Can Republicans Find Common Ground in 2025? Tax Legislation Update

Key Takeaways

• The 2017 income tax cuts are set to expire at the end of 2025, potentially raising income taxes for nearly all taxpayers unless Congress acts to proactively extend them. 
• Passing new tax legislation will be a complex undertaking, even with unified Republican leadership of the Presidency, Senate and House of Representatives.
• We intend to write pieces throughout the year – updating clients on the status of tax legislation, as well as financial planning and investment strategies around policies that may be extended, added or dropped from any tax legislation.

Introduction

Following a Republican sweep in the November elections, a new Congress convened on January 3, 2025. Republicans secured a 53-47 Senate majority, while their control of the House narrowed to 219-215. 

Republicans may have only two years to accomplish their legislative priorities, since there is no guarantee they will maintain control of both chambers of Congress in the 2026 elections. This narrow control of Congress carries major implications for the ability of Republicans to pass laws in 2025 and 2026.

Tax Policy Implications

The Tax Cuts and Jobs Act (TCJA) of 2017, President Trump’s signature economic act, introduced significant reductions in personal income and corporate taxes. However, its provisions are set to sunset at the end of 2025, which would result in widespread tax increases for nearly all taxpayers in 2026 unless Congress acts to extend them.

Key TCJA provisions expiring in 2025 include:

• Income Taxes: Most tax rates aside from the lowest will increase, with the top rate rising from 37% to 39.6%, and tax bracket thresholds reverting to lower levels.
• Deductions: The standard deduction will decrease, the $10,000 cap on state and local tax (SALT) deductions will expire, and the mortgage interest deduction will apply to $1 million in debt (up from $750,000).
• Alternative Minimum Tax (AMT): Lower thresholds will subject more taxpayers to the AMT.
• Gift and Estate Taxes: The lifetime exemption will drop from nearly $14 million to $7 million per individual.

On the campaign trail, President Trump expressed support for making the TCJA’s provisions permanent while also proposing other tax reforms, including:

• Eliminating the SALT deduction cap (a major revenue driver in the original bill)
• Reducing corporate taxes to 15% for goods manufactured in the U.S.
• Exempting Social Security benefits, tipped wages, and overtime pay from income taxes.

We should not automatically assume that all of the TCJA’s major terms will be extended as-is, even with Republican control of the House and Senate. A Wall Street Journal poll taken in September showed that President Trump’s two most popular campaign proposals were exempting Social Security benefits and tipped wages from income taxes.   

It is best to think of the policies articulated above as the Republican party’s tax wish list. The budgetary cost of these new proposals, along with removing the cap on SALT deductions, may compel Republicans to reprioritize certain items before passing their next tax bill. For example, some of the TCJA’s original tax cut provisions may be dropped in favor of a new proposal. Concern about the budget deficit and pressure from high interest rates may further limit Congress’ ability to pass tax legislation.‍

Budget Reconciliation Overview

Republicans plan to advance their tax legislation using the budget reconciliation process, a mechanism that allows Congress to pass budget-related bills without the risk of a Senate filibuster, which requires 60 votes to overcome. Reconciliation provides a streamlined path to enact legislation with a simple majority and is typically available once per fiscal year, ending in September. Thus, Congress has two opportunities to use reconciliation before the Tax Cuts and Jobs Act (TCJA) sunsets on December 31, 2025.

Historically, reconciliation has been employed when one party controls the Presidency and both chambers of Congress, offering the majority party its best chance to implement key legislative priorities. According to data from the Peter G. Peterson Foundation, reconciliation has been used only nine times this century, and just once on a bipartisan basis. However, single-party control does not guarantee success. In 2017, Republicans failed to repeal the Affordable Care Act through reconciliation. Similarly, in 2022, President Biden’s Build Back Better proposal stalled in the Senate, though a scaled-down version passed as the Inflation Reduction Act.

One Reconciliation Bill or Two?

In 2025, Republicans have two opportunities to pass budget reconciliation bills. In theory, tax cuts could be addressed in one bill, other legislative priorities in a second, or all of their priorities could be combined into a single, large bill. House and Senate leaders appear to prefer different approaches.

According to recent reports in The Washington Post, Senate Majority Leader John Thune plans to use the first reconciliation bill to focus on immigration, energy production, and the defense budget, leaving the extension of the TCJA and other tax cuts for later in the year. In contrast, The Wall Street Journal notes that House Republicans, under Speaker Mike Johnson, favor a single, large bill approach.

The reasoning behind these preferences is clear. In the Senate, Republicans can afford to lose up to three votes and still pass legislation with the Vice President’s tie-breaking vote. In the House, however, the margin for error is razor-thin. Speaker Johnson, who was narrowly reelected by a single vote, faces an even slimmer majority due to two members being nominated to President Trump’s Cabinet. Speaker Johnson may only have one attempt to hold House members together to pass Republican legislative priorities. 

Possible Outcomes for Tax Cuts in 2025

The fate of the 2017 TCJA and additional policies favored by President Trump on the campaign trail remains uncertain. 

Several potential scenarios could unfold:

• A Blend of Campaign Proposals and TCJA Provisions: If time allows, Republicans may craft legislation that extends key elements of the TCJA, revises or eliminates others, and incorporates popular campaign proposals. The removal of certain provisions – such as the current gift and estate tax exemptions – could carry significant planning implications, making it crucial to stay proactive.
• Extension of the TCJA as Is: Facing year-end pressure, Republicans may opt to extend the TCJA in its current form rather than risk the consequences of failing to pass any legislation.
• A Bipartisan Compromise: With Republicans holding a narrow House majority, losing just a few votes could necessitate a bipartisan agreement. Democrats, including Vice President Harris, have previously supported extending tax cuts for individuals earning less than $400,000, providing a potential foundation for a limited compromise.
• Nothing Happens: The possibility of legislative inaction cannot be overlooked. If Republicans struggle to unite their party, Democrats may choose to let the gridlock persist, placing the political burden of tax increases in 2026 squarely on Republican shoulders.

What to Expect from Farther this Year

We are committed to keeping you informed as the fate of the Tax Cuts and Jobs Act (TCJA) unfolds:

• Legislative Updates: We will provide timely insights into the discussions taking place in Congress, the progress of the legislative process, and the final outcome – whether provisions are passed, amended, or left out entirely.
• Market Implications: Our team will analyze the financial market impacts of any tax legislation and how these changes may influence your investment portfolio.
• Strategic Planning: We will offer guidance on both financial and investment planning strategies tailored to potential legislative outcomes. For example, the timing of your plans – whether implemented in 2025 or deferred to 2026 – could depend on whether specific provisions are extended.

As always, your Farther advisor is here to address any questions you may have.