Originally published by Bloomberg Tax
Businesses should prepare to defend against trillions of dollars in adverse tax changes in 2025 as Congress considers how to pay for extensions in the Tax Cuts and Jobs Act—despite pledges from Republicans to protect their signature 2017 law.
Congressional leaders are preparing to consider major tax legislation under expedited reconciliation procedures in the first 100 days of the 119th Congress, a process that will restrict amendments and allow passage by a simple majority vote.
Because of this, businesses should begin identifying their policy priorities, developing legislative strategies, and refining narratives to prepare for this critical moment for US tax policy.
Congress will consider major tax reform legislation next year before major provisions in the TCJA expire at the end of 2025. With approximately $8 trillion in tax cuts and over $3 trillion in revenue-raising provisions set to expire, a full TCJA extension could add nearly $5 trillion to the federal deficit, if not offset with new revenue raisers not included in the original law.
Driving the debate are several sunsetting tax cuts for individuals, including lower marginal income tax rates, which Congress purposefully made temporary. While several changes to business taxation in the TCJA are permanent, such as the decrease in the corporate income tax rate, Congress will be under fiscal and political pressure to use business tax policies to prevent tax hikes on individuals and reduce the overall cost of a forthcoming tax package.
The result is a high likelihood that future tax legislation will contain several adverse tax policy changes for businesses, including new revenue-raising measures.
Businesses also face a more hostile policy environment in 2025 compared with 2017, adding to the risk of negative tax changes. Congressional Republicans have growing concerns over the size of the national debt, annual budget deficits, and inflation. They may take more hostile positions toward business tax incentives to make tradeoffs that preserve individual relief in a fiscally demanding environment.
At-risk business provisions may include policies proposed and enacted in 2017 that add to federal deficits. Several Democrats in Congress have supported increasing taxes on businesses or modifying pro-business tax policy changes adopted under TCJA. As a result, several adverse tax changes may enjoy bipartisan support in the next Congress, where the House will be controlled by a slim majority.
Significant turnover in the House and Senate also means many lawmakers, including members of the House Committee on Ways and Means and Senate Finance Committee, didn’t participate in the 2017 tax debate. A lack of an established voting record on various business tax proposals likely will add to the uncertainty.
Evaluate the most impactful provisions. Businesses should identify existing, expired, and sunsetting provisions of the federal tax code that most affect their business model to develop major policy goals for upcoming tax legislation. Provisions may include cost recovery provisions considered in the stalled Smith-Wyden deal, such as immediate deductibility of research and development expenses, 100% bonus depreciation, and interest deductibility.
Develop a narrative. This can help support any advocacy efforts and legislative strategies. Activities may include developing talking points and background documents on major tax provisions and their effect on the business. In a demanding fiscal environment, businesses should also be prepared to communicate the broader economic impact of their legislative priorities—such as provisions’ impact on job and wage growth and domestic investment—to demonstrate policy choices’ return on investment.
Identify legislative champions. Businesses should pinpoint multiple audiences for their advocacy efforts, including key congressional champions based on their business footprint or past engagement. Once identified, businesses should begin to engage with stakeholders and legislative champions and communicate their business models and legislative priorities.
Develop proactive mitigation strategies. Businesses should consider strategies to monitor for and defend against adverse tax changes related to their policy goals, business model, or footprint—including changes beyond increases to the corporate tax rate and business tax provisions that have previously enjoyed bipartisan support. For example, businesses may consider developing a coalition of similarly situated companies focused on one or more relevant tax provisions.
Tax policy will dominate the legislative landscape next year. With trillions of dollars in tax hikes on the horizon, it isn’t a question of whether Congress will consider tax legislation but how and when Congress will advance a tax package. Businesses should prepare to engage in the upcoming tax debate or risk financing the extension of critical TCJA provisions in 2025.
