With the budget resolution completed, Republicans are working quickly behind the scenes to try to assemble a sweeping tax package in time to meet an aggressive timeline set by congressional leadership.
The budget resolution set the framework for passing legislation using the reconciliation process, and negotiations over the tax title are beginning to reveal the outlook for key issues, including bonus depreciation, individual rate increases, energy tax credits, and limits on individual and business deductions for state and local taxes.
House Speaker Mike Johnson, R-La., is pushing the Ways and Means Committee to conduct its mark-up the week of May 5, though Ways and Means Committee Chair Jason Smith, R-Mo., has not yet committed to a date. It is possible a mark-up slips to the week of May 13. Johnson is aiming to have a bill through the House by Memorial Day, and Treasury Secretary Scott Bessent said this week that they are targeting July 4 for enactment. That schedule may prove optimistic as Republicans negotiate difficult tax and spending issues.
BDO Takeaway
The real deadline for completing a reconciliation bill using the current budget resolution is Sep. 30, when the current government fiscal year ends. The debt limit could put pressure on Republicans to act more quickly. The Congressional Budget Office previously predicted that an increase in the limit would be needed to avoid a default by August or September, but Bessent said an updated deadline could be available soon. Republicans are seeking to address the debt limit as part of the reconciliation bill to avoid negotiating with Democrats on the issue.
The Ways and Means Committee is pushing to resolve major issues in order to release a draft bill 48 hours in advance of a potential mark-up next week, but may wait for the other committees to act before finalizing the numbers and setting up the mark-up. The amount of spending cuts achieved by other committees could affect the committee’s allowance for tax cuts. The reconciliation instructions for House committees provide for up to $4.5 trillion in net tax cuts, but that cap is increased or reduced by the amount by which spending cuts exceed or fall short of $2 trillion.
The budget resolution provides separate reconciliation instructions for the Senate committees. The Senate instructions may be more important for the final bill because following them is the only way to avoid 60-vote procedural hurdles in the Senate. The House can waive any points of order for failing to follow its own instructions with simple majority votes. For more on the implications of the budget, see our full discussion).
The Senate instructions provide for up to $1.5 trillion in net tax cuts under a current policy baseline, which assumes current policy is maintained. Under this baseline, extending expiring tax provisions has no revenue impact. Republicans are hoping this will allow them to make the expiring provisions in the Tax Cuts and Job Act (TCJA) permanent. There are lingering concerns, however, about this budgetary maneuver on the House side. House Budget Committee Chair Jodey Arrington, R-Texas, recently said that incorporating a current policy baseline is “well beyond our vote margin” in the House. “It’s probably, you know, in the double digits for sure.”
Despite Arrington’s concerns, there is significant support from Speaker Johnson, President Donald Trump, and House Ways and Means Committee Chair Jason Smith, R-Mo., for using the Senate’s current policy baseline to make TCJA tax cuts permanent.
The Senate Finance Committee is expected to wait for House action before marking up a tax title, but the timing could change. Tax writers on both sides are actively negotiating key aspects of the tax package.
Corporate and Individual SALT Cap
The House Ways and Means Committee has proposed an increase in the individual SALT cap to $25,000. Key Republicans pushing for SALT cap relief have deemed this inadequate, and have pushed for a cap as high as $50,000. The final figure will be subject to negotiation and seems likely to fall within these boundaries, but cost could be the key factor.
House tax writers continue to tease the prospect of repealing the ability of corporations and perhaps other types of businesses from deducting state and local taxes. This could raise up to $300 billion to pay for other tax cut priorities, depending on the types of SALT taxes that are included. Unless this change is offered in exchange for other significant business tax benefits, lobbying against the provisions could be fierce and may make enactment difficult.
Individual Rate Increases
In a somewhat surprising development, key Republicans have floated the idea of an increase in the top individual rate. Influential conservative and House Freedom Caucus Chair Andy Harris, R-Md., said imposing a 40% tax on income exceeding $1 million would be a “reasonable way to pay for” Trump’s pledge to eliminate taxes on tips. Senate Finance Committee member Chuck Grassley, R-Iowa, said in a town hall session that allowing the top individual marginal rate to revert to 39.6% to pay for an increased child credit was on a “working sheet” of potential Republican tax options. Even Trump himself expressed openness to the idea of raising taxes on the “wealthy” to “take care of the middles class.”
“I actually love the concept, but I don’t want it to be used against me politically,” Trump said. “Because I’ve seen people lose elections for less.”
BDO Takeaway
The idea remains a long shot. Bessent and other key Trump economic advisors dismissed the idea. Johnson has twice refuted it is as a possibility. “I don’t think we’re raising taxes on anybody,” he said.
Energy Credits
The energy credits created, extended, and enhanced by the Inflation Reduction Act remain a point of contention among Republicans. There is interest in scaling back or restricting many aspects of the credits to raise money for other priorities, but the credits also enjoy a significant level of support among some Republicans.
Four Senate Republicans recently wrote a letter to the Senate majority leader in support of the energy credits, and a similar letter from 21 House Republicans to Smith quickly followed. In response, 38 House Republicans wrote a letter calling for a full repeal.
BDO Takeaway
Energy credits remain a target, but changes are likely to be targeted and effective only for projects beginning construction after a future date set by the legislation.
Bonus Depreciation
President Trump said this week at a White House event that Republicans plan to reinstate 100% bonus depreciation for four years retroactive to Jan. 20, 2025. Bessent added that they are seeking to make factories eligible, presumably meaning the structural components of manufacturing facilities such as buildings.
BDO Takeaway
The four-year timeline for 100% bonus depreciation could also apply to the potential reinstatement of expensing for research costs under Section 174 (which could apply only to domestic costs) and the more favorable calculation of the limit on the interest deduction under Section 163(j). Republicans have also hinted at sunsetting after four years any new tax cuts coming from Trump campaign promises. Republicans are seeking to extend the expiring TCJA provisions for a much longer period and possibly even making them permanent.
Targeting Pillar Two
Ways and Means Committee Member Ron Estes, R-Kansas, is pushing to include his Unfair Tax Prevention Act in the reconciliation bill. The Estes legislation would treat 50% of costs of goods sold as a base erosion payment under the Base Erosions and Anti-Abuse Tax (BEAT) for taxpayers owned by foreign parents from countries implementing the undertaxed profits rule (UTPR) under the Organisation for Economic Co-operation and Development (OECD)’s Pillar Two.
The OECD and the European Union (EU) are actively discussing options to assuage Republican concerns over Pillar Two implementation. The OECD released a statement on April 11 stating that the EU is considering offering relief from minimum taxes for U.S. tax credits and an extension of the safe harbor for the UTPR.
Derek Theurer, counselor to the Treasury Secretary, recently said that the administration is actively working on Pillar Two issues and emphasized the need for harmony with the global intangible low-taxed income (GILTI) regime.
BDO Takeaway
Despite Republican opposition to aspects of Pillar Two, key provisions are expected to move forward abroad. U.S. multinational taxpayers that are in scope of the rules should be preparing to comply.
Other Revenue Raisers
Tax writers are actively exploring many revenue raising tax options to pay for other priorities, including:
- Increasing the stock buyback tax
- Targeting executive compensation
- Increasing and expanding the excise tax on endowments
- Changing the tax treatment of carried interest
BDO Takeaway
Taxpayers that would be affected by these provisions or other revenue raising tax provisions should actively monitor the legislative process to see what may gain traction and understand how they could be affected. There may be planning opportunities to mitigate the impact.
Please visit BDO’s National Tax Office page for more information on how BDO can help.