How the election — and Senate procedure — will decide tax policies

With next month's election looming as a referendum on so many issues, the recent history of Congress offers a few hints on what may happen to taxes, according to legislative experts.

Financial advisors, tax professionals and their clients trying to prepare for changes to the Tax Cuts and Jobs Act ahead of the sunset date for many provisions in the law at the end of next year may want to read up on the Senate procedure known as "budget reconciliation" — a complicated means of passing a bill that doesn't require a 60-vote supermajority in the chamber. Veteran Washington insiders speaking in a virtual panel held last month by law firm K&L Gates' Public Policy and Law practice described the possible tax policy implications of that process. 

K&L Gates is one of the top lobbying firms with more than $47.8 million worth of business in the last three years per the Open Secrets database, and the roundtable shed light on how the next Congress and administration led by either former President Donald Trump or Vice President Kamala Harris will move forward with taxes next year. That process will bring potential shifts in estate taxes, federal income brackets and the deduction for qualified business income — to name only a few policies hanging in the balance.

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The upcoming deadline at the end of 2025 presents many different scenarios, according to Mary Burke Baker, a government affairs advisor who is the leader of the tax policy practice in the Washington, D.C. office of K&L Gates and a onetime 28-year veteran IRS staff member.

"Once there's a tax title moving, then everybody wants to throw their thing at the wall and see if it sticks," Baker said. "And, as we also all know, for better or worse, the tax code is seen as the solution by both parties for everything — whether it's U.S. competitiveness, jobs, supply chain or social policies. So that's going to put a lot of pressure on tax legislation next year."

Advisors and their clients aiming to understand how the process will play out under either party should likely consult the recent history of budget reconciliation bills used by both Republicans and Democrats in the past 20 years or so and an aspect of the procedure called the "Byrd Rule," said Mike Evans, a partner in the Washington office's public policy and law practice who was formerly chief counsel to Democrats on two different Senate committees.

The Byrd Rule forbids the Senate from using the reconciliation process for any bills that raise the deficit beyond 10 years or make any changes to Social Security. That latter "fairly obscure" aspect of Byrd likely rules out any provisions "exempting Social Security benefits from income tax," Evans said.

"That's why the TCJA stuff expires now, because it had to, under the Byrd Rule, limit the duration of the bill," he said. "It limits the scope of the bill. The Byrd Rule comes into effect, and that limits the scope of the bill. Obviously, things that are not budget related are not to be included. You have big debates about whether something is really incidental to the budget or not. But we have seen proposals regarding abortion, proposals regarding minimum wage and proposals regarding immigration reform excluded from the scope of the budget reconciliation bill because of the Byrd Rule."

Even if former President Trump wins, Republicans are still "going to be very conscious of adding to the debt," according to Ryan Carney, a government affairs advisor and member of the office's public policy and law practice who was once chief of staff to two GOP members of Congress. He predicted that a Republican-led White House and Congress would consider how to address research and development tax credits, deductions for state and local duties and the child tax credit. The fact that the government's debt has risen so sharply since 2017 "means that a full-on extension is going to be challenging," Carney said.

"There's some knowledge of how he would govern and what his tax priorities would be," Carney said of Trump. "At the same time, his signature legislation from his first term is expiring, so, unsurprisingly, a big priority — should Republicans win and get the trifecta of the House, Senate and the White House — would be to extend the Tax Cuts and Jobs Act, probably using the reconciliation vehicle. They would want to include bonus and research expensing into that 10-year extension as well. But 2025 is going to be a very different debt environment from 2017."

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The question of whether one party will sweep Congress and the White House will decide whether the expiration of the laws provides "an opportunity with a capital 'O' or an opportunity with a small-case 'O,'" according to Bruce Heiman, a partner in the public policy practice who was the legislative director and trade counsel to the late Sen. Daniel Patrick Moynihan, a Democrat from New York. If the Democrats use reconciliation, the legislation will "be partisan" and "move fast," Heiman said.

"If not, I think you're going to have a lot more negotiation and compromise," he said. "Whoever controls, there are going to be slim majorities. And so you're going to have to be working with both sides. Second, Harris has just less experience working with Congress than Biden did, necessarily. She's been newer to Congress, and she also has fewer personal relationships with members in a more polarized environment, too. All of which means it's harder to get things done, a greater need for compromise and more pushing toward the middle."