Federal Tax Reform Timing Still Uncertain

Following the January inauguration, a flurry of executive orders, and Senate confirmations rolling in, the timing of when federal tax reform will take place still appears to be undecided amongst the Republican party. Federal tax reform will include the extension of tax provisions provided under the Tax Cuts and Jobs Act (“TCJA”) that are set to expire on December 31, 2025. If federal tax reform cannot be passed, the vast majority of individual and private businesses federal income taxes will significantly increase.

While President Trump’s campaign promised to extend the TCJA sunsetting provisions, the Republican party seems divided on the timing to address the federal tax reform in Congress. During the evening of January 5^th, President Trump took to social media to announce, “Members of Congress are getting to work on one powerful Bill that will bring our Country back and make it greater than ever before”, which would include a focus on securing the border, rolling back restrictions around American energy, and renewing the Trump tax cuts. In addition, President Trump has also stated that the Republicans should use their newfound leverage resulting from the needed disaster relief funding for the Los Angeles wildfires. However, recent comments from GOP Congressional leaders reflects uncertainty on the appropriate timing of a federal tax reform bill.

How will Federal Tax Reform be presented in Congress?

Congress intends to pass federal tax reform, as well as border security bills, through a process called budget reconciliation. A budget reconciliation process is addressed in the Federal’s annual budget resolution process. In its annual budget resolution, Congress sets total spending, revenues, the surplus or deficit, and the public debt. The budget resolution may also include reconciliation instructions. Budget reconciliation instructions direct one or more committees to recommend changes to existing law to achieve specified changes in spending, revenues, deficits, and/or the debt limit, which can include changes to tax law.

The budget reconciliation process is desirable to Republican controlled Senate as a 60 votes for approval is no longer needed, but only a Senate simple majority or 51. This will allow the Senate to pass a budget reconciliation bill with support from 51 of the current 53 Republican senators while also avoiding the need to seek the support of any Democrats or Independents to pass the bill.

Since 1980, the budget reconciliation process has resulted in 23 enacted bills, with both parties taking advantage of the process. Democrats most recently used it in 2022 to lower the cost of prescription drugs and health care and invest in cleaner energy. Republicans last utilized the bill in 2017 to approve the TCJA.

So, what’s the catch? The Budget Committee only provides a specific dollar amount for increases to the federal budget deficit or reduction to the budget surplus over a 10-year budget window. For example, when passing TCJA, Republicans were able to increase the budget deficit by $1.5 trillion over a 10-year window. This process forces the bill to have expiring provisions so that over a 10-year window, the deficit is not increased by the assigned amount. This is reflected in the TCJA as a significant amount of TCJA tax provisions are expiring as of December 31, 2025, in order to ensure the deficit spending did not exceed $1.5 trillion over the ten-year period provided.

Congress will be able to pass a budget reconciliation bill twice during the 2025 calendar year, one to adopt the FY 2025 budget and another to adopt the FY 2026 budget. Therefore, federal tax reform could be included in the FY 2025 budget resolution process in the first months of 2025 or be delayed until late 2025 or even early 2026 when approving the FY 2026 budget.

Congress Divided

Senators, including Majority Leader John Thune, have been indicating that the early budget reconciliation package will be focused on border security and defense, with a second budget reconciliation bill addressing federal tax reform. However, House Speaker Mike Johnson has outlined a plan where federal tax reform would be included in the first reconciliation bill and was quoted that it would be on Trump’s desk “certainly by May” or “in the worst-case scenario by Memorial Day”.

The challenge for Speaker Johnson is that the House majority has dwindled from five Republicans to only three. The resignation of Representative Gaetz (R-FL) and the appointment of Rep. Michael Waltz (R-FL) as National Security advisor decreased the GOP House seats to 218. In addition, the appointment of Elise Stefanik (R-NY) as U.N. Ambassador will also require her House resignation, although it is expected that special elections in both Florida and New York will result in Republican wins.

The narrow Republican majority in the House makes Speaker Johnson’s ability to pass a budget reconciliation even more challenging. Without any Democratic support, he can only lose two to five Republicans, depending on when the budget reconciliation bill is presented. As a reference, 13 Republicans opposed the TCJA budget reconciliation in 2017.

The Freedom Caucus, including 31 Republican House Representatives, on January 16^th expressed their desire for two separate budget reconciliation bills. The arguable leader of the Freedom Caucus, Chip Roy (R-TX), has made it clear that his support for the agenda will be contingent on budget cuts. Representative Roy was quoted by Politico reinforcing the need for two separate bills:

“They are counting on the ability to try to take border [funding], put it in reconciliation with tax cuts and roll us on spending,” he said, summarizing Johnson’s emerging strategy. “That ain’t gonna fly. So they should probably get religion now, or it’s gonna be a really long year.”

The Freedom Caucus’s statement supporting two separate bills requires the first budget reconciliation to create savings between $361 and $541 billion over the next decade. In exchange, the Freedom Caucus would support a $4 trillion increase in the federal debt ceiling before June 5, the estimated timeline provided by Janet Yellen, the Secretary of Treasury, as to when the extraordinary measures to keep the government operational will be gone, requiring Congress to act to prevent the US from defaulting. A $4 trillion increase in the federal deficit, would go toward the $4.5 trillion ten-year cost of the extension of the full TCJA without offsets that was estimated by the Congressional Budget Office.

Even President Trump has acknowledged the difficulty for the House to approve a budget reconciliation bill relying solely on Republican votes. On January 23^rd, President Trump acknowledged the Republican party is working with the Democrats on getting an extension of the TCJA. He stated the following:

“We have to get Democrats to approve it. But, you know, if the Democrats didn’t approve it, I don’t know how they can survive with about a 45% tax increase, because that what it would be. And so, I think they’re going to be. We’ve been working along with them pretty well.”

Pushing tax reform to the fall of 2025 could result in further delays. Based on Congressional history, a budget resolution has been passed by the original deadline 19 times out of the past 49 fiscal years. After a budget resolution is adopted, Congress is required to pass a series of separate bills funding various federal agencies and activities by October 1, the start of a new fiscal year. However, Congress has failed to timely pass more than five of its 12 regular appropriations bills at any point in history. Congress receives extra time by relying on a continuing resolution process. In the most extreme case, the final spending bill for fiscal 2017 did not become law until May 2017.

The uncertainty regarding the timing of tax reform is making taxpayers and business owners uneasy. In addition, the Budget Committee allotment of how much can be added to the deficit is still unknown, which will have a direct impact on what tax law changes might be extended. As House Ways and Means Committee Chairman, Representative Jason Smith (R-MO), pointed out in a recent statement, Congress only has 149 legislative days in 2025 to address the expiration of many provisions in the TCJA. While many may have anticipated that a Republican sweep of the House, Senate, and Presidency would streamline the federal tax reform process, all current indicators reveal that actually enacting federal tax reform could become increasingly challenging as the year progresses.