US: Trump tax cut bill renewal will be a major legislative fight in 2025

• Our base case is that President Biden will win reelection, with the Senate flipping to Republican control and the House to Democratic control. That said, we expect the presidential race and congressional control to be very narrowly decided, and it is worth considering how different permutations of Washington control would play out when it comes to managing the expiration of many of the Trump Tax Cuts.
  • For the purposes of this exercise, we consider four scenarios:
    • (A) President Biden wins with split control of Congress (our base case),
    • (B) President Biden wins with unified Democratic control of Congress (see our blue wave note here),
    • (C) President Trump wins with split control of Congress,
    • (D) President Trump wins with unified Republican control of Congress.
  • This note examines some of the TCJA’s provisions and how their renewal (or not) could be affected by this year’s elections.

• The “headline” corporate tax provision of the TCJA was the reduction of the corporate tax rate from 35% to 21%. That provision is not set to expire in 2025, but we expect any debate in Congress addressing the expiring provisions to include the possibility of changing that rate.
  • (A) Biden will certainly seek to raise the corporate tax rate, as will a Democratic House, but we believe a Republican-controlled Senate will block his efforts.
  • (B) In a blue wave scenario, we assess that the corporate tax rate will increase, likely to 28% as outlined in the President’s FY2025 budget proposal.
  • (C) Trump has discussed lowering the corporate tax rate to 15%, but if Democrats control the House, they will not approve that change.
  • (D) In a red wave scenario we expect to see legislation lowering the corporate tax rate.

TCJA personal taxes:

• The Trump Tax Cuts lowered personal rates for five of the IRS’s seven brackets; absent action by Congress those rates will automatically revert to their pre-2018 levels at the start of 2026. We believe the only scenario in which these rates do not go back up is under a Trump presidency.
  • (A) President Biden has been clear in his intentions to raise taxes for income over USD 400,000, and has specifically called out the lowering of the top bracket’s rate from 39.6% to 37%, pledging to restore the highest rate. Since a lack of action in Washington will lead to rates increasing, Biden does not need legislative action by Congress to make good on this promise.
  • (B) In a blue wave situation we assess that personal taxes for earners over USD 400,000 will also revert to 39.6%, though we are skeptical that even a unified Democratic Congress would pass higher rates.
  • (C) Trump may try working with Congress to pass legislation keeping personal tax rates at current levels, but a Democratic House is unlikely to pass any such bills.
  • (D) If Republicans sweep control of Washington, we expect that they will indeed pass legislation maintaining, though not necessarily lowering, the current rates.

• The TCJA roughly doubled the estate tax exemption, which now stands at USD 13.61 million per person. Without action by Congress this rate will revert, starting in the FY2026 tax year, to its prior rate of USD 5 million (adjusted for inflation).
  • (A) Biden favors the exemption returning to pre-2017 levels of USD 5 million without adjusting for inflation. Without support from a GOP-led Senate, that rate will more likely be reduced to the inflation-adjusted level.
  • (B) With Democratic control of Washington, we expect the estate tax exemption will by default be lowered back to the pre-TCJA levels. Some Democrats (including Biden) may argue for steeper cuts in the exemption, but those would be unlikely to pass even in a Democrat-controlled Senate.
  • (C) Trump will certainly push for the higher exemption level to remain in place, but a Democratic House will not support legislation to do so, and the rates will most probably revert as scheduled.
  • (D) In this scenario, we assess Congress will pass, and the President will sign, legislation maintaining the TCJA (current) estate tax exemption levels.

• The TCJA capped State and Local Taxes (SALT) deductions at USD 10,000; that cap will expire at the end of 2025. A draft House bill earlier this year that would have doubled the cap failed in a procedural vote.
  • (A) Biden may be inclined to seek common ground with Senate Republicans to craft a compromise that lifts, but doesn’t eliminate, the cap after the rates sunset. Republicans can claim success in cutting taxes, and Biden, we believe, will not want to push for an “overly generous” tax cut for the wealthiest Americans (a study by the Tax Policy Center estimates that 67% of the benefits of doubling of the cap would accrue to taxpayers making over USD 200,000/year.)
  • (B) We do not believe unified Democratic control of Washington would necessarily lead to inaction and the expiry of the SALT cap. While the benefits do indeed accrue mostly to taxpayers in blue states, approving a complete removal of the cap would run counter to Biden’s pledge to “make the wealthy pay their fair share.” A possible course of action for Democrats in Washington would therefore be to limit the SALT deduction to taxpayers under an income threshold, thus avoiding the impression of passing legislation that benefits the wealthiest Americans.
  • (C) While Trump and a Democratic House could well find common ground on SALT, and changes are unlikely to come up as stand-alone legislation, House Democrats will likely oppose any broader package of tax cuts put forward by Trump, thus raising the possibility that no action is taken on SALT and that the deduction cap expires.
  • (D) If Republicans control the White House and Congress, we believe they will have little incentive to restore unlimited SALT deductions and will instead pass legislation maintaining the current cap. As they did in 2017, they will be able to “offset” the cost of other tax cuts by keeping a SALT cap in place.