A tax battle looms in 2025, with the stakes amounting to trillions of dollars for individuals and businesses. Who wins the White House and Congress will determine who gets a break and who pays the bill.
The stage was set by former President Donald Trump’s Tax Cuts and Jobs Act, passed in 2017 along partisan lines. The law permanently lowered the top corporate tax rate to 21% from 35%. It temporarily gave a break to households, lowering marginal tax rates and nearly doubling the standard deduction to $12,000 for single filers and $24,000 for married joint filers. Those deductions have since adjusted upward for inflation.
To limit the costs of the bill, the Republican-controlled Congress that passed the measure set the individual taxpayer breaks to expire at the end of 2025—partly as a bet that a future Congress wouldn’t dare let it happen. That assumption will be put to the test.
“It sets up an extraordinary policy battle for 2025. Something has to happen,” says Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center.
The good news for most individual taxpayers is that their taxes likely won’t go up no matter who wins the White House. That’s because President Joe Biden has already committed to preserving the cuts for households earning less than $400,000. Since Trump and Republicans also say they want to extend all the cuts, it’s a rare point of agreement for the two parties.
After that, Republicans’ and Democrats’ goals diverge.
While Biden has promised not to raise taxes on households below a $400,000 threshold, he’s said the cuts for higher earners should expire.
Corporations could also see higher tax rates. In Biden’s 2024 budget proposal, the administration suggested moving the top corporate tax rate to 28%, aiming to raise $1.3 trillion over a decade. Biden would also increase a tax on stock buybacks and revise rules on foreign income to reduce incentives for U.S. businesses to exploit international tax regulations so as to avoid U.S. taxes. The proposals altogether would raise an estimated $2 trillion.
The good news for investors is that raising corporate tax rates hasn’t dampened equity market returns historically. A study by BMO Capital Markets found that in years where corporate tax rates have risen, the
S&P 500
rose an average 12.9%—a better return than the years where tax rates were reduced.
Democrats’ Congressional map also looks more vulnerable than Republicans’, raising doubt that Biden could pull off a corporate tax hike. The 2024 electoral map favors Republicans taking control of the Senate, meaning that Biden would have to compromise with business-friendly Republicans on the tax package.
Trump, on the other hand, may benefit from a friendlier Congress as Republicans have good odds of retaking the Senate and a 50-50 shot at the House. If Republicans sweep Congress and the White House, they will likely seek to extend all the provisions of the 2017 tax law.
The Congressional Budget Office and Joint Committee on Taxation peg that cost at $3.5 trillion over the next decade.
There’s a chance the former president would try to lower the corporate tax rate further to 15%, according to Washington research firm
Beacon
Policy Advisors. He could also look to extend breaks that let companies immediately deduct some research and development and capital expenses, which helps companies that buy and sell expensive equipment, such as
Caterpillar,
Boeing,
Amazon.com,
and
Verizon Communications,
Beacon said.
It’s less clear how Republicans would look to raise revenue. Trump has already proposed a 10% across-the-board tariff on all imported goods. House Ways and Means Chairman Jason Smith (R., Mo.) also says he wants to reduce clean-energy tax credits included in Biden’s Inflation Reduction Act. Such a move could hit stocks like
Corning,
which makes glass and solar materials, solar company
Enphase Energy,
and energy-efficiency company
Schneider Electric.
Since either party is likely to have a slim majority, it’s simply too difficult to game out exactly what will happen with other controversial tax breaks, like the expiring cap on deductions for state and local taxes, known as SALT, says Steve Wamhoff, federal tax policy director for the left-leaning Institute on Taxation and Economic Policy.
The SALT deduction mainly benefits upper-income households in states like California, New York, and New Jersey, and it has proven intractable politically. Progressive Democrats oppose it as a tax break for the wealthy, while Republicans have been in no rush to see the cap lifted. That said, if Republicans or Democrats in high-tax locales went to the mat, they might be able to extract a concession from their party no matter who controls Congress.
“I’ve been doing this for a while. We could have one of those situations where Congress spends all of 2025 talking about this but then waits until New Year’s Day to actually pass something,” Wamhoff said.
Write to Joe Light at [email protected]
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