In 2025, taxes may go up, go down, or go up for some and not others
The issue most likely to consume the time and energy of Congress next year is not anything President Biden or former president Donald Trump is talking about during this campaign season. It’s the budget, because if Congress does nothing, the law will automatically impose tax increases and spending cuts that neither party wants and that the public would hate.
Major provisions of the Tax Cut and Jobs Act of 2017 — the main legislative accomplishment of Trump’s presidency — expire at the end of 2025. That means that, absent action, tax rates will rise and the standard deduction and the child credit will shrink. Businesses will lose some tax breaks.
There will also be automatic tax cuts: The deduction for state and local taxes will expand for high earners, as will the mortgage deduction for people who buy expensive homes. The personal and dependent exemptions, eliminated by the 2017 law, will come back. But the tax increases will be larger than the cuts.
On the same day that all these changes to the tax code are scheduled to take place, an expansion of health-care programs that Biden signed into law will expire. And if that’s not enough, the federal government will hit the debt limit earlier in 2025.
What the parties want
We have a rough sense of what both parties want to happen. Republicans, including Trump, say the tax policies they put into law in 2017 should be extended as far as possible. Biden and the Democrats want to keep only the tax cuts for single people making less than $400,000 a year and married couples making less than $450,000 a year — and keep the health-care subsidies, too.
The Democrats would also like to take corporate tax rates half the way back to their higher, pre-Trump level. The corporate tax rate will not rise automatically. If they have enough power after the elections, Democrats could either pass an increase on their own or insist it be part of a deal.
The parties have some experience at making budget deals even in these contentious times. They reached an agreement just last year on the debt ceiling. At the end of 2012, the parties made a bargain to soften some spending cuts and tax increases that were scheduled to take place. Biden, then the vice president,
was a top negotiator.
That “fiscal cliff” is the nearest analogue to what will hit Congress next year. But there are two complications that will make it more difficult to reach a compromise this time.
First, both interest rates and the federal debt have risen a lot since 2012. That means that the easiest bargain — give the Democrats most of the spending they want, and the Republicans most of the tax cuts, at the cost of several trillion dollars of added federal debt — is less attractive, and less responsible, now.
At the same time, both Trump and Biden have declared themselves against cutting two of the largest federal spending programs: Medicare and Social Security.
It’s going to confuse
Second, the tax increases that were scheduled to take place if Congress did nothing at the end of 2012 were comparatively simple. Republicans under President George W. Bush had cut several tax rates, and those rates were poised to spring back up.
Democrats wanted to preserve the tax cuts for households making less than $250,000, Republicans wanted to preserve them for everyone. That was a splittable difference: The tax cuts were extended for households making less than $400,000. The Democrats got a tax increase on the highest earners, but had to settle for less than they had wanted.
Trump’s tax law, by contrast, cut some taxes and raised others. Congress can’t
simply pick a number and extend the tax cuts for everyone whose income falls below it — at least, not without making the tax code a lot more complex and perverse.
One more thing: The discussion of these policies is going to confuse normal people, because Republicans and Democrats are going to be measuring these policies from different starting places.
Let’s say that a bill before Congress lets some scheduled tax increases happen and averts others. Would that be a tax increase, because on balance people will pay higher taxes the year after it passes? Or would it be a tax cut, because on balance people will pay lower taxes than if Congress passed nothing?
Republicans and Democrats are going to pick different answers. There will be a lot of terminological debate that’s impossible to resolve because both sides will be right.
It depends on who wins
The legislative outcome will depend a great deal on who wins the elections for the presidency, House and Senate this year. But these issues stand in an odd relation to the campaign: Trump is the one who wants to keep more of the status quo than the incumbent.
It seems pretty likely that the eventual winners are not going to think about how to reach a deal until after the elections are over.