What Will The Midterm Elections Mean For Tax Policy?

With Democrats retaining narrow control of the Senate and Republicans on the cusp of winning the barest of majorities in the House, it will be difficult if not impossible for Congress to enact major tax bills in 2023.

A divided Congress combined with continued Democratic control of the White House put a halt to big ambitions. But Congress still could adopt some tax legislation, driven as much by the state of the economy as by political control.

During the campaign, confident Republicans made two big tax pledges: Repeal some or all of the $80 billion in new IRS funding the Democratic-controlled Congress approved this year and make permanent the individual income tax provisions of their signature 2017 Tax Cuts and Jobs Act (TCJA).

For their part, Democratic leaders hoped an improbable legislative sweep could lead to more tax increases on the wealthy, restoration of the generous 2021 version of the Child Tax Credit (CTC), and approval of a global minimum tax and a new regime for taxing revenues of big tech firms included in the Organisation for Economic Co-operation and Development (OECD’s) ambitious corporate tax framework.

None of that will happen in a divided Congress. Still, lawmakers may try to address several important, but smaller, tax law changes. They include new retirement savings incentives, a modest expansion of the CTC, and some important business tax breaks that expired this year.

The question is whether either party will pursue legislation that can become law or spend time trying to advance their partisan agendas. Rep. Kevin McCarthy (R-CA), the frontrunner to become the next House Speaker, warned the GOP will use the need to increase the federal debt limit and pass a budget next fall to try to force Democrats to accept big spending reductions. That effort likely will be doomed, but could well stall any substantive legislation.

More than either party wanted to admit in the campaign, next year’s agenda is likely to be driven by the state of the economy.

If inflation remains high, Republicans will have some leverage to freeze government spending but have more difficulty cutting taxes. If the economy slows, spending cuts will be off the table. And even though a GOP House won’t increase spending, a recession could open the door for modest bipartisan tax cuts. Here are some issues to watch:

Who will chair the House Ways & Means Committee? With top Republican Kevin Brady (R-TX) retiring, three lawmakers are vying to chair the panel: Vern Buchanan of Florida, rian Smith of Nebraska, and Jason Smith of Missouri.

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The debt limit. The battle will drag into next fall and could be exceedingly ugly. Democrats could try to avoid the crisis by raising the borrowing cap in the next six weeks while they still control both houses of Congress.

IRS funding. Already some Republicans are threatening to shut down the government over IRS funding, but with Democrats in control of the Senate, there is little chance the money will be slashed. The Senate will consider Biden’s nomination of Danny Werfel to head the agency and Republicans may try to extract some concessions on how the funding is spent.

The Inflation Reduction Act (IRA) Democratic control of the Senate ends Republican dreams of rolling back the two major corporate tax hikes in the bill passed last summer—a minimum tax on book income and a 1 percent tax on stock buybacks.

Extending the TCJA. Even if the House passes a bill to extend the individual income tax provisions of the 2017 tax cut, which are due to expire at the end of 2025, the measure will die in the Senate.

Individual income tax cuts. This could be a sleeper. If the economy slumps, Congress could enact some temporary tax cuts. But lawmakers of both parties will have to decide whether they want a political message or a compromise bill that becomes law.

Retirement savings. There is broad bipartisan support in the current Congress to increase tax subsidies for retirement savings. Lawmakers could agree to a consensus measure in a lame duck session. If not, it could come up again next year.

Cats and dogs. There are a number of expiring or expired business tax provisions Congress may address either in a post-election session this year or next year. They include restoring the ability of firms to write off research costs the year they are incurred, a provision the GOP repealed in the TCJA.

The Child Tax Credit. The #1 priority for progressives is to restore several elements of the expanded CTC Congress enacted temporarily in 2021. Some Democrats may try to squeeze some changes into December’s must-pass budget bill. But it is a long shot. Sen. Mitt Romney (R-UT) proposed his own benefit package for families with children. But it has generated almost no GOP support. If Democrats can’t act in the lame duck, it is hard to see the issue going anywhere in 2023.

The best bet: Expect nasty partisan wrangling over the debt limit and a possible government shutdown as well as deep ideological divisions among the Republicans. The result will be little or no major tax legislation in 2023. But some narrow bills could pass, as both parties start to jockey over their tax agendas for the 2024 campaign.