How will Trump allies pay for the Tax Cuts and Jobs Act extension?

March 4, 2025 5:17 PM

Financial advisors and their clients know that the expiring parts of the Tax Cuts and Jobs Act will likely remain in place, but they could be waiting until the end of the year on the details.

Regardless of their views of eight key policy questions outlined in the slideshow below and on President Donald Trump and his Republican party's control of Congress and the White House, planners and other tax and wealth management professionals face the need to get ready for new potential rules. That's why it's important to look past the daily headlines emanating from Capitol Hill to the big themes.

Currently, the House and the Senate are tying each other up in the complicated process of agreeing to a budget resolution setting a target for revenue and spending that includes tax legislation and other priorities for this session of Congress, according to experts like Jonathan Traub, a managing principal and the leader of the Tax Policy Group at consulting and professional services firm Deloitte Tax. They must reach an understanding on their budget blueprint before moving on to legislation meeting those price figures.

President Trump has expressed more support for the House's plan to pass "one big, beautiful bill" covering taxes and immigration, but the Senate is lining up behind two pieces of legislation — which Trump has described as an acceptable option as well.

"I understand his perspective, which is, 'I will weigh in on the policy, but that's their ballfield. I'm not going to play on their turf,'" Traub said, noting the delays among Republicans seeking to find common ground on the budget resolution. "The longer that goes on, in my mind it ends up backing you into a two-bill strategy. At some point, if they're working on parallel tracks that never meet, the president's going to be frustrated by the lack of action."

The tax policy dilemma that is converging on Trump and his party revolves around thorny math and politics that don't pose many easy answers. The legislation will expand the deficit by several trillions of dollars and add to the country's debt — even if its supporters wish to think that tariffs or corresponding economic gains will wipe away the cost completely. Simultaneously, other ideas such as cutting out tens of billions of dollars worth of tax enforcement programs signed into law by Trump's predecessor, President Joe Biden, is "actually a revenue-loser as opposed to a revenue-raiser," said Mary Burke Baker, a government affairs counselor and the leader of the Tax Policy practice of law firm K&L Gates.

As a former "keeper of the offset list" with the Senate Finance Committee, Burke Baker pointed out that this process is a very difficult one for any party on a major bill.

"Some offset is going to affect somebody, and that makes it extremely challenging to come up with acceptable offsets that have any money attached to them that they can use to help pay for this bill," she said.

It's no wonder that some earlier forecasts before President Trump took office that the tax legislation would pass by May are now looking flimsy for a Congress with a very slim Republican majority in the House. By congressional standards, completing the tax legislation by Memorial Day would represent a very speedy process — almost unthinkably so.

"It will really involve all Republican lawmakers just following neatly in line with President Trump," said Joe Hughes, a senior analyst for the nonprofit, nonpartisan Institute on Taxation and Economic Policy, which provides "data-driven recommendations to shape equitable and sustainable tax systems." As much as they do support Trump, many of the Republican ranks aim to reduce the deficit spending in the tax bill, Hughes noted.

"No matter how you slice it up, it will be a very costly bill and have enormous impact on the federal deficit and debt," he added.

Even as some in Congress show that they're willing to pretend that extending the Trump tax law somehow costs zero dollars, that budget gimmick could sign them up for a rendezvous with so-called bond vigilantes who have economy-tanking high interest rates in their holsters. Altering the baseline of the federal budget with "funny math" by counting current tax laws as costing nothing "would make a lot of people mad," said Ben Henry-Moreland, a former planner who's a senior financial planning nerd with the Kitces.com blog.

"It all depends on what sort of will and political pressure there is to pass these tax cuts," he said. "If there's a will to do that, they're going to find a way."

Scroll down the slideshow below for eight key tax policy issues for financial advisors and tax professionals to consider in the extension of the Tax Cuts and Jobs Act of 2017. To read the other part of Financial Planning's tax-season feature on the math and politics shaping clients' plans for next year, see "Tax Cuts and Jobs Act expiration: A guide for financial advisors." And click on the "tax" tag to see all of FP's coverage of tax-related topics for advisors.

The pretend math option

Advisors and their clients may not have to do a thing about next year's taxes if Congress and President Trump decide that the 2017 law didn't cost any money and won't pose any outlays moving forward. Trump is nothing if not audacious. And even some mainstream local chambers of commerce and national trade associations under the auspices of the U.S. Chamber of Commerce have lined up behind the "current policy baseline" gimmick.

The idea among some lawmakers to avoid "a big negative number attached to the extension" is similar to grading on a curve in that, "it doesn't change how you actually did on your paper," said Erica York, the vice president of federal tax policy at the nonpartisan, nonprofit Tax Foundation's Center for Federal Tax Policy. "Rather than going through that difficult exercise of truly paying for it, it's a lot easier to say, 'Well, what if we just bake it into the baseline?'"

Even if Congress did treat current tax laws as posing no additional expense, additional priorities such as President Trump's campaign promises to get rid of taxes on tips and Social Security benefits and create a deduction for the interest on domestic auto loans, the lawmakers will face a reckoning from "scorekeepers" like Fed Chairman Jay Powell, bond investors and fiscal conservatives who might "just say, 'That's just too huge,'" said Traub.

"It's still going to increase borrowing over current levels by a nontrivial amount," Traub said. "It does not solve your problem."

In a parallel universe…

No one is keeping the long list of options for reducing the federal deficit a secret. For example, eliminating itemized deductions would slash deficits by $3.4 trillion over a decade, according to the Congressional Budget Office. A more surgical approach such as President Trump's idea to drop the so-called carried interest loophole benefitting private equity, venture capital and hedge fund managers could shrink the deficit by $13 billion.

However, administrations from both parties have failed on that particular stated goal for a dozen or more years — a demonstration of the political complexity involved with fighting Wall Street. That idea would also bring much lower possible savings than, say, hiking the rates on long-term capital gains and qualified dividends by 2 percentage points ($103 billion), increasing corporate taxes by 1 point ($136 billion) or taxing the foreign income of U.S. companies at the full statutory level ($340 billion). None of those options can garner much support in the current Congress.

Clawbacks of IRS enforcement or green energy credits?

The last administration's IRS enforcement money and tax credits for sustainable home repairs, electric cars and other green energy investments may look convenient, given that they came under the purview of Republicans' political opponents and cost hundreds of billions of dollars.

The clean energy investments, though, have attracted "pockets of support" among Republicans due to the job creation in their districts from them, so that "could make it difficult for any sort of significant repeal" of those green tax credits, said Burke Baker. Then again, a big piece of legislation will cover "a lot of issues," she noted.

"It remains to be seen how much of that is actually going to be coming to fruition," Burke Baker said. "Are they really going to vote against that bill for the clean energy?"

Defense or entitlement-program spending?

No one is talking about the idea of pushing down defense spending by up to $959 billion over 10 years, and no suggestions to expand taxable payroll earnings for Social Security purposes ($728 billion to $1.4 trillion) or cut benefits have taken hold during the debate. Most budget experts point out that defense and entitlement budgets represent the key to solving federal deficits and debt.

The House budget lays out a target goal of shrinking spending by $1.5 trillion across cuts to at least one entitlement program, Medicaid, alongside food stamps, student loan assistance and other areas. In particular, the House GOP budget blueprint calls for the Energy and Commerce Committee to chop $880 billion off the deficit from Medicaid and its other areas of jurisdiction, according to the bipartisan Committee for a Responsible Federal Budget.

If those remain in any legislation taken up and passed this year, those numbers could prove painful to low-income households and others relying on Medicaid for their healthcare — as well as to election prospects for the politicians supporting them. But budget hawks see ample areas to cut.

"In addition to Medicaid, Congress should consider common-sense savings to the Medicare program that would result in lower spending without cuts to beneficiaries," according to a blog post by the nonprofit, nonpartisan committee last month. "For example, instituting site-neutral payments could save $160 billion through 2034. It is challenging to cut Medicaid spending, especially if trying to preserve the number of beneficiaries covered, access to medical care, and other policy priorities. But the changes described here, other offsets, and/or reductions in the size of the tax cuts they are helping to offset – could go a long way in crafting a fiscally responsible reconciliation package."

Rubbing SALT on a headache

Removing the deduction for state and local taxes could save $1 trillion over a decade, but Congress is likely to increase the current limit on the deduction at $10,000. Perhaps they could axe the deduction for corporate state and local taxes ($310 billion in savings). But other policy proposals such as making only property duties deductible (a cost of $300 billion) or lifting the limit to $15,000 for individuals and $30,000 for couples ($500 billion) would come with high price tags. And Trump and House Speaker Mike Johnson need the vote of almost every Republican from high-tax areas like New York and California to get any bill to the finish line.

Barriers to municipal bonding?

Another idea to end the tax advantages for municipal bonds is stoking fear among state and local governments, underwriters and investors. That one could save tens of billions of dollars a year, but the lawmakers' constituents and the other stakeholders will be placing "a lot of pressure" on them not to include it in the final bill, said Henry-Moreland.

"It won't necessarily affect everyone, but it does kind of take an arrow out of the quiver or a tool out of the toolbox," he said. "I would put that on the lower end of probability. There would be so much pushback on that from Wall Street."

Estate tax exemptions in focus

A higher exemption to household wealth subject to estate taxes under the 2017 law has given advisors and their clients a window in recent years to set up their plans. That window is more likely to widen rather than go away, according to Burke Baker.

"It's hard to imagine that, with Republicans in control, they would reset back to 2017 levels, or even that the exemptions would go down at all," she said.

Just spitballing here

Outside of the budget resolution that the House passed narrowly last month ahead of negotiations with the Senate on its pending blueprint, a document compiled by the House Ways and Means Committee in January on all of the options for lower spending or higher revenue has received the most attention of anything emanating from Capitol Hill so far about the tax cuts.

If that document is any indication, much of Congress remains stuck in a "brainstorming phase" about the legislation, said York. As the debate moves closer to the idea of the current policy baseline for the budget, it's going away from the original goal of tax reform to increase the base of payers by cutting down on itemization and loopholes, she noted.

"The variety and the breadth there indicated that there's not a clear direction," York said of the Ways and Means Committee's document. "You could go further in that direction and get rid of all itemized deductions, but, unfortunately, that's not the direction that lawmakers seem to be going."

Outside the Beltway, advisors and their clients will have to decide to what extent they want to "try to get into the minutiae and daily news around who's saying what and what proposals are out there," Henry-Moreland said. "You get upsides and downsides with both of those. If you try to keep on top of everything, there's a lot of noise. It takes a lot of work to follow it all."

They'll likely want to keep tabs on the bigger picture, though.

"If you just wait until everything is kind of set in stone, you don't have any opportunity to plan," he added.

Count Traub of Deloitte as "skeptical that this gets done before late summer," he said, citing the ongoing disagreement on whether to combine tax cuts with other priorities or seek two different bills. The efforts of Elon Musk's Department of Government Efficiency, or DOGE, may receive a lot of attention for the depth of the spending cuts in the meantime, Traub said.

"I know it's a lot of money, but, in the context of what they're trying to do, it's not even a rounding error," he said. "I'm skeptical of a very accelerated timeline."