Republican lawmakers will change tax policy in 2025 – a tax expert explains what to expect

Although there was coverage of the 2024 elections dominated by the economyTaxes received little attention in the run-up to the vote. This is a bit of a surprise, because 2025 will be an critical year for the US tax system – in fact, the fate of the most critical tax reform in three decades hangs in the balance.

That would be the Tax Cuts and Jobs Act that Congress passed during President-elect Donald Trump’s first term in 2017. If lawmakers don’t act, the entire package expires at the end of next year. A tax expert from Western Governors University Business School, Jim Franklin, explains what effects this bill may have and what awaits taxpayers.

What do the election results mean for Republicans’ ability to implement their tax agenda?

We know there will be a Republican president and the Republican Party will have a majority in both houses of Congress. This means Republicans will be able to pass the tax bill along party lines, just as Democrats passed the inflation-reduction bill through budget reconciliation.

This would allow Republicans to pass key policies with a straightforward majority. The Republican majority is narrow, so it will be fascinating to see how leaders unite their constituent groups.

Republicans have traditionally favored lower tax rates for businesses and individuals, as well as tax incentives to facilitate spur economic activity.

What’s next for the Tax Cuts and Jobs Act?

The act is currently scheduled to expire at the end of 2025, but Trump and Republicans support extending many of its provisions.

The nonpartisan Congressional Budget Office in May 2024 estimated that extending the law would cost the government $4.6 trillionand there is a split in the party, with one bloc of Republicans in Congress calling for a full extension and the other demanding a balance between tax policy and annual federal deficits.

Republicans will likely fight to keep key elements, including senior ones standard deductionreduced corporate tax rates, individual rate reductions and increased property tax exemption.

There is even talk of further reducing the corporate income tax rate, perhaps to 15% in the case of domestic production, which would be a significant move.

What other tax measures are Republicans considering?

During the campaign, Trump mentioned various ideas for tax breaks, including an income tax exemption for tips, Social Security benefits and overtime pay, as well as creating an itemized deduction for car loan interest.

Republicans, however, are not completely unanimous on tax policy. Some deficit hawks fear loss of revenue, so there could be domestic pushback on all of these issues. The real question is whether there will be enough opposition within the party to change or block some of the proposals.

However, I expect that many parts of the act will be renewed and perhaps we will see some additions. For example, there has been a lot of pressure around increasing the state and local tax deduction limit, also known as SALT, which has bipartisan support in states with higher state income taxes such as New York, California and Illinois. It will be fascinating to see if this gains traction. There is a lot of pressure among representatives, both Republicans and Democrats, for relief in this area.

Where will they find income?

Good question. Observers indicate that Republicans will likely consider cutting green energy subsidies from the Inflation Reduction Act of 2022. They could be eliminated to facilitate offset the costs of up-to-date tax proposals.

Another area worth paying attention to is tariffs. There is talk of increasing tariffs on Chinese goods – potentially up to 60% — and even imposing a universal tariff on all U.S. imports at a rate of 20%.. It will be fascinating to see how this plays out. Will it be more targeted? For example, will there continue to be tariffs on select imports, such as car imports from China, to protect the U.S. electric vehicle market?

What will you be watching between now and Tax Day?

One factor will be nominations in the Trump government. For example, whoever he nominates as Treasury Secretary could have a lot of influence. They can facilitate shape what your tax bill looks like. Another key factor will be who ends up on Congress’ tax committees. The composition of key committees will influence policy direction and details.

What do you think will happen with tariffs?

Tariffs are unpredictable: they can be applied more broadly or selectively. This may be reminiscent of the way Trump and his first administration imposed tariffs on steel, aluminum and solar panels. Interestingly, many of the tariffs have been kept in place by the Biden administration.

Blanket tariffs can tardy down the economy, so there’s always a risk. Tariffs affect inflation because they affect the cost of imported goods, which would likely reduce consumers’ purchasing power. Domestic political pressure will play a role as higher tariffs could raise the prices of many imported goods, including imperative products such as medicines.

Do you have advice for people who are struggling to keep up with the latest tax news?

Observers often take literally every policy suggestion that appears on the campaign trail – excluding tips, Social Security benefits, overtime pay, etc. – as if all of these proposals were adopted exactly as stated. But details matter, and policies are rarely implemented without adjustments. That’s why it’s wise to read beyond the headlines.

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