Midterm Dem rout puts tax policy at inflection point

The election at a glance

In one of the most consequential midterm elections in decades, Democrats not only flipped the House of Representatives – an almost foregone conclusion heading into Election Day due to a slim Republican majority in that chamber – but gained more Senate seats than anticipated even by most ardent Democratic partisans, winning control of at least 54 (and as many as 56) in the 120^th Congress.

A flip of the House of Representatives was baked into expectations of most political professionals  but exceeded forecasts in how large Democrats grew the margins of their incoming majority in that chamber, picking up at least 31 seats as of this writing, but likely to end up with more than 250 total House members after all votes are counted.

The larger-than-expected margin in the Senate especially will give Democrats more leeway to craft and advance their own agenda. This includes the potential passage of a party-line tax policy and funding package, though it would still face a likely presidential veto.

Legislation focused on affordability – healthcare, tariffs and other pocketbook topics – will likely be the first bills introduced by Democrats in January. Thanks to their newfound majorities in both chambers, Democrats will now have access to budget reconciliation, a fast-track process for revenue and spending legislation that bypasses the normal 60-vote filibuster threshold in the Senate and would enable a wide variety of policy proposals. These could range from restoring a more generous tax credit for health insurance purchased through Affordable Care Act exchanges to tax increases on the wealthy and tariff-related relief, though such legislation would still be subject to a presidential veto, making it unlikely to become law.

Because of the high threshold for overturning a presidential veto (two-thirds supermajority) for any Democratic legislation to become law it will need to be hashed out with the Trump administration – or broadly bipartisan enough for a critical mass of remaining congressional Republicans to support it. While unlikely, both scenarios are feasible, depending on the policies. For example, increased health insurance tax credits are more likely than tax increases or tariff authority rollbacks to become law.

Democrats will now hold more leverage for investigations into the Trump administration, and the private sector, as well as over the nomination process. Balancing those oversight fights, seen as most favored by strong partisans, with addressing the pocketbook issues that won Democrats a sizable number of independent votes will be a fine line to walk.

In an Election Night tweet, the likely returning Senate Finance Committee chair, Sen. Ron Wyden, D-Ore., wrote one word: “Subpoenas.” But in a Nov. 4 written statement, the Oregon Democrat nodded towards the balance congressional Democrats know they will need to strike if they want to maintain political momentum into the 2028 election cycle and potentially win back the White House: “Under my leadership, the top priorities of the Finance Committee will be affordability for us, accountability for them,” Wyden said.

For both parties, leadership elections will expose divides that emerged on the campaign trail. Within the GOP, that divide is between those in fairly safe districts who have fully supported the Trump agenda and those with constituents looking for more distance from the White House. For Democrats, their famously “big tent” party has to manage a wide gulf between its most progressive members, including newly elected Democratic progressives such as Abdul El-Sayed from Michigan, and those who are more centrist, such as Adam Hamilton from Kansas and Annie Andrews of South Carolina. 

1. The Senate

Heading into Election Day, Democrats needed to net four seats to win the majority. Eleven senators chose to step down this year, the most retirements ever in a single cycle. Democrats successfully defended two seats in states Trump won in 2024: Michigan, an open seat vacated by Sen. Gary Peters and won by El-Sayed; and Georgia, where Sen. Jon Ossoff won re-election. The party also flipped Republican seats in Iowa, Kansas, Maine, North Carolina, South Carolina and Texas.

• Republican retirements include Alan Armstrong, Okla.; Steve Daines, Mont.; Jodi Ernst, Iowa; Cynthia Lummis, Wyo.; Mitch McConnell, Ky. and Thom Tillis, N.C.
• Elections to other office include Marsha Blackburn, Tenn., to governor; Tommy Tuberville, Ala., to governor
• Republican incumbent primary losses include Bill Cassidy, La.; John Cornyn, Texas
• Republican incumbent Election Day losses include Susan Collins, Maine; Darline Graham, South Carolina; Jon Husted, Ohio; and Roger Marshall, Kansas.
• Democratic retirements include Dick Durbin, Ill.; Gary Peters, Mich.; Jeanne Shaheen, N.H.; Tina Smith, Minn.
• The races in Alaska and Mississippi remain uncalled at the time of this publication. Republican Sens. Dan Sullivan, R-Alaska, and Cindy Hyde-Smith are seeking re-election.

Senate Democrats are expected to hold their leadership elections in early December, and Sen. Chuck Schumer, D-N.Y., is expected to return to the role of majority leader, which he previously held in 2021-25. It appears certain that Schumer will have sufficient backing from his colleagues, though several newly elected senators, including El-Sayed, Troy Jackson of Maine and James Talarico of Texas, haven’t committed to supporting him in the party’s leadership vote, and progressives could force the adoption of certain policies or rules in exchange for their support.

Schumer’s relationship with Rep. Hakeem Jeffries, D-N.Y., the presumptive incoming House speaker, is markedly different than the one he had with former Speaker Nancy Pelosi, D-Calif., and the two New Yorkers publicly clashed on approaches to deals in the first year of this Congress. While Senate and House leaders often have the same policy goals, the differences in the chambers’ dynamics and rules — notably the need for 60 votes to get most legislation through the Senate — can cause tension.

Presenting an additional challenge for Schumer is that heading into the 2028 election cycle, he will have a caucus with as many as eight senators exploring a run for president. These potential candidates might want to grapple with the establishment and stand out to the electorate, rather than fall in line with Senate leadership. Schumer himself faces a decision in the next two years on whether to run for a sixth term in the Senate or retire. That choice could influence his leadership style, including how he interacts with Trump, with whom he has a long and complex relationship.

Senate Republicans will elect their leaders for the 120^th Congress on Nov. 10. In the wake of the GOP's loss of Senate control — a prospect that was nearly unimaginable at the beginning of this year — Senate Majority Leader John Thune, R-S.D., could step aside but currently appears likely to return as minority leader. A key factor in this decision will be President Trump's response to the loss and his rhetoric about Thune.

With no control over setting the legislative agenda, the minority leader is often more of a messenger for the party, and at this point Senate Republicans may opt for a leader who will aggressively counter Democrats. Thune has been the target of significant criticism by the president during his first term as leader, especially for his inability to ensure Senate passage of a federal voting overhaul bill and his refusal to support eliminating the filibuster.

The president has not directly called for Thune to be replaced, but the strongest Trump allies remaining in the Senate could push for consideration of a leader who is better aligned with the president.

2. The House

House Republicans entered the election with 218 seats to Democrats’ 214, along with one Independent caucusing with the GOP and two vacancies. Democrats needed to net at least three seats to take the majority, and they have secured at least 35 net seats, though that tally could go as high as 51. (At the time of publication, 47 races remain uncalled.)

A record number of members chose to leave the House this cycle, and 11 members lost their primaries, amplifying the turnover between the 119^th Congress and the 120^th. In January, there will be at least 102 new members of the House.

Senate Democrats are expected to hold their leadership elections in early December, and Sen. Chuck Schumer, D-N.Y., is expected to return to the role of majority leader, which he previously held in 2021-25. It appears certain that Schumer will have sufficient backing from his colleagues, though several newly elected senators, including El-Sayed, Troy Jackson of Maine and James Talarico of Texas, haven’t committed to supporting him in the party’s leadership vote, and progressives could force the adoption of certain policies or rules in exchange for their support.

Schumer’s relationship with Rep. Hakeem Jeffries, D-N.Y., the presumptive incoming House speaker, is markedly different than the one he had with former Speaker Nancy Pelosi, D-Calif., and the two New Yorkers publicly clashed on approaches to deals in the first year of this Congress. While Senate and House leaders often have the same policy goals, the differences in the chambers’ dynamics and rules — notably the need for 60 votes to get most legislation through the Senate — can cause tension.

Presenting an additional challenge for Schumer is that heading into the 2028 election cycle, he will have a caucus with as many as eight senators exploring a run for president. These potential candidates might want to grapple with the establishment and stand out to the electorate, rather than fall in line with Senate leadership. Schumer himself faces a decision in the next two years on whether to run for a sixth term in the Senate or retire. That choice could influence his leadership style, including how he interacts with Trump, with whom he has a long and complex relationship.

Senate Republicans will elect their leaders for the 120^th Congress on Nov. 10. In the wake of the GOP's loss of Senate control — a prospect that was nearly unimaginable at the beginning of this year — Senate Majority Leader John Thune, R-S.D., could step aside but currently appears likely to return as minority leader. A key factor in this decision will be President Trump's response to the loss and his rhetoric about Thune.

With no control over setting the legislative agenda, the minority leader is often more of a messenger for the party, and at this point Senate Republicans may opt for a leader who will aggressively counter Democrats. Thune has been the target of significant criticism by the president during his first term as leader, especially for his inability to ensure Senate passage of a federal voting overhaul bill and his refusal to support eliminating the filibuster.

The president has not directly called for Thune to be replaced, but the strongest Trump allies remaining in the Senate could push for consideration of a leader who is better aligned with the president.

Jeffries, chosen as the Democratic leader in 2025 after Pelosi’s 20-year leadership tenure, is expected to be elected speaker of the House when the 120^th Congress convenes on Jan. 3, 2027. The role of speaker is very different than that of minority leader, and Jeffries is untested in it. He has virtually no relationship with Trump, so his role in any negotiations between Democrats and the president is something of a blank slate. House Democratic leadership will hold its internal elections Nov. 18-19.

Outgoing House Speaker Mike Johnson, R-La., said he will not run for a leadership position in the next Congress, setting the stage for a contest between fellow Louisianan Steve Scalise, the Republican House Majority Leader, and Rep. Jim Jordan, R-Ohio, for House Minority Leader, though other candidates could join the race. Neither was able to win the speaker’s race in 2023, when they needed 218 votes from the full House, but election to minority leader will require a simple majority of the GOP’s returning incumbents and new members-elect.

Jordan would represent a clearer break from the existing leadership structure after a House loss, as he spent the first several years of his congressional career as an outspoken critic and thorn in the side to House Republican leadership (and some rank-and-file members) but is seen as closer to the current power structure of the party after Trump’s ascendancy over the last decade. Scalise has a deeper institutional network but a lesser public profile than Jordan, who is a fixture on conservative media. A Trump endorsement would likely be particularly consequential, but the president has so far said he will stay out of the race, which will be by secret ballot.

Rep. Tom Emmer, R-Minn., the current House Republican whip, announced his candidacy for the same position in the minority, though Rep. August Pfluger, R-Texas, said he will challenge for that role. Again, other candidates could join the fray as more election results solidify. The House Republicans will hold leadership elections Nov. 10.

Bottom line for business: A change in congressional control does not mean an immediate change in tax law. Watch leadership elections and emerging priorities for signals about where legislation and scrutiny may focus, while keeping business plans grounded in current law.

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Why results matter: Power, process and pathways

Control of Congress determines more than which bills pass each chamber. It establishes who controls the floor, the committee gavels and subpoena authority; whether the budget reconciliation process is available to bypass a Senate filibuster; and how much leverage each side brings to the negotiations on must-pass bills such as government funding and the debt limit.

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1. Legislative control

A majority in either chamber brings real advantages. The majority party controls the floor schedule, holds every committee gavel and a majority of seats on each panel, and decides which bills receive hearings, markups and votes. But the power to set the agenda is not the same as the power to enact it.

In the House, where the majority typically must pass procedural rules on party-line votes before bringing legislation to the floor, a large enough bloc of members — an ideological faction, or a group of lawmakers from swing districts — can block a rule, stall a bill or extract concessions from leadership.

The GOP majority in the House throughout the 119^th Congress has faced big hurdles to moving their agenda because of its extremely narrow margin. Democrats will not be entirely immune to this even with a significantly larger majority; both progressives and more conservative members of the New Democrats have powerful voting blocs — and sometime quite different legislative priorities.

In the Senate, the arithmetic is different but no less constraining. A simple majority is enough to confirm nominees, but most legislation must clear a 60-vote threshold to end a filibuster. Neither party has held 60 seats since February 2010, so the majority must generally win votes from the other side of the aisle for government funding and nearly  all other legislation.

The principal exception is budget reconciliation, which can pass with a simple majority but requires both chambers to first adopt a concurrent budget resolution and is limited under the Senate’s Byrd rule to provisions with a direct budgetary effect. In recent decades, this process has been a tool of unified party control.

Even then, a narrow majority hands outsized leverage to individual senators: Democrats’ 50-50 Senate in 2021-22 saw a single member’s opposition sink the Build Back Better package (later revived in a less expansive form as the Inflation Reduction Act), and the OBBBA cleared the Senate only with Vice President J.D. Vance's tie-breaking vote after three Republicans voted no. For taxpayers, the practical result is that the size of a majority may matter nearly as much as which party holds it.

With at least 54 members (two races remain undetermined at publication time), the incoming Democratic majority in the Senate will be able to afford a few dissenting members if they choose to attempt budget reconciliation. Successful passage of such a legislative package across both chambers would demonstrate the policies that unite the party, even if they cannot overcome a presidential veto.

How much the president and Democrats want to cut deals will be a huge variable in the next Congress. Bipartisan dealmaking was limited after Democrats took control of the House and Senate during Trump’s first term, but his attitude towards the incoming Democratic majority has revolved between defiant and accommodating; in one interview Trump referred to himself as “Mr. Veto,” while in another statement on Election Night he said, “I don’t want to be just sitting there for two years vetoing everything.”

2. Oversight control

Senate Democrats are expected to hold their leadership elections in early December, and Sen. Chuck Schumer, D-N.Y., is expected to return to the role of majority leader, which he previously held in 2021-25. It appears certain that Schumer will have sufficient backing from his colleagues, though several newly elected senators, including El-Sayed, Troy Jackson of Maine and James Talarico of Texas, haven’t committed to supporting him in the party’s leadership vote, and progressives could force the adoption of certain policies or rules in exchange for their support.

Schumer’s relationship with Rep. Hakeem Jeffries, D-N.Y., the presumptive incoming House speaker, is markedly different than the one he had with former Speaker Nancy Pelosi, D-Calif., and the two New Yorkers publicly clashed on approaches to deals in the first year of this Congress. While Senate and House leaders often have the same policy goals, the differences in the chambers’ dynamics and rules — notably the need for 60 votes to get most legislation through the Senate — can cause tension.

Presenting an additional challenge for Schumer is that heading into the 2028 election cycle, he will have a caucus with as many as eight senators exploring a run for president. These potential candidates might want to grapple with the establishment and stand out to the electorate, rather than fall in line with Senate leadership. Schumer himself faces a decision in the next two years on whether to run for a sixth term in the Senate or retire. That choice could influence his leadership style, including how he interacts with Trump, with whom he has a long and complex relationship.

Senate Republicans will elect their leaders for the 120^th Congress on Nov. 10. In the wake of the GOP's loss of Senate control — a prospect that was nearly unimaginable at the beginning of this year — Senate Majority Leader John Thune, R-S.D., could step aside but currently appears likely to return as minority leader. A key factor in this decision will be President Trump's response to the loss and his rhetoric about Thune.

With no control over setting the legislative agenda, the minority leader is often more of a messenger for the party, and at this point Senate Republicans may opt for a leader who will aggressively counter Democrats. Thune has been the target of significant criticism by the president during his first term as leader, especially for his inability to ensure Senate passage of a federal voting overhaul bill and his refusal to support eliminating the filibuster.

The president has not directly called for Thune to be replaced, but the strongest Trump allies remaining in the Senate could push for consideration of a leader who is better aligned with the president.

3. Confirmation power

Confirmation of presidential nominees is a Senate-only power, and it is the part of Senate control that could most directly affect Treasury and the IRS. Unlike most legislation, nominations are not subject to the 60-vote threshold: a simple majority is enough. The majority also decides which nominees receive committee hearings and floor time. The 2025 rules change that allows most sub-cabinet nominees to be confirmed as a group makes it easier for a majority to clear the nominees it favors but only those it chooses to bring to the floor.

A Democratic majority will control which Trump nominees advance for the most senior positions at Treasury and the IRS, for any Supreme Court seats that open during the next Congress and for other judgeships, giving the party leverage it would not have in the minority.

The power has limits, however. Acting officials can serve temporarily under the Federal Vacancies Reform Act, generally for 210 days and longer while a nomination is pending; career civil servants can continue day-to-day operations; and some functions can be exercised by already confirmed officials higher in the department. So if Democrats block nominees, they could delay and reshape an administration’s team, but they probably will not be able to force the White House to nominate a particular candidate.

(The timing of pending nominations and what Democratic Senate control could mean for Treasury and IRS leadership is discussed later in this article.)

Bottom line for business: Legislative gridlock does not eliminate policy risk. Oversight and confirmation battles can influence tax administration even when major tax bills cannot become law. A Democratic Congress could use appropriations and oversight to rebuild IRS capabilities that have been scaled back or disrupted under Republicans. That does not mean there will be an immediate explosion of audits, but businesses should plan for the possibility that sophisticated enforcement capabilities begin reemerging in 2027-28.

The lame-duck session: Deal now or wait until 2027?

1. The calendar and the likely agenda

The continuing resolution (CR) signed in September funds the federal government through Dec. 11 (continuing IRS funding at $11.2 billion and blocking a second rescission of $11.7 billion in Inflation Reduction Act funding). Congress must pass full-year FY2027 appropriations or another CR by Dec. 11 to avoid a government shutdown and either will likely require bipartisan cooperation in the Senate.

There is a robust legislative agenda that has largely been sidelined for the past year, and policymakers are eager to leverage the lame-duck session to advance key initiatives. Not much will move as a standalone bill, so the National Defense Authorization Act (NDAA) and the FY2027 funding bill are the most likely vehicles to advance any other initiatives policymakers hope to get across the finish line this year.

The funding bill could carry additional measures, most notably an increase in the debt limit, which will be needed in the coming year (assuming Republicans do not do this through a partisan budget reconciliation bill) and bipartisan permitting reform. In both cases, careful negotiation between Republicans and Democrats and between the two chambers is still needed.

Timing is driving a debate over a debt limit ceiling increase or suspension. The OBBBA raised the limit by $5 trillion, to $41.1 trillion, but projections are that, without another increase or a suspension, Treasury will run out of enough cash and accounting measures to pay all of the government’s bills on time by late 2027 or early 2028.

The permitting reform package would broadly accelerate energy and infrastructure development, setting clearer permitting timelines and litigation rules, and specifically address the surge in electricity demand from AI data centers, including provisions intended to ensure large computational loads bear the costs of transmission infrastructure needed to serve them. It has significant buy-in from both parties and a painstakingly negotiated agreement struck in the Senate. However, environmental groups are putting pressure on Democrats to abandon the bill despite bipartisan agreement and support from the White House.

Other measures considered “must do” by year-end include a surface transportation authorization extension (expired Sept. 30); a farm bill extension (expired Sept. 30 but some key nutrition and other measures were extended through other legislation); nearly 20 health programs including Medicare, rural health and other policies (expiring Dec. 31), the national flood insurance program authorization (expires Dec. 11); and the NDAA, which has passed annually since 1981.

A number of factors will drive what any end-of-year package consists of and how much can be accomplished. These include a willingness for Democrats and Republicans to negotiate, a willingness for lawmakers who are leaving Congress in January to return to Washington, D.C. to vote, and the ability of both parties to put politics aside and prioritize moving legislation, especially the bills that would bring significant consequence if not passed (i.e., a debt limit increase and FY 2027 funding).

Beyond all of this, the key variable in the lame-duck period is the post-election mood. Until the members gather in Washington to meet in person and digest the election results, it remains unclear how productive the next six weeks or so will be.

With just 20 post-election legislative days scheduled in the House and 22 in the Senate, leaders will be pressed for time to work out agreements that can pass both chambers and get the president's approval.

2. Strategic choices for each party

Both parties face a strategic choice for the next six weeks or so: clear legislation while the GOP still holds the majority in both chambers, or preserve issues for the next Congress. The outgoing Republican majority will likely want to legislate as much as it can on its priorities before losing control, but there are practical limitations.

The Trump administration’s aspirations for a third Republican-only budget reconciliation package, centered around supplemental spending for the Iran war, will be put to the test as support for the war dwindles from already low public support. (The OBBBA was the first reconciliation bill of this Congress; “Reconciliation 2.0” became a narrower immigration-enforcement bill.)

In late July, the House passed a budget resolution that unlocks a third budget reconciliation package for Republicans, providing a path for legislation that circumvents the Senate filibuster and so needs no Democratic support. But while deficit hawks in the GOP conference have pushed for deep spending cuts since last summer’s first reconciliation measure, and House Budget Committee Chair Jodey Arrington, R-Texas, has advocated for provisions to combat fraud in government programs including Medicaid and Medicare, House leaders kept the new package narrowly focused on defense spending, aid for farmers and election integrity measures and did not include any offsets (or tax-related provisions).

Senate Republican leaders have expressed deep skepticism about another reconciliation process, which is more challenging for the upper chamber. It would entail two “vote-a-ramas” in which Democrats can force unlimited votes — not as politically treacherous as it was before the midterms but still dreaded — and would require the support of 50 of the 53 GOP senators at a time when at least 14 of them are leaving office.

Any changes to the budget resolution — including adding a tax title or a debt-limit increase — would require a new vote in the House, as well as passage by the Senate, before work on an underlying legislative package could begin. All of this, plus a limited window of time, points to an unlikely path for a successful third partisan package.

For their part, Democrats, as the incoming majority, may want some of the decks cleared to start January with a clean slate, leading them to seek agreement on targeted bipartisan legislation, government funding and the debt limit; or they may prefer to delay action on most measures until they gain control of the gavels and have the power to impose more Democratic preferences.

A debt limit increase or suspension has detractors among both parties. Trump has urged Congress to raise the limit before the end of the year, which would push the next deadline beyond the end of his term, and some Republicans want to act while the party still controls both chambers — preferably through a bipartisan deal, but through a budget reconciliation package if Democrats will not negotiate. Resistance within the GOP is real, however, with some opposing raising the ceiling without deep spending cuts and assurances of fiscal responsibility.

Democrats face their own calculus on this issue. Jeffries suggested in September that the debt limit could be on the agenda after the midterm elections, but Democratic members could be more hesitant to strike a deal after their success in the midterms. The Democratic majority could try to extract policy concessions from the president next year in exchange for raising the ceiling.

Two moves that have the potential to deter Democratic cooperation on legislation during the lame-duck session are a hard GOP push for a third reconciliation package and a renewal of military attacks in Iran by the administration.

The election outcome will create a strong incentive for Senate Republicans to confirm pending Treasury and IRS nominees before control of the confirmation process changes hands. James Gadwood, nominated to serve as IRS chief counsel and an assistant general counsel at Treasury, has already been approved by the Senate Finance Committee and placed on the Senate Executive Calendar. Crapo has already notified Finance members that the committee will consider pending nominations next week, including Robert Stebbins as Treasury general counsel and Francis Browne as Treasury undersecretary for domestic finance.

One conspicuous position cannot currently be filled this year through Senate action alone: IRS commissioner. The IRS does not currently have a Senate-confirmed commissioner following Billy Long’s removal in August 2025, and no nominee for the position is pending before the Senate.

Other notable positions for which there are no current nominees include assistant secretary for tax policy and deputy undersecretary for legislative affairs (vacated, respectively, by Ken Kies and Derek Theurer in July).

3. What tax legislation could move?

Tax administration

The TAS Act, championed by Finance Committee leaders Crapo and Wyden, aims to reform substantial parts of IRS customer service, tax administration, refund litigation and controversy management. The bill reflects bipartisan interest in improving IRS operations while strengthening taxpayer rights and increasing transparency and predictability in tax administration. It also signals a continued shift away from paper‑based processes and prolonged phone interactions and toward expanded digital tools, online account access and electronic communications for both taxpayers and their authorized representatives.

If enacted, the provisions also could significantly alter refund claim strategy, forum selection, cash‑tax planning and controversy risk management for large partnerships and corporations.

Among its many provisions, the TAS Act would generally give the IRS 12 months to decide refund claims and require written explanations of denials; codify a hazards-of-litigation standard for the IRS Independent Office of Appeals; allow taxpayers to bring refund and credit suits in the Tax Court; and require taxpayer dashboards on backlogs and refund status.

In the House, the Ways and Means Committee has weighed some of the same issues, addressing them in narrowly focused bills that overlap with provisions of the TAS Act. There are also some substantive differences between the two chambers.

The TAS Act contains international taxpayer-related and tax preparer enforcement provisions that are not included in the House bills and could present friction points in bicameral negotiations. One section that has been the target of disagreement from opposing coalitions of conservative organizations would grant the IRS authority to deny or revoke Preparer Tax Identification Numbers (PTINs) for paid, non-credentialed tax return preparers that fail to complete annual continuing education requirements.

A House measure also would lower the partnership e-filing threshold, which could require changes for funds and closely held businesses.

Because of its technical, noncontroversial nature and its prioritization by both of the Senate’s top tax writers, either the TAS Act itself or a similar package negotiated between the House and Senate has a better chance than many measures of becoming law in a lame duck session.

Digital asset tax treatment

The Digital Asset Tax Certainty Act (DATCA), passed on a strong bipartisan basis by the Ways and Means Committee, would allow mark-to-market accounting for digital asset dealers and traders, apply wash-sale and constructive-sale rules to digital assets, create a $10 de minimis exception for transaction fees, narrow additional broker reporting and offer a voluntary disclosure safe harbor.

The Finance Committee also held a hearing on the issue of cryptocurrency taxation, and Sen. Steve Daines, R-Mont., later introduced the Aligning Digital Assets with Principles of Taxation (ADAPT) Act. This proposal overlaps significantly with DATCA but would go further in changes of tax treatment for digital asset lending, instruct Treasury to make new rules for foreign decentralized autonomous organizations to reorganize as U.S. corporations, and exclude passive staking income (in cryptocurrency) for tax-exempt organizations from business taxes.

A key question is whether congressional leadership will have the appetite for crypto tax reform post-election, or if Democrats believe they could draft a new version with more of their imprint in the next Congress. Specifically left out of DATCA was any provision clarifying the timing of taxing staking and mining rewards, which has been a point of intense debate. A leading Democratic negotiator, Rep. Steven Horsford, D-Nev. noted that the committee will have “more work to do” in this area.

Daines, as well as Sen. Cynthia Lummis, R-Wyo., an original cosponsor and outspoken crypto reform advocate, are both retiring at the end of this Congress.

Gambling loss deduction

Lawmakers could revisit a controversial gambling provision enacted in the OBBBA that, beginning in 2026, limits the deduction for wagering losses to 90% of losses, subject to the existing limitation that deductions cannot exceed gambling winnings. The change can result in taxpayers recognizing taxable income even when their wagering activity breaks even overall.

There have been bipartisan efforts to restore the prior 100% deduction since shortly after the passage of the OBBBA, and the Ways and Means Committee approved a provision repealing the 90% limitation as part of DATCA. The issue faces at least some resistance in the Senate, though, where Finance Committee member Sen. James Lankford, R-Okla., has opposed restoring the full deduction, characterizing the 90% limitation as a relatively minor change and pointing to the federal revenue generated by the provision.

Work Opportunity Tax Credit

Congress could again consider extending and expanding the Work Opportunity Tax Credit (WOTC), which provides an incentive for employers to hire workers from certain groups that face barriers to employment. The credit expired at the end of 2025, but lawmakers in both parties have introduced proposals to revive it.

The bipartisan Improve and Enhance the Work Opportunity Tax Credit Act (S. 3265) would extend the credit through 2030 while increasing the credit percentage, providing a larger incentive for employees who work at least 400 hours, expanding eligibility and adding qualified military spouses as a targeted group. Other proposals would similarly extend or expand the credit, including legislation focused on individuals affected by the criminal justice system.

The breadth of bipartisan interest could make WOTC a candidate for inclusion in a tax package, although lawmakers have not yet considered an extension.

Section 48D semiconductor credit

An extension of the Section 48D advanced manufacturing investment credit also could be in the year-end mix. Created by the CHIPS and Science Act to encourage domestic investment in semiconductor and semiconductor-equipment manufacturing, the credit was increased from 25% to 35% by the OBBBA for qualifying property placed in service after 2025, but the OBBBA did not change the requirement that construction begin before Jan. 1, 2027. There is significant bipartisan support for extending that deadline.

Senate Finance Committee Chair Mike Crapo, R-Idaho, and ranking Democrat Ron Wyden, D-Ore., jointly called for an extension in August 2026, while other lawmakers have introduced bipartisan, bicameral proposals that would expand the credit to additional semiconductor-related investments. The combination of bipartisan tax writer support, industry advocacy and continued congressional interest in promoting domestic semiconductor manufacturing could make an extension or expansion of Section 48D a candidate for a tax or economic-policy package.

Film/television production tax incentive

A bipartisan group of legislators recently introduced bills in both chambers to create a new federal tax credit incentivizing U.S. film and television production, proposing a change that could prove more beneficial than the revival of Section 181, a lapsed tax deduction that entertainment producers previously championed.

The Motion Picture, Television, and Entertainment Revitalization Act would create a new federal tax credit under Section 45BB for productions in which the principal photography begins in tax years starting after Dec. 31, 2026. The tax credit would be similar to the incentives some individual states offer — including California, Georgia, Illinois, New Mexico and New York — and could stack on top of those. As proposed, the federal credit also would be transferable, further adding to its appeal for taxpayers, and would increase in value for production in qualified rural opportunity zones and federal disaster areas.

While the federal revenue impact of the legislation has not been estimated to date, there could be some headwinds against any policy that would reduce revenue without a built-in offset. The cost of the credit and long-held views on corporate subsidies from some members could impact whether it garners enough support to become law in a narrowly divided Congress.

On the other hand, the bill’s incentives align with the GOP’s onshoring and made-in-America focus, and the president, who has endorsed the measure, could choose to put more weight behind the proposal if a potential legislative vehicle emerges during the lame duck session.

U.S.-Taiwan tax agreement

A longstanding ratification effort for a tax agreement with Taiwan could also be addressed before the 119th Congress ends — but supporters have had their hopes dashed on this front in previous years. There is unusually broad bipartisan support for relieving double taxation between the U.S. and Taiwan: after the legislation advanced but did not get over the finish line in the 118^th Congress, the House passed H.R. 33 by 423-1 early in this Congress, and the Senate legislation is backed by the bipartisan leaders of both the Finance and Foreign Relations committees.

Taiwan's unique diplomatic status complicates the mechanism for providing treaty-like tax benefits, but concern about China's reaction has not emerged as a significant source of congressional opposition. In fact, supporters have increasingly framed double-tax relief as a way to deepen U.S.-Taiwan economic ties, strengthen semiconductor supply chains and reduce dependence on China.

IRS funding

Funding for the IRS funding has been on a rollercoaster ride since passage of the Inflation Reduction Act in 2022. That law provided an additional $80 billion in IRS funding — most of which was rescinded over the last few years.

The White House proposed cutting IRS funding to $9.8 billion for FY 2027, a $1.4 billion (12.2%) decrease from the FY 2026 enacted level. The House Appropriations Committee approved $10.2 billion in funding, cutting nearly $1.4 billion from enforcement while keeping taxpayer services funding flat. The Senate has not considered its own appropriations bill, yet.

The current CR under which the federal government is operating maintains IRS funding at the FY 2026 level of $11.2 billion but omitted another rescission of $11.7 billion in Inflation Reduction Act funding.

With government funding set to take place on an ad hoc basis, again, due to lack of movement of individual appropriations bills through the regular government funding process and a looming funding deadline on Dec. 11, the IRS's budget could once again be a negotiating point in broader talks.

4. How tax legislation could move before year-end

Noncontroversial measures can pass on their own under a suspension of the rules in the House (requiring the support of two-thirds of members present and voting) and by unanimous consent in the Senate (requiring no opposition). More substantial bipartisan provisions generally need to be combined and attached to a larger must-pass bill in the closing weeks of the year.

The defense authorization bill typically does not carry a tax title, and tax provisions are generally kept off the farm bill because they can attract controversial additions. Government funding is therefore the most likely year-end vehicle to carry tax legislation if any is to move.

A budget reconciliation package would be the partisan alternative.

Bottom line for business: The lame-duck session offers a limited, uncertain window for targeted tax changes. Track measures relevant to your business, including taxpayer rights reform, digital asset rules and potential tax incentive extensions, and model alternative effective dates. Do not assume a proposed benefit or extension will become law when making year-end commitments.

Tax legislation in the 119th Congress: A scorecard

The defining tax law of this Congress was the 2025 reconciliation tax and spending law, the OBBBA, which extended — and in some cases enhanced — tax cuts and incentives enacted in 2017, created new temporary tax deductions for some individuals, modified the foreign tax regime and limited renewable energy tax incentives. The package also included changes to Medicaid that cut funding and tightened eligibility, driving a strong opposition message for Democrats with swing voters. CBO estimated that the OBBBA would add $3.4 trillion to deficits over 10 years, plus $718 billion in interest.

Since the OBBBA's enactment in July 2025, congressional tax activity has centered on hearings, limited oversight of OBBBA implementation and a handful of bipartisan bills.

The 119th Congress used hearings to explore several emerging tax issues without ultimately enacting legislation. Ways and Means examined the growing business of professional and college sports, including the use of tax-exempt municipal bonds to finance stadiums, the tax-exempt status of major college athletic programs and sports organizations, the deductibility of compensation paid by privately held teams, and the tax compliance challenges associated with name, image and likeness payments to student-athletes.

Although the committees’ work demonstrated bipartisan interest in at least some of these questions, the hearings did not produce enacted legislation, leaving sports and digital-asset taxation among the issues that could carry over into the 120th Congress.

The tax writing committees in transition

1. House Ways and Means Committee

GOP members who announced their departures at the end of the 119^th Congress include Reps. Vern Buchanan, R-Fla., David Schweikert, R-Ariz., Jodey Arrington, R-Texas, Kevin Hern, R-Okla., and Randy Feenstra, R-Iowa. Election losses by Reps. Brian Fitzpatrick, R-Pa., Max Miller, R-Ohio, and Mike Carey, R-Ohio, will further shrink the roster of returning members. (North Carolina Rep. Greg Murphy’s race is currently uncalled.)

Democrats will lose three of the committee’s five most senior tax writers with the departures of Reps. Lloyd Doggett, D-Texas, John Larson, D-Conn. (who lost his primary), and Danny Davis, D-Ill., as well as Dwight Evans, D-Pa.

Given the size of the majority that Democrats will have in the House — likely between 250 and 260 members when all the races are determined — the committee ratios between the two parties will change significantly, and Democrats will have room for more than a dozen new committee members on their side.

House Republicans have said they plan on populating committees for the 120^th Congress after Thanksgiving.

2. Senate Finance

Sens. John Cornyn, R-Texas, Bill Cassidy, R-La., Thom Tillis, R-N.C., Steve Daines, R-Mont., Marsha Blackburn, R-Tenn., and Tina Smith, D-Minn., all announced their retirements, lost their primaries, or announced they would depart for a different position (governor of Tennessee for Blackburn) prior to midterms. Sen. Roger Marshall, R-Kan., lost his seat on Election Day.

The only departure among Finance Committee Democrats will be Sen. Tina Smith, D-Minn., who is retiring.

One incoming member of the Senate brings significant tax  writing experience with him: Sherrod Brown, who defeated Sen. John Husted, R-Ohio, in a special election previously served three terms as a senator before losing reelection in 2024. Brown sat on the Finance Committee from 2007 through 2024 and has said he hopes to return to the panel. Democrats’ internal rules mandate that for committee seniority purposes, he will be treated as a freshman, but it’s possible he will look to negotiate an exception with leadership. At the time of his election loss, Brown also was chair of the Banking Committee and the second-most senior Democrat on the Agriculture Committee.

Because this was a special election, Brown will be sworn in this year, likely during the lame-duck session, and so will change the Senate’s balance even before the 120^th Congress starts.

3. Committee leadership in the 120th Congress

Rep. Richard Neal, D-Mass., the presumed incoming House Ways and Means Committee chair, previously led the committee from 2019-22 and has served as a tax writer for more than 30 years. The outgoing chair, Rep. Jason Smith, R-Mo., who oversaw the House drafting and passage of the OBBBA, is expected to remain the top Republican on the panel.

Likewise, Sen. Ron Wyden, D-Ore., expected to serve as Senate Finance chair, is an experienced hand in the role, having held it in 2014 and 2021-23, as is the top Republican, Sen. Mike Crapo, R-Idaho, the outgoing chair.

Seniority could give women leadership of four of six Ways and Means subcommittees for the first time: Reps. Linda Sánchez, Terri Sewell, Suzan DelBene and Judy Chu.

Bottom line for business: Familiar committee leaders do not guarantee continuity in the tax agenda. Significant membership turnover makes committee assignments and subcommittee leadership important signals to watch. Revisit your advocacy priorities and prepare clear explanations of how potential tax changes would affect your business.

The 2027 tax agenda

A Democratic Congress will give the party the gavels, subpoena power and control of the agenda, but not the ability to enact that agenda on its own. Any bill, including a budget reconciliation package that could bypass the Senate filibuster, would still need President Trump’s signature, and Democrats will remain far short of the two-thirds majorities needed to override a veto.

As a result, Democratic tax activity will likely move on three tracks: oversight and confirmations, where the new majorities will bring real leverage; a narrow set of bipartisan provisions that could win 60 votes in the Senate and the president’s support; and messaging legislation intended to shape the party’s 2028 platform.

Affordability will almost certainly be the organizing theme. Ways and Means Democrats may start from legislation along the lines of the American Affordability Act (H.R.6900), a broad package introduced in December 2025 by Rep. Mike Thompson, D-Calif., the top Democrat on the committee’s tax subcommittee, with Neal and other committee Democrats. The bill would expand the low-income housing tax credit (LIHTC), create refundable credits for first-time homebuyers and renters, expand the child tax credit (including monthly payments) and the child and dependent care credit, and restore clean energy incentives curtailed by the OBBBA. It did not identify any revenue offsets.

Democrats have also indicated that one of their very first priorities will be a push to revive the enhanced Affordable Care Act (ACA) premium tax credits that expired at the end of 2025 and to reverse the OBBBA’s Medicaid changes, which CBO estimated would reduce federal Medicaid spending by $911 billion over 10 years.

Without Republican buy-in, however, these measures would serve chiefly as markers for future negotiations.

The more consequential question is whether any narrow tax policies could clear 60 votes in the Senate and win Trump’s signature.

“I guess I’ll become Mr. Veto” at first, the president said on the conservative podcast “Pod Force One” days before the election, addressing the potential for Democratic control of both chambers. “And then at some point, we’ll probably make deals.”

Housing policy may offer the most plausible opening. The bipartisan More Homes on the Market Act (H.R.1340/S.3332), which would double the home-sale capital gains exclusion to $500,000 for single filers and $1 million for joint filers and index it to inflation, had more than 150 House cosponsors and 23 Senate cosponsors as of August, although its lead Senate sponsor, Cornyn, is departing this year after losing his primary.

Further LIHTC expansion building on the OBBBA’s changes, other affordable housing incentives, and tax incentives for employers that provide employee benefits also have backers in both parties.

An extension of the OBBBA’s deduction for tip income, which expires after 2028, could draw bipartisan support as well, although lawmakers may prefer to hold it for a larger negotiation closer to its expiration.

Public backlash against the rapid expansion of AI and the data centers needed to support it has mounted in recent months, and both Republicans and Democrats are grappling with how to respond — so far without developing a uniform view within either party. Trump remains broadly supportive of the industry, but multiple senators have introduced legislation to withhold certain tax-related business subsidies from these data centers.

In July, Sen. Mark Warner, D-Va., introduced the Data Center Tax Accountability and Disclosure Act of 2026 (S.5054), which would generally deny 100% bonus depreciation for property used in AI data centers and impose new reporting requirements related to energy and water use. Wyden has released a broader proposal that would impose a new gross-receipts excise tax on data center operators and restrict data centers’ access to several existing tax benefits, including 100% bonus depreciation and Opportunity Zone incentives.

Some Republicans also have begun consider how to address concerns around data centers. Sen. Josh Hawley, R-Mo., introduced the No Tax Breaks for Data Centers Act (S.5418), which would exclude data centers from qualifying for Opportunity Zone tax benefits.

Sen. Bernie Moreno, R-Ohio, has proposed going significantly further with the Recapturing Excessive Corporate Largesse through Accountability and Incentive Measures (RECLAIM) Act (S.1069) which would prohibit covered AI-focused data centers from receiving federal financial assistance or tax incentives and impose a federal excise tax equal to 100% of state and local incentives received by covered facilities. Moreno’s proposal generally targets large facilities.

Although these proposals take different approaches and face uncertain legislative prospects, the involvement of both Democratic and Republican senators suggests that scrutiny of federal, state and local tax subsidies for large AI data centers is likely to be a prominent tax policy issue in the 120th Congress. It also fits into the affordability agenda.

Other ideas have some potential for bipartisan support, but likely not enough to clear a 60-vote hurdle in the Senate. Democrats are certain to reintroduce legislation to overturn some of the tariffs imposed by the Trump administration — including that along the lines of Schumer's End Trump's Tariffs Act (S.5390) — and could launch efforts to rein in the president’s authority to raise import duties without a congressional vote. Any such legislation will face a veto by Trump, so for it to become law, a significant number of Republicans in both chambers would need to break with the president and help provide a veto-proof majority (two-thirds).

This appears unlikely. While Republicans had for decades before Trump’s rise been the party of free trade and a few have broken with the president over his trade policies and their ties to increased costs for voters, there are not yet signs that enough GOP lawmakers would support changes that Trump opposes.

Taxing carried interest at ordinary income rates is a perennial Democratic priority. Wyden, D-Ore., and Sens. Sheldon Whitehouse, D-R.I., and Angus King, I-Maine, reintroduced the Ending the Carried Interest Loophole Act (S.4330) this year, and President Trump has repeatedly called for closing the “loophole.” However, congressional Republicans have generally not been supportive of the change, leaving it out of both their 2017 tax reform and the OBBBA.

A Democratic proposal introduced this summer by Schumer, Wyden and Sen. Elizabeth Warren, D-Mass., to quadruple the 1% excise tax on stock buybacks to 4% faces similar GOP resistance.

Some reinstatement of targeted clean energy credits with constituencies in Republican districts could attract select GOP members but probably not the number needed to pass both chambers. The administration has been highly critical of those credits and would likely demand a significant policy trade before agreeing to negotiate extensions or revivals.

Other Democratic priorities have little or no Republican support, including full restoration of the clean energy credits the OBBBA curtailed and repeal of fossil fuel tax incentives. Much of Democrats’ tax focus in the 120th Congress will therefore be on shaping a 2028 platform, with bills and hearings designed to draw contrasts with Republicans as much as to become law.

Clashing views of the legislative approach Democrats should take in the majority began playing out even before Election Day. Sen. Brian Schatz, D-Hawaii, set to become the Senate majority whip, said it would be “wasted energy” for the party to propose things the president is certain to veto; but Congressional Progressive Caucus Chair Greg Casar, D-Texas, insists they must “pass bills powerful enough to actually tackle the cost of living crisis and root out rampant corruption” and not “just tinker around the edges.”

“If Donald Trump chooses to veto our popular, pro-affordability policies, the fight is far from over,” Casar said. “We’ll run on them in 2028 and pass them in 2029.”

Personnel is policy

Democratic control of the Senate also would give the party significant influence over personnel at the Treasury Department and the IRS, and that leverage would arrive at an unusual moment. The IRS has not had a Senate-confirmed commissioner since Trump removed Billy Long in August 2025. Treasury Secretary Scott Bessent’s authority to serve as acting commissioner lapsed in March under the Federal Vacancies Reform Act, and day-to-day operations are run by Frank Bisignano in the newly created, non-statutory role of IRS CEO. (This latter position is one likely to be an oversight target by Democrats.)

A Democratic Senate could slow or block nominees viewed as too ideological or controversial, pushing the administration toward more moderate or technically respected candidates, and could use its leverage to demand commitments on IRS funding, taxpayer service, audits, international tax enforcement, tariffs and regulatory policy before moving nominees. For the IRS commissioner in particular, Democrats could refuse to confirm a nominee perceived as hostile to the agency or supportive of further major staffing reductions, insist on someone with significant tax administration experience, and use the confirmation hearing to extract commitments on enforcement, audits of large corporations and high-income taxpayers, and taxpayer service.

As noted earlier, the administration would retain several workarounds, and the IRS itself has operated for long periods under acting leadership, with Treasury retaining substantial oversight authority over the agency. From a practical perspective, a Democratic Senate majority would probably find it difficult to leave Treasury leadership vacant indefinitely, but it could substantially delay nominees, reject the most controversial candidates and shape the administration's tax agenda through the confirmation process. That leverage is often one of the most important powers the Senate majority possesses when the White House is controlled by the opposite party.

The confirmation battles most likely to attract attention from the tax community would involve nominees' views on IRS funding and staffing, large-business and high-income taxpayer audits and enforcement and the use of regulatory authority to implement tax laws in a way Democrats may view as more narrow or expansive than Congress intended.

Bottom line for business: There is unlikely to be another major pro-business tax bill before 2029 at the earliest, and there is greater uncertainty around future rates and incentives. Separate the tax debate in the next Congress into proposals that signal the parties’ priorities and proposals that could realistically result in bipartisan deals. Prioritize modeling for measures most relevant to your business, including housing incentives, data center tax benefits and potential revenue raisers. Brief boards and audit committees on both legislative uncertainty and tax administration risks, without treating campaign priorities as enacted policy.

What it means for your business

Treat policy volatility as an enterprise issue, with potential risk and reward. Coordinated decisions across tax, trade, finance, operations, legal and internal audit help companies respond before policy changes erode margins. The post-election environment represents an opportunity for smart companies to gain competitive advantages through thoughtful planning.

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Year-end considerations

• Tax incentives: Firms that have previously utilized or may benefit in the future from WOTC or the 48D tax credit for semiconductor manufacturing should watch for potential extensions of these laws. A new tax credit for domestic entertainment production could benefit film, television and theater production companies.
• Controversy: If the TAS Act becomes law, Tax Court refund jurisdiction and appeals changes could reshape litigation strategy, settlement and cash planning.
• Partnerships: A lower e-filing threshold could require operational changes.
• Digital assets: Wash-sale and mark-to-market rules could change trading and reporting.
• IRS and other government operations: Failure by Congress to pass a government funding package or another CR would result in a government shutdown after Dec. 11 until the funding is resolved and could go into next year.

Looking ahead

For businesses, the increased risks of government shutdowns and fiscal confrontations translates to the potential for Treasury-market volatility, higher or more volatile borrowing costs, and a weaker environment for investment and M&A activity. Leveraged companies should elevate liquidity and refinancing risk on their planning agenda.

The tax policy landscape after 2028 is highly uncertain. Companies contemplating these actions:

• large capital expenditures
• acquisitions
• business sales
• succession transactions
• partnership restructurings
• entity conversions
• significant owner distributions

should begin modeling both the current-law case and a post-2028 Democratic tax-policy case.

The IRS already has the strategic architecture for data-driven enforcement. Its plan expressly contemplates modern technology, data and analytics alongside specialized capabilities for large corporations and partnerships. As Democrats look to increase funding and strengthen enforcement, taxpayers should revisit:

• partnership allocations and basis
• Section 704(c) and Section 752 positions
• transfer pricing and cross-border structures
• R&D credit substantiation
• employee versus independent-contractor issues
• executive compensation
• accounting methods
• related-party transactions
• state/federal information-reporting consistency
• uncertain tax positions and reserves
• documentation underlying significant transactions

 Companies exposed to imports should continue:

• tariff scenario modeling
• country-of-origin analysis
• supplier diversification
• customs versus transfer-pricing alignment

Contacts: