Q4 2024 Wealth Strategy Insights
by Dash Thompson, CPA, CGMA Tax Director
Double Down on Trickle Down: Tax Policy Following A GOP Election Sweep
Over the past fifty years, the battle over income tax policy has been a cornerstone of American politics, shaping economic discourse and influencing voter sentiment. In the twenty-first century, however, federal tax policy is increasingly temporary due to a combination of factors, including bitter polarization among lawmakers in Washington.
President-elect Donald Trump’s tax policies during his first administration were pivotal in defining his economic agenda. The passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 represented the most significant overhaul of the U.S. tax code in three decades. While certain key features of the TCJA do not have an expiration date (“permanent”), most other provisions will revert to pre-TCJA law after 2025 (“temporary”) unless Congress takes action before then. Some of the most impactful provisions and their prospects for renewal are outlined below(1).
Permanent
Reduction in the Corporate Tax Rate. Bar congressional action, the flat 21% tax on net profits for Ccorporations will remain unchanged. However, lawmakers have indicated that “everything is on the table” when negotiating extensions of the TCJA.
Elimination of the Individual Mandate Penalty from the Affordable Care Act. While some states, including California, have enacted their versions of the health insurance mandate penalty, there is no longer any enforceable penalty at the federal level for lack of health coverage. Though other features of the ACA remain popular, the individual mandate penalty is unlikely to be reinstated.
Temporary
Incentives for Business Investment. The TCJA initially included 100% accelerated first-year (“bonus”) depreciation but was reduced to 80% in 2023 and will decline to 20% per year until it disappears entirely after 2026. Congress has repeatedly renewed various bonus depreciation provisions since at least 2003, often at the last minute or even retroactively after expiration on several occasions. Expect this to be extended in some form, possibly increasing the bonus rate to 100% retroactively for 2024-26.
Individual Tax Relief. The TCJA introduced lower tax rates for individuals, increased the standard deduction and the child tax credit, and made other significant changes. These provisions are set to expire after 2025. President-elect Trump has proposed to make the expiring TCJA provisions permanent, which the Congressional Budget Office estimates would add $3.3 trillion to the federal deficit over a 10-year period. Because of this cost, expect intraparty arguments from GOP deficit hawks and lengthy congressional debates regarding extending these individual tax benefits.
Qualified Business Income (QBI) Deduction. This has been a key tax break for many business owners, including S-corporation shareholders, LLC members, and self-employed individuals. Debate in Congress on whether to extend the QBI deduction beyond 2025 has been ongoing, with proponents arguing that the deduction helps narrow the difference in tax burden between c-corporation profits (flat 21%) and pass-through business profits (up to 37%). Critics of extending the provision argue that calculating the deduction is needlessly complex and rife for abuse. At the same time, there is no evidence that the tax break has been an effective incentive for business investment and job growth.
State and Local Tax (SALT) Deduction. The limitation on SALT deductions at the individual tax level has significantly impacted middle-class and high-net-worth residents alike in higher-tax states like California and New York. As a result, this aspect of the TCJA has drawn bipartisan criticism and calls for reform, as it has created disparities in tax liabilities based on geographic location. As a response, many states have enacted pass-through entity tax (PTET) deduction laws that allow business owners to pay and deduct their state taxes at the business entity level. While this has been a welcome and effective workaround to the SALT cap in many cases, it has created additional complexity with tax planning and increased compliance costs for taxpayers. The SALT cap is unlikely to be repealed entirely due to its cost but may be modified to appease GOP congress members from higher-tax states.
As public sentiment on taxes and economic conditions continues to influence political decisions into the future, discussions surrounding tax policy will remain central to the broader discourse on economic justice and prosperity. If the economy shows signs of weakness or inflation persists, lawmakers may be pressured to reconsider tax cuts that disproportionately benefit the wealthy and corporations. Conversely, if the economy is strong, proponents of the TCJA may argue that the tax cuts should be maintained to sustain growth.
The TCJA was a partisan effort, primarily supported by Republicans and opposed by Democrats at the time of its passage. The political climate remains contentious, with Democrats generally advocating for increased taxation on corporations and high-income earners to fund social programs. Republicans are likely to push for the extension of tax cuts and increased privatization of government services. This divide will play a significant role in congressional negotiations.
Corporate interests, particularly those benefiting from the reduced corporate tax rate and other provisions, will likely lobby for the extension of favorable tax policies. However, advocacy groups representing lower- and middle-income families may push for reforms to ensure tax benefits are more equitably distributed. Their influence can sway lawmakers, particularly those in swing districts.
The future of American tax policy hinges on a complex interplay of political dynamics, public sentiment, and economic conditions. Lawmakers must navigate these factors carefully, weighing the benefits of tax cuts against the potential consequences for federal revenue and public equity. Extending or modifying the TCJA will reflect party ideologies and the practical realities of governing in an increasingly polarized political environment. The outcome will likely shape the economic landscape and fiscal policy for years to come.
1 https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses
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