What the U.S. Midterms Mean for Tax Reform

October 2018

By Todd Simmens, Ben Willis, Traci Kratish Pumo, and John Nuckolls
 
This November’s U.S. midterm elections are expected to have quite an impact on the country’s political environment, and the results could also have substantial implications for the future of tax reform.
 
Businesses will be closely watching congressional election outcomes to determine how changes in Washington could further shape tax policy. While tax reform was enacted nearly a year ago, 66 percent of in-house tax professionals who recently completed BDO’s Tax Reform Assessment cited understanding the impact of the TCJA on their business as their greatest challenge. At the same time, 44 percent of public company board directors say the new U.S. tax law has had a “favorable” impact on their business, according to the 2018 BDO Board Survey. These findings emphasize how tax reform remains top of mind for business leaders; companies will no doubt closely follow the midterm elections, as they could have a major impact on federal tax policy.
 
The GOP’s “Tax Reform 2.0” package, which was recently passed by the House and awaits debate in the Senate, seems to be a fairly good indication of where Republicans’ tax policy priorities currently lie. While Republicans seem mainly concerned with making temporary provisions—such as individual tax cuts—permanent, Tax Reform 2.0 also includes a proposed tax-deferred savings account for individuals and start-up expense deductions within the American Innovation Act. Republicans may also prioritize making the 199A deduction for pass-throughs—which is largely viewed as a win for owners of passthrough entities—permanent or even extend its lifespan, given that the provision is currently set to expire in 2025. At this point, it is virtually impossible for Republicans to pass Tax Reform 2.0 as a standalone measure under the Senate’s current rules, since generally only budget reconciliation can avoid the 60-vote requirement and thus allow for tax legislation to pass by simple majority (including cases where the Vice President would vote). However, businesses should view the proposed legislation, as well as the type of tax changes Republicans and Democrats mention during Congressional campaigns, as strong suggestions of potential future policy priorities. 
 
Should Democrats regain either the House or Senate, the chance that Republicans would pass Tax Reform 2.0 would be further minimized if not diminished. In the less likely event both the House and Senate flip, Democrats could work to try to reverse some of the provisions in the TCJA.  While this would require approval of the President, it could be a bargaining chip for some changes, such as revisiting the $10,000 state and local tax (SALT) deduction cap.
 
If tax policy is not a priority after the mid-term elections, it will come up at some point early in the next Congress.  Moreover, state and local election results will also influence jurisdictions’ tax codes. Understanding both parties’ tax priorities now across government levels will help businesses prepare for all potential outcomes of the midterms.
 
While many will be waiting to see whether Democrats regain control of the House this November, businesses must prepare for the only political certainty in today’s climate: uncertainty.
 
Here are ways federal tax policy could be affected by the following potential election outcomes:
 
Congressional Midterm Election Outcome Impact on Federal Tax Policy
If Republicans retain control of both the House and the Senate
 
 
 
If Republicans stay in control of the House and gain ground in the Senate, they could push to make the temporary provisions—including individual tax cuts—permanent, or even introduce additional tax cuts. However, if the Senate filibuster rules remain in place, this would likely make permanent provisions difficult to pass.
 
Democrats regain control of the House but not the Senate
 
 
 
If Democrats flip the House, they may try to repeal or revise certain parts of the TCJA, in particular the $10K cap on SALT deductions.  These provisions might become a bargaining item for negotiation of other policy issues, tax or non-tax.
 
Democrats regain control of the Senate but not the House
 
 
 
If Democrats flip the Senate, they may try to repeal or revise certain parts of the TCJA, in particular the $10K cap on SALT deductions.  These provisions might become a bargaining item for negotiation of other policy issues, tax or non-tax.
 
Democrats flip both the Senate and the House
 
 
If Democrats win back both the House and the Senate, it’s likely they will stop the GOP’s and the President’s legislative agenda.
 
In this scenario, Democrats may also try to repeal or revise certain parts of the TCJA, in particular the $10K cap on SALT deductions.  These provisions might become a bargaining item for negotiation of other policy issues, tax or non-tax.  Indeed, more robust changes to the provisions in the TCJA could be on the table.