Congress weighs presidential tax promises

SALT deduction cap back on the (crowded) table

During a Sept. 17 campaign rally, Trump promised to fully restore the state and local tax deduction, reversing course from enacting the $10,000 SALT deduction cap into law as part of the TCJA in 2017. The announcement may have come as welcome news to congressional Republicans in competitive districts in high-tax states like New York and California, but it could further complicate tax negotiations next year.

It is unclear how much of a priority this would be in a Trump presidency or how other Republicans would view it. Extending the current TCJA over 10 years would increase the federal deficit by $4.6 trillion, according to the Joint Committee on Taxation. and the Penn-Wharton Budget Model estimates eliminating the SALT deduction cap entirely would add approximately $1.2 trillion to the overall cost of that. Trump has also touted other potentially expensive tax proposals including making tips and overtime pay tax-free, which could lower federal revenues by hundreds of billions of dollars to over $1 trillion over the standard 10-year window, according to multiple estimates by independent experts.

Those policies could eat into budgetary space for continuing, or increasing, business tax cuts and benefits, and deficit considerations mean that tax increases, like a corporate tax hike, could be on the table in order to offset the costs of these more populist promises, though Trump has also campaigned on lowering the corporate rate, which would also reduce revenues.  

Republicans still seeking consensus on tax cuts and deficits

Congressional Republicans are of differing opinions over offsetting the costs of tax cuts. Top Senate Finance Committee Republican Mike Crapo told reporters on Sept. 17 that an extension of current policy should not be considered to reduce revenues, and only the cost of new tax policy should be part of the congressional debate around extending the TCJA next year.

“If you look at history, extending current tax law has never been offset by Congress,” Crapo said with the January 2013 extension of most of the 2001 and 2003 tax cuts in mind, according to reports. “If it’s literally not changing tax policy, I’m just telling you what the precedent that Congress has set is.”

However, other Republicans in the House and Senate have suggested that an extension of the TCJA should be at least partially offset to help deal with mounting deficits and a historically large debt-to-GDP ratio, exacerbated in recent years by increased borrowing costs for the government.

Asked about whether he was concerned about the impact of Trump’s proposals, including restoring the full SALT deduction, would have on federal deficits, House Speaker Mike Johnson said, “I’ve thought about it. But I do think it’s a combination of steps we would look to take.”

Republicans soften stance on IRA energy credits

In remarks to journalists on Sept. 18, House Speaker Mike Johnson said that while Republicans would seek to repeal energy credits created or expanded upon by the Inflation Reduction Act, they would not try to fully repeal every one, or the entire law.

“You’ve got to use a scalpel and not a sledgehammer, because there’s a few provisions in there that have helped overall,” Johnson said.

The comments came a little over a month after 18 members of the House Republican Conference wrote Johnson in favor of preserving some of the energy tax credits.

During a policy speech the same day, Johnson promised to restore full Section 174 R&E expensing, as well as full bonus depreciation, two pillars of the bipartisan extenders bill that has, at least so far, fallen short in the Senate. Johnson did not elaborate on whether that might be in the lame-duck session of Congress this year or during the broader tax negotiations due to take place in 2025.

Congress takes on tax-free tips

Recognizing the political appeal as elections draw near, Congressional lawmakers continued to flesh out a campaign trail promise of both parties: making tips tax-free.

While not all proposals will have a shelf-life past the election, early details could define the path of negotiations moving forward. And though pledges, like no federal taxes on tips or overtime pay, are aimed at individuals rather than businesses, they can indirectly impact what happens around the tax treatment of businesses next year, as Congress will be conscious of the overall cost to the federal government of next year’s tax package, and may seek to recoup revenues by raising taxes or ending certain benefits for businesses to offset more popular personal tax provisions. The tips and overtime tax holidays would also increase reporting requirements for employers.

Congressional Democrats and Republicans have introduced their own bills on the tax-free tips pledges made by former President Donald Trump and Vice President Kamala Harris.