Capitol roundup: ACA tax credits, IRS funding, reconciliation 2.0?

Tax Hot Topics

Members of Congress returned to Washington, D.C., after their year-end break to a stack of challenges, including an ongoing partisan standoff over the expiration of enhanced Affordable Care Act (ACA) premium tax credits and a need to fund much of the federal government for the remainer of fiscal year 2026 before the current continuing resolution expires Jan. 30.

With “affordability” seemingly the word of this midterm election year, both parties are angling to advance what they believe to be policy that will improve voters’ views of the economy and win those voters over in November.

While both sides of the aisle agree that healthcare costs are a vital issue in the cost-of-living debate, their vastly different ideas on how to address them continue to prevent passage of legislation that can get through both chambers. House Democrats were able to gather the necessary support from a handful of their Republicans colleagues to force a vote Jan. 8 on a three-year extension of the enhanced ACA premium credits.

The final House vote on that bill saw 17 GOP members buck their party to help pass it, which was more than anticipated after Republican leadership insisted throughout 2025 that there was almost no support of extension within its conference.

However, a Senate vote in mid-December on that same three-year extension failed to win the 60 votes needed for passage in that chamber, and even the vote in the House looks unlikely to sufficiently change that dynamic. A bipartisan group of senators has been collaborating since last year to develop an approach to extending the credits that could pass, but to date, a successful compromise has eluded them.

Instead of extending the credits, most Republican lawmakers have instead advocated shifting money away from insurers and toward individuals through health savings accounts (HSAs); loosening insurance regulations to allow cheaper, less comprehensive plans; and increasing market competition.

These proposals align with those from President Donald Trump, who recently said he would veto a straight extension of the enhanced credits and wants Congress to redirect money directly to consumers. On Jan. 15, Trump released a framework dubbed The Great Healthcare Plan that calls for reduced premiums, lower drug prices, expanded price transparency and more accountability for insurance companies.

Beyond healthcare tax credits

The GOP also is focused on touting the middle-class tax benefits of last year’s massive budget reconciliation bill. Originally called the One Big Beautiful Bill Act (OBBBA), Republican lawmakers and those in the Trump administration now refer to the legislation almost exclusively as the Working Families Tax Cuts.

They are forecasting what they say will be some of the biggest tax refunds in history this filing season as a result of new tax credits for tip and overtime income that were not reflected in workers’ 2025 tax withholdings; an expanded tax deduction for many seniors; a higher cap on the state and local tax deduction; and other provisions.     

While most Congress watchers — and even many Republican lawmakers — are skeptical it can be achieved, conservatives are pushing for a second budget reconciliation bill this year. On Jan. 13, the House’s Republican Study Committee (RSC), the largest GOP caucus with about 190 members, released what it calls the Making the American Dream Affordable Again framework, which included proposals to lower housing, healthcare and energy costs; provide additional tax cuts; cut federal spending; and codify the president’s executive orders. 

Tax proposals in the framework include:

• Repealing the estate tax
• Indexing capital gains taxes for inflation
• Eliminating capital gains taxes on the sale of homes to first-time homebuyers and on the sale of rental homes to tenants
• Extending the recently expired work opportunity tax credit
• Imposing tax penalties on the purchase of U.S. land and real estate by foreign nationals
• Expanding the current 1% remittance tax to electronic and mobile money transfers, and imposing a 5% remittance tax on funds sent by a noncitizen to their country of origin
• Allowing single-income families to claim the claim the child and dependent care tax credit and to double their contributions to 401(k) retirement plans
• Creating several new tax-advantaged savings accounts

In exchange for their votes on the OBBBA last summer, House Speaker Mike Johnson, R-La., promised some of the chamber’s hard-liners that he would support a second reconciliation bill to further cut spending and address items that did not make it into the first bill. He and House Budget Committee Chair Jodey Arrington, R-Texas, have held meetings with members to discuss what could be included.

However, other Republicans have expressed strong skepticism, including House Ways and Means Chair Jason Smith, R-Mo., who has said that another reconciliation bill amid current intraparty differences is unrealistic without a “must-do” driver like the OBBBA had — the looming sunset of the 2017 individual tax cuts.

Johnson currently faces a daily challenge of lining up enough votes to pass the GOP’s measures, as the party’s majority has shrunk to a bare minimum (218 to 213) following the Jan. 5 resignation of Rep. Marjorie Taylor Greene of Georgia and the Jan. 6 death of Rep. Doug LaMalfa of California. Additional absences and defections from the ranks on individual measures have led to some surprise failed votes and to leadership pulling bills from the House floor at the last minute.

Acknowledging his need to have every possible Republican available for each vote, Johnson told reporters last week that he has a message for his members: “No adventure sports, no risk-taking, take your vitamins and stay healthy and be here.”

IRS funding passes House on bipartisan basis

An appropriations package (H.R. 7006) that includes FY2026 funding for the IRS and broader Treasury Department advanced out of the House of Representatives on Jan. 14 by a vote of 341-79, with support from majorities in both parties. The bill includes $5 billion in enforcement funding, $3.2 billion in operations and technology support funding, and $3 billion in taxpayer services funding for the agency.

The $11.2 billion in IRS funding represents a cut of about 9% from FY2025 — less than the 23% decrease originally proposed by the House. The House proposal would have included a 45% year-over-year cut to the enforcement budget.

The final appropriations package released by the House Jan. 20 and expected to be voted on this week includes an $11.6 billion cut to operations support funding for FY2026 from money originally provided to the IRS in the Inflation Reduction Act. The proposed reduction would leave $7 billion for the agency remaining from the original $25.3 billion in 10-year funding.

More bipartisan administrative tax relief

While Republicans and Democrats may not be able to find common ground on major tax changes in the current atmosphere, one bipartisan administrative relief measure became law late last year, and Ways and Means advanced another out of committee last week.

Trump signed into law the Disaster-Related Extension of Deadlines Act on Dec. 26, aligning the look-back period for taxpayers to receive a credit or refund for a tax overpayment in the case of a disaster extension and ensuring that tax collection notices to disaster victims account for any disregarded period.

On Jan. 14, House taxwriters unanimously passed a bill that would require the IRS to include a scannable barcode on paper tax returns prepared electronically, allowing the data to be converted into an electronic format. The BARCODE Act also would have the IRS use optical character recognition technology to scan handwritten paper returns. Both changes should allow paper tax returns to be processed — and refunds issued — more quickly.

At the committee’s markup, Joint Committee on Taxation Chief of Staff Tom Barthold told members that if the bill becomes law before July, it will apply to returns filed during the 2027 tax season.

Two other administrative bills passed the full House in December; and Ways and Means advanced three more that month.