Tax cut 2.0 push seen ending in whimper, but there’s always 2025
A Republican effort to make last year’s individual tax changes permanent is expected to be approved by the House on Friday, before the initiative likely gets shelved because the Senate won’t act on it.
But, if history is any guide, taxpayers who benefited from the overhaul shouldn’t think all hope is lost — they’ll just have to be patient until shortly before the provisions are set to expire at the end of 2025.
Lawmakers, regardless of whether Democrats or Republicans control Congress, have often voted to extend tax breaks just before they’re scheduled to disappear. Members who have decried the changes when they’re initially inserted into the code are generally reluctant to erase all of the benefits years later.
“As history has proven, once the public and taxpayers get used to certain tax benefits, that increases the pressure on Congress to extend them or make them permanent,” said Jorge Castro, a tax consultant and former House and Senate aide.
That’s what happened with the tax cuts passed in 2001 (which had a follow-up enhancement bill in 2003) under former President George W. Bush. The cuts were set to expire in 2010, but were extended for two additional years. Then, in the early days of 2013, President Barack Obama and Congress worked out a budget deal to make the tax cuts permanent for most earners.
“As time passes, the political nature of a piece of legislation can be detached from its reality,” said Mattie Duppler, a senior fellow at the right-leaning National Taxpayers Union. “A Democrat voting in 2013 wasn’t voting in support of President Bush’s philosophy. They were supporting current law.”
House Republicans have forged ahead with holding a vote on “Tax Reform 2.0” legislation before the congressional elections this November. Yet that vote has largely been viewed as a political exercise, since the Senate is unlikely to take up the issue this year because it does not have the votes to pass.
In another example of congressional reluctance to kill off tax breaks, lawmakers have repeatedly extended the deduction for mortgage insurance premiums, which helps homeowners who can’t afford a 20 percent down payment. The deduction, which expired at the end of 2017, is likely to get extended again to cover 2018 and possibly years beyond in an end-of-the year vote.
Republicans have hoped that the 2.0 legislation could be used to remind voters of President Donald Trump’s $1.5 trillion tax cut — which has had a lukewarm reception so far — and force Democrats to take an uncomfortable vote against providing middle-class relief.
Tax Law Perception
The tax overhaul slashed income tax rates across the board, while also almost doubling the standard deduction and providing an enhanced child tax credit. It removed personal exemptions and eliminated or limited itemized deductions, such as for state and local taxes.
It also provided a special break for owners of pass-through businesses, such as partnerships. All of the individual changes are set to expire at the end of 2025 for budgetary reasons. On the corporate side, the law permanently slashed the rate.
The non-partisan Joint Committee on Taxation estimates making the individual cuts permanent would cost about $545.1 billion over the next 10 years, after taking economic growth into account.
So far, the tax law has not been the political pot of gold that Republicans had hoped. No Democrats voted for it, and party members have not hesitated to attack it. Even some Republicans — particularly those in high-tax Northeastern states hurt by the new cap on the so-called SALT deduction — don’t want to talk about their party’s signature legislative achievement.
A survey commissioned by the Republican National Committee obtained by Bloomberg News shows that Republicans acknowledge that voters overwhelmingly believe the tax overhaul helps the wealthy instead of average Americans.
The political landscape in about seven years is likely to be much different. Trump will no longer be president. There are four election cycles in the House between now and then. The tax law talking points will be long gone from the public discourse.
Kevin Brady of Texas, chairman of the tax-writing House Ways and Means Committee, has acknowledged that his plan to pass the legislation out of the House now isn’t likely to lead to anything reaching Trump’s desk imminently.
Senate Majority Leader Mitch McConnell “has told me directly that when he sees 60 votes available for that provision, that’s when he’ll make a decision,” Brady said.
Sixty votes — the number of votes needed to pass most legislation in the Senate — aren’t likely to materialize while Democrats oppose the 2.0 campaign. But Democrats haven’t been universally opposed to making temporary tax cuts permanent, especially those that have been on the books for a decade or more.
That’s what happened when Obama signed the tax legislation in 2013 — passed by a Republican House and a Democratic Senate — making the majority of his Republican predecessor’s tax cuts permanent. Congress is setting themselves up for a “2024 or 2025 showdown” this time around, said John Gimigliano, head of federal tax legislative and regulatory services at accounting firm KPMG.
‘Balance of Power’
Still, there were adjustments to the Bush tax cuts “reversing provisions for those at the top and adding things for lower-wage workers,” said Chuck Marr, director of Federal Tax Policy at the left-leaning Center on Budget and Policy Priorities. “It reflected the balance of power at the time.”
Those earning more than $400,000 as an individual or $450,000 as a couple saw their top rates raised to 39.6 percent and the long-term capital gains rate increased to 20 percent.
For the 2017 law, it’s possible some provisions like the $10,000 SALT deduction cap are likely to continue to be controversial and could be tweaked. But cornerstones of the legislation, such as the standard deduction increase, which means more taxpayers can file their taxes using a simplified process, are likely to be favored by both parties.
“I don’t think in 2025 anybody is going to be excited about a middle-class tax hike,” Duppler said.