What the GOP's Tax Plan Might Actually Look Like

With Republicans poised to take control of the White House and Congress, the odds are high that key elements of the 2017 Tax Cuts and Jobs Act set to expire at the end of 2025 will in fact be extended — potentially for the better part of the next decade.

Still, given the relatively narrow majorities expected in both the House and the Senate, the exact path forward for tax reform and broader federal budget negotiations also includes some unknowns.

Could a fight over the state and local tax deduction cap split Republicans? Will changes to Social Security taxes be part of the process? What about the pledged elimination of taxes on tips and overtime?

Those questions all remain open, according to a webcast Tuesday by Anna Tylor and Jonathan Traub, two Washington-based tax policy experts with Deloitte. Adding to the uncertainty is the scale (and commensurate price tag) of the many policy pledges made on the campaign trail by Donald Trump, the president-elect.

Simply put, some tax cuts or immigration policy priorities will have to be deprioritized if Republican leadership hopes to avoid dramatically expanding the deficit.

Probably the likeliest path forward, according to Taylor and Traub, is a reconciliation-based process that will allow Republican leaders to move relatively quickly on a “core TCJA extension” while avoiding a filibuster threat in the Senate.

This pathway could deliver tax policy success for Republicans during the first half of 2025 — potentially as soon as March in their best-case scenario — but also narrow the scope of what can be accomplished. That’s because the Congressional Budget and Impoundment Control Act limits the use of reconciliation in some key ways.

“For example, because of the way the rules work, the president would very likely be unable to achieve his goal of eliminating taxes on Social Security benefits within a package that depended on reconciliation,” Taylor said. “But the core provisions of the TCJA are all fair game.”

Will SALT Be a Sticking Point?

Overall, Taylor and Traub said, they are confident that much or all of the 2017 tax legislation will be extended via the reconciliation process, but one potential sticking point is the $10,000 cap that was set on state and local tax deductions.

The cap has long been criticized and targeted by lawmakers of both parties from high-tax states like New York and California. In recent months, lawmakers have floated proposals to double the cap to $20,000 for couples, with earlier proposals seeking a cap as high as $80,000.

Media reports have also suggested that such an expansion of the cap could be paired with other policies favorable to some Republicans, including a requirement that parents collecting the child tax credit provide a Social Security number — an attempt to offset the cost of raising the SALT cap and to placate House Freedom Caucus members concerned about undocumented immigrant parents collecting the credit.

“Dealing with the SALT cap will be one of the primary conundrums for the Republicans,” Traub said. “It’s hard to see the SALT-focused members not demanding a change here. Where it ends up will be a matter of delicate debate within the broader context of setting the budget and tax policy. We could easily see a small group of Republicans banding together and really playing with the SALT cap rules.”

Other Policies and the Debt Limit

As a general rule, the more policies that Republicans attempt to force into the reconciliation process, the more challenging it will be to complete, both as a matter of following the rules and in satisfying enough members concerned about the federal budget deficit.

“Leadership will be grappling with how to best add in all the various pieces that President-elect Trump has talked about on the campaign trail,” Taylor observed. “They’ve pledged no taxes on tips, no taxes on overtime, no taxes on Social Security benefits, no taxes on foreign income for Americans living abroad, and a new family caregiving credit for newborns. That’s not all. They’ve also floated interest deduction for domestic automobile purchases and electric generator installation.”

It’s a lot of ground to cover, even for a party that has control of Congress and the White House.

“On top of all those promises, you have the president-elect saying he wants to lower the corporate rate further for domestic manufacturing,” Taylor said. “All of that together, without any revenue raisers, would add trillions of dollars in additional deficits.”

The degree to which such a deficit increase would be palatable to a Republican majority remains to be seen, but it will clearly be a point of debate. One relief value could be Trump and his allies arguing that new tariffs will cover any gaps, but that provides only rhetorical (rather than legal) cover.

“The other complicating factor here is that, at the very start of the next administration, they will already have to deal with the debt limit,” Taylor noted. “The suspension actually expires even before Trump takes office, in January.”

The Treasury will be able to deploy its “usual” extraordinary measures to get more wiggle room, Taylor noted, but the timeline will present the Republican majority with a big choice.

“Do you do the debt limit first as a standalone issue, or do you try to do debt limit negotiations within the tax reform debate?” Taylor asked. “Both are possible outcomes, and we don’t know which path they will take yet.”

Eliminating Estate Tax Is Unlikely

Responding to a question from ThinkAdvisor, the Deloitte duo said they were confident that the historically high estate tax exemption was here to stay — as it is “very extendible” via reconciliation.

But as to whether the Republican majority will seize on this moment to cut the estate tax entirely, they were far less bullish.

“It’s hard to imagine a scenario where Congress goes even further on the estate tax exemption than where we are at now,” Traub said. “We haven’t heard a ton of discussion on this, but we could see some areas adjusted on the margin. Maybe there are extra exemptions for family farms, for example.”

Taylor agreed with that sentiment.

“To me, it feels like where the law is right now is stable,” she said. “Remember, anything making the exemption even more generous will result in a loss in revenue that will have to be accounted for elsewhere.”