican lawmakers — namely, those in energy producing districts and agricultural districts that are using biofuel provisions. This summer, a group of House Republicans cautioned against a full repeal of the energy credits, noting they have already “spurred innovation, incentivized investment, and created good jobs in many parts of the country.”
What makes sense, fiscally?
As far as the fiscally wise option, Marc Goldwein of the Committee for a Responsible Federal Budget (CRFB) said on October 16 that “we may, in fact, let the Tax Cuts and Jobs Act expire.” According to Goldwein, “from a fiscal standpoint, that’d be a far better outcome than either of the candidates’ plans, but I think it’s likely that there is going to be some form of extension.”
Goldwein was discussing the CRFB’s U.S. Budget Watch 2024, an analysis of Vice President Kamala Harris and former President Donald Trump’s proposed tax and spending policies.
While the current fiscal situation isn’t sustainable, Goldwein said “both candidates, Trump more so than Harris under our estimates, … would take a bad situation and make it significantly worse.” He posited that “if we were to enact either of their agendas in full… and not take future corrective action, we could be facing some kind of debt spiral in the not-all-too-distant future.”
“There’s a risk of the frog-in-the-pot situation where the frog doesn’t realize the water’s boiling until it’s too late,” said Goldwein, adding that it’s important that leaders act now “before the water hits that boiling point.”
On how to raise needed the revenue, Goldwein said the “best way” is “to enforce the Tax Code that we already have.” He explained that “then you’re actually collecting more money without raising anyone’s taxes — you’re just reducing cheating.”
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