Midterm Elections Shift the Tax Legislative Landscape

Democratic gains in the midterm elections change the tax policy outlook, elevating bipartisan tax proposals and potentially prompting more aggressive IRS administrative action. 

Democrats are projected to take control of both the House and Senate by comfortable margins, ending two years of Republican single-party control of the government. Split government could create periods of gridlock over the next two years, but bipartisan tax initiatives will also have opportunities to advance.

The first possibility for tax legislation will come in a lame-duck session. There is bipartisan interest in addressing several issues, including extender tax provisions, digital assets, IRS reform, film credits, the semiconductor credit, and tax-treaty-like benefits for Taiwan. But the election results could hurt the chances for a near-term tax package if Democrats think they can negotiate better deals once they take the majority. The prospects will also depend on whether lawmakers from both parties care enough about the provisions to build the necessary momentum and whether there is a viable legislative vehicle.

Government funding is set to expire on December 11, and any agreement to extend it could carry tax provisions. Republicans have also discussed moving another reconciliation bill in their last two months of single-party control. Such an effort would face major challenges and might not include tax provisions.

Once the new Congress convenes, legislation will need to be bipartisan to advance. Lawmakers from both parties have expressed interest in several common tax issues, including tax provisions targeting housing, affordability, AI, and data centers. Democrats are expected to conduct vigorous oversight and focus on some of their most ambitious campaign promises, which could make for a contentious environment. 

President Trump said in his initial comments to the press that he did not believe the election results were a repudiation of him and pointed out that he retained veto power. But he also congratulated Democrats and said there were would be bipartisan opportunities to work with them on “many, many things.” Economic challenges can often lead to bipartisan action, so any major economic events over the next two years could also become the impetus for a tax bill.

Taxpayers should also expect the White House to pursue regulatory and administrative action more aggressively now that Republicans no longer control Congress. Trump flirted with issues such as indexing capital gains to inflation after Republicans lost the House during his first term. This term, the IRS has already advanced an ambitious deregulation and burden reduction agenda, and the administration has implemented sweeping tariffs. 

Election Results

House

As of the date of publication, the major news organizations had generally called at least 240 House seats in favor of Democrats with dozens remaining uncalled. Many projections show the majority could top 250 once all results are certified. Challenges and recounts are possible in several close races, but they are not projected to threaten the Democrats’ ability to reach the 218 seats needed to hold a majority in the 435-seat chamber.

House Minority Leader Hakeem Jeffries, D-N.Y., is the favorite to become House speaker, although a number of Democrats on the campaign trail declined to commit to supporting him. Jeffries became House minority leader in 2023 and does not have an extensive record on tax issues.

Rep. Richard Neal, D-Mass., is expected to chair the House Ways and Means Committee. Neal is generally considered a mainstream Democrat on tax issues. He has successfully championed bipartisan retirement tax packages, and he worked with current Chair Jason Smith, R-Mo., on bipartisan tax administration and digital asset tax legislation this year. He was chair of the committee when the Inflation Reduction Act (IRA) was enacted, although the final bill was largely negotiated in the Senate. Significant turnover in the Ways and Means Committee could also bring new tax issues to the forefront.

House rules make it easier to quash dissent than in the Senate, and Democrats’ large majority will give them significant leeway. Bipartisan negotiations over tax legislation may be more likely to take place in the Senate and between congressional Democrats and the White House.

Senate

At the time of publication, Democrats were projected to flip the Senate, gaining at least seven seats to bring their total to 54, with races in Mississippi and Alaska still too close to call. 

Senate Minority Leader Chuck Schumer, D-N.Y., is widely expected to be elected Senate majority leader. He has led the Senate Democratic caucus as either majority or minority leader since 2017 and was instrumental in negotiating the final version of the IRA with Democratic holdouts. He has also been quietly sympathetic to the way carried interest is treated under current law. 

Senate Finance Committee Ranking Member Ron Wyden, D-Ore., is expected to become committee chair. He has served as chair or minority leader since 2014 and has at times worked on bipartisan issues with current chair Mike Crapo, R-Idaho. Wyden was one of the primary architects of the IRA and is a strong supporter of energy credits. He has proposed several bills seeking to curb aggressive tax planning strategies and has an ambitious proposal to tax unrealized capital gains. Turnover among rank-and-file Senate Finance Committee members could also affect taxwriter priorities.  

With at least 54 votes, Democrats will not be beholden to one or two holdouts on simple majority votes. But because Democrats lack the 60 votes needed to overcome filibusters and other procedural hurdles, any tax legislation emerging from the Senate will likely need to be bipartisan. 

Lame-Duck Session

Outlook

The House and Senate are both scheduled to return on Monday, November 9, and will face a crowded agenda. The most urgent priority will likely be the December 11 expiration of government funding. Neither party appears to be gearing up for a potential shutdown fight, but competing priorities and contentious issues could complicate efforts to reach an agreement. Any shutdown would be very disruptive for the IRS.

Assuming a funding deal is reached, the legislation could provide a vehicle for bipartisan tax priorities, including:

• Reforming the tax treatment of digital assets 
• Addressing a range of tax administration issues on an IRS reform bill
• Extending the semiconductor manufacturing credit under Section 48D 
• Extending the work opportunity tax credit
• Extending the seven-year recovery period for motorsports entertainment complexes
• Extending Section 181 expensing for film, television, and theatrical productions 
• Creating a new transferable film credit (see our related Insight, From Regional to National: What Federal Film Credit Transferability Could Mean for the Tax Credit Market)
• Providing tax-treaty-like benefits for Taiwan 
• Reversing the limit on the gambling deduction enacted as part of the OBBBA

Extenders

The work opportunity tax credit, film expensing, and seven-year recovery period for motorsports all expired at the end of 2025. The provisions are fairly noncontroversial and share bipartisan support. Extending expiring tax provisions was often a routine process in prior years, but the shrinking list of provisions blunts some of the momentum. There is less urgency for an extenders package this year than in prior years when more provisions were affected.

The advanced manufacturing investment credit for semiconductor manufacturing under Section 48D expires for construction beginning after December 31, 2026. There is bipartisan support for this provision, and in August, Crapo and Wyden reaffirmed their commitment to extending it. But a similar lack of urgency could hurt its chances. Congress often waits until provisions have expired to extend them retroactively. Lawmakers have also proposed enhancing the credit, and making substantive changes is more difficult than passing a “clean” extension.

Tax Administration

The Senate approved an IRS reform bill (H.R. 5349) last month that would address a long list of tax administration issues, including provisions that would:

• Require the IRS to respond to refund claims within 12 months 
• Allow taxpayers to appeal denied refund claims to Appeals and the Tax Court 
• Accelerate the deadline for filing many Form 1099 series information returns with the IRS from March 31 to January 31 
• Create a new rule for the timeliness of electronic returns and payments 
• Clarify the supervisory approval requirements for examiners asserting penalties  
• Lower the threshold for requiring partnerships to e-file from 100 partners to 50 partners or $1 million in assets (partnerships filing at least 10 returns of any type would continue to have to e-file)
• Require the IRS to create taxpayer accounts allowing access to significant account information and capabilities
• Impose new education and certification requirements on uncredentialed preparers

Digital Assets

The House Ways and Means Committee voted 38 to 5 in September to approve a bipartisan bill (H.R. 10357) that would reform the tax treatment of digital assets. The bill represents the culmination of months of progress toward a potential compromise. 

If enacted, the legislation would provide new clarity on cryptocurrency tax issues, defining key terms such as digital assets, widely traded digital assets, stablecoin, validation activity, staking, and mining. The bill would also change or clarify the tax treatment of many digital asset transactions, with provisions that would: 

• Provide a mark-to-market election for traders and dealers of widely traded digital assets
• Create an elective simplified accounting method for other taxpayers
• Create an exception for gain and loss from qualifying stablecoin transactions
• Treat mining and staking rewards as ordinary income with new sourcing rules
• Extend wash sale, constructive sale, and securities lending rules to digital assets
• Apply subpart F and passive foreign investment company (PFIC) rules to digital assets
• Amend the broker reporting rules
• Provide an exception for charitable deduction valuation rules for certain digital assets
• Create a voluntary disclosure program

The bill could have an immediate impact on taxpayers, with several effective dates applying retroactively.

Sen. Steve Daines, R-Mont., floated a draft bill in response to the House package that is directionally similar but less fully developed. Crapo recently said the Senate Finance Committee plans to give the House bill a “thorough review” and that Senate taxwriters “may want to tune it up.”

Supporters are pushing to complete the bill in the lame-duck session, but major challenges remain. Democrats now appear more likely to wait until 2027, when they control both chambers, to negotiate a final version. In addition, the Senate in September rejected broader legislation on digital assets, which supporters hoped would pave the way for the follow-up tax bill. 

For the bill to move forward in the lame-duck session or next year, several technical issues may need to be resolved. The bill omits any rule on the timing for recognizing income from mining and staking rewards because lawmakers were unable to reach an agreement on the issue. 

Film Credit

Momentum has been building for the creation of a film credit, with an aggressive lobbying campaign boosting its chances. The idea enjoys bipartisan support, and the president has been a vocal proponent. 

In September, Republicans and Democrats introduced companion legislation in the House and Senate (H.R. 10582 and S. 5552) that would establish a 20% federal credit on production labor costs. Bonus credits would add five percentage points to the 20% baseline (up to a maximum of 30%) across four uplift categories: 

• Productions in rural opportunity zones or disaster areas 
• Independent productions 
• Multistate producers filming in at least 10 states
• Taxpayers showing a measurable increase in domestic production

The credit would be transferable under Section 6418, like many of the energy credits.

Gambling Deduction

The OBBBA limited the deduction for gambling losses to the lesser of gambling gains or 90% of gambling losses. Since the bill’s passage, bipartisan support has emerged to reverse the change. If a lame-duck tax package comes together, this provision has an excellent chance to be included.

Taiwan

The House voted 423 to 1 in January to pass legislation (H.R. 33) that would confer tax-treaty-like benefits to Taiwan. Taiwan’s unique political status prevents a tax treaty, so the bill would provide similar treatment through changes to the Internal Revenue Code that would become effective when Treasury certifies that Taiwan has enacted reciprocal provisions. 

The treaty-like benefits generally align with the U.S. Model Income Tax Convention and include:  

• Reducing the 30% withholding rate on U.S.-source interest and royalties to 10% for nonresident Taiwanese aliens and Taiwanese corporations
• Reducing the dividend withholding rate to 15%, with a 10% rate for specific conditions
• Applying permanent establishment rules to determine effectively connected income
• Exempting certain U.S. wages of Taiwanese residents from U.S. tax

The bill enjoys overwhelming bipartisan support in the Senate but has been stymied for several years by objections from Sen. Rand Paul, R-Ky., who generally opposes all tax treaty instruments. If a tax package moves in the lame-duck session, this provision is a candidate to be included.

Reconciliation Bill

Several Republican lawmakers have pushed the idea of a post-election reconciliation bill to address unfinished Republican priorities. The House has already passed a budget resolution providing for a third reconciliation bill, but the bill is narrowly targeted at defense spending and several other funding priorities. Instructions were not provided to the taxwriting committees.

Any reconciliation bill based on the current budget resolution generally could not carry tax provisions. Crafting a more expansive budget resolution and then a broader reconciliation bill in a lame-duck session would be very challenging for Republicans.

Long-Term Outlook

Democratic Priorities

Democrats campaigned on a host of tax issues, including:

• Restoring the energy credits restricted or phased out by the OBBBA
• Removing or raising the cap on state and local tax (SALT) deductions
• Restoring enhanced Affordable Care Act premium tax credits
• Addressing affordability and housing tax issues
• Increasing taxes on high-income taxpayers
• Limiting the administration’s tariff authority

Wyden released a statement following the elections that said the Finance Committee will be focused on requiring the “ultra-rich and corporations to pay their fair share,” addressing healthcare affordability, conducting oversight of the administration, and reasserting congressional authority over trade policy.

But Democrats cannot enact any tax policy without the agreement of Trump unless congressional Republicans help give them the two-thirds majority needed to overcome a veto. Any legislation will generally need to have Trump’s support to become law. Some Democratic initiatives, such as limiting tariff authority and increasing taxes on high-income taxpayers, could be nonstarters with Trump. Trump also remains a fierce critic of energy credits.

Republican Priorities

Republicans have also expressed interest in affordability and housing tax relief measures. Trump has specifically called for reducing taxes on capital gains from the sale of principal residences, either by reducing or removing the cap on the current exclusion. Some Republicans are pushing for broader capital gains relief that could be achieved by indexing basis to inflation.

Trump also promised taxpayers a $5,000 “dividend” if Republicans won the election. The election results may take that specific proposal off the table, but the president has long pushed to issue “tariff rebates” to reduce individual taxes based on tariff revenue.

At different points on the midterm campaign trail, Trump mentioned repealing the estate tax; increasing the Section 199A deduction; and extending the individual deductions for tips and overtime, which are scheduled to expire at the end of 2028. 

Like Democrats, Trump will not be able to enact legislation without bipartisan support. Several Republican proposals, including tariff rebates, estate tax repeal, and increasing the Section 199A deduction, are likely nonstarters with the newly Democratically controlled Congress.

Bipartisan Possibilities

Democrats may try to immediately move some of their most ambitious campaign proposals to demonstrate action, which could quickly put them at odds with congressional Republicans and the administration. Partisan politics could make legislating difficult over the next two years, particularly when campaign action heats up for the 2028 presidential election cycle. Increased Democratic oversight of the administration will also create a contentious political environment. 

Still, some bipartisan tax legislation is likely. Republicans and Democrats share a few common tax priorities. Any of the bipartisan proposals that fail to advance during the lame-duck session could be considered when the new Congress convenes. Both Republicans and Democrats are interested in proposals addressing housing costs and general affordability. 

There is also growing bipartisan interest in taxing or limiting tax benefits for AI and data centers (see our prior Alert, Top Democratic Senate Taxwriter Targets Data Centers). Over the last several months, six proposals have been released:

• Wyden has released a discussion draft that would impose an excise tax on data center gross receipts, while making data centers ineligible for qualified opportunity zones, bonus depreciation, the research credit, and qualifying income for real estate investment trusts.
• Sens. Mark Warner, D-Va., and Tammy Duckworth, D-Ill., and 28 House Democrats have introduced companion legislation that would deny bonus depreciation to data centers (H.R. 10448 and S. 5054).
• Sen. Mark Kelly, D-Ariz., has introduced a bill that would impose a digital advertising tax, an AI-use tax, and an AI excess-profits tax (S. 5518).
• Sen. Josh Hawley, R-Mo., has introduced a bill (S. 5418) that would exclude data centers from the definition of qualified opportunity zone businesses.
• Sen. Bernie Moreno, R-Ohio, has introduced a bill (S. 5689) that would make large data centers ineligible for any federal tax credit, incentive, or benefit and impose a 100% federal excise tax on state incentives.

All the bills would raise revenue and could be used to pay for other bipartisan priorities. 

Tax Increases

Revenue-raising provisions could represent one of the few sources of bipartisan tax agreement over the next two years if Republicans and Democrats can align on new economic relief measures that may need offsets as the debt picture worsens.

Tax increase proposals that have been considered in previous tax reform efforts could resurface. Several revenue raisers that were included in the House version of the OBBBA but dropped in the Senate could attract Democratic support, including:

• A litigation-financing excise tax
• Limits on the ability to use state pass-through regimes to work around the SALT cap
• An excise tax on private foundations

Several other revenue raisers were discussed by Republicans in the lead-up to the OBBBA but were never added to the bill, including:

• Repealing tax-exempt bonds
• Limiting the corporate SALT deduction
• Expanding the Section 162(m) cap on compensation deductions to private companies

Several tax increases proposed as part of TCJA discussions could also be resurrected, including:

• Limiting eligibility for the cash method of accounting
• Repealing the last-in-first-out method of accounting
• Repealing IC-DISC preferences
• Taxing nonqualified deferred compensation at vesting

In addition, the tax treatment of carried interest has been a target of both Democrats and Trump.

Administrative Outlook

Deregulation and Burden Reduction

It is common for presidents to turn more heavily to regulatory and administrative action after their party loses control of Congress. Trump could increasingly look to fulfill his tax policy objectives through IRS action.

The IRS has already pursued an ambitious deregulation and burden reduction agenda over the last two years, including the following guidance projects:

• Providing corporate alternative minimum tax relief for expensing under Section 174A and other issues
• Removing the funding rule in the final regulations for the stock buyback tax
• Withdrawing proposed regulations on built-in gain under Section 382
• Revoking digital asset broker reporting for decentralized finance
• Withdrawing proposed disregarded payment loss rules under Section 1503
• Withdrawing partnership basis-shifting rules
• Simplifying foreign currency rules under Section 987
• Withdrawing per se device rules for Section 355 spinoffs
• Withdrawing 71 obsolete notices, revenue rulings, and revenue procedures

The most recent IRS priority guidance plan contains 54 additional projects under the burden reduction and deregulation category. Targeted projects include targeting research credits and Section 385 funding rules. The IRS is also reconsidering recent form-based expansions in reporting requirements for partnerships and research credits.

The IRS has also increased its focus on tax-exempt activities, targeting community benefits; foreign influence; fiscal sponsorship arrangements; and diversity, equity, and inclusion programs.

IRS Funding and Enforcement

Despite favorable guidance initiatives and reduction in funding and staffing, the IRS continues to step up enforcement across key areas. The IRS lost nearly 25% of its employees in 2025 and has had its funding cut several times. That trend may be beginning to reverse. The IRS recently announced it was hiring 1,000 employees to target high-income taxpayers, and the latest government funding agreement left the IRS largely intact. 

The recent deal to extend government funding through December 11 kept IRS funding at its prior level and did not rescind the remaining $10 billion left of the special $80 billion allocation of IRA funding. Around $54 billion of the original allocation has already been rescinded, and approximately $16 billion has been spent. Any further funding lapses, funding cuts, or rescissions could be damaging to the agency. 

Although the major ramp-up in IRS enforcement expected under the original IRA funding never occurred, the IRS continues to drive major enforcement efforts. The agency recently launched new campaigns aimed at conservation easements and Section 351 transactions. Other major enforcement priorities include:

• Transfer pricing
• Research credits
• Self-employment tax
• Interest capitalization
• Partnership transactions

The IRS is also increasingly asserting economic substance arguments to challenge taxpayer transactions (see our prior Alert, Court Wins Give IRS Stronger Hand on Economic Substance). 

Tariffs

Trump has implemented a sweeping tariff and trade agenda over the last two years. Many Democrats are claiming the election results represent a rejection of the administration’s tariff policy, but taxpayers should not necessarily expect Trump to stand down. The administration dialed back its tariff actions in the last months leading up to the election as Republican campaigns faced tariff pushback, but Trump still appears committed to using tariffs to drive his trade agenda and raise revenue. 

Since the Supreme Court invalidated the tariffs under the International Emergency Economic Powers Act (IEEPA) (see our recent Alert, CIT Certifies Importer Class Seeking IEEPA Duty Refunds: Key Considerations for Importers, for the latest on refunds), the administration has opened investigations into an expansive list of countries and activities under its authorities in Sections 232 and 301, many of which remain open (others have already led to new tariffs). Those investigations could pave the way for significant new tariffs over the next two years. The administration has also imposed Section 338 tariffs on many Canadian goods while it negotiates a potential trade agreement.