All About the Mid-Term Election

Jan 30, 2024 By Triston Martin

In 2023, it will be complicated, if not impossible, for Congress to adopt any significant tax legislation due to the Democrats' continued tenuous hold on the Senate and the Republicans' near-certain victory in the House.

Big plans were shelved due to a splintered Congress and sustained Democratic control of the White House. However, tax legislation may still be passed by Congress, with economic conditions and political will playing a role.

Two of the most prominent tax promises made by Republicans during the campaign were to repeal the $80 billion in new funding for the IRS that was approved this year by the Democratically controlled Congress and to make permanent the individual income tax provisions of their signature 2017 Tax Cuts and Jobs Act (TCJA).

Democratic Leaders Wanted More Tax Increases

Democratic leaders wanted more tax increases on the wealthy, the return of the excellent Child Tax Credit (CTC) version from 2021, and approval of a global minimum tax and a new regime for taxing the revenues of big tech firms, both of which are part of the ambitious corporate tax framework proposed by the Organization for Economic Co-operation and Development (OECD).

A politically divided Congress would never allow anything like that to happen. Nonetheless, legislators may attempt to tackle several keys, though more incremental, tax code adjustments. They include this year's expiration of key business tax advantages and new incentives for saving for retirement.

The big question is whether or not either party will try to pass legislation that has a chance of becoming law or whether they will instead focus on advancing their own partisan goals. The Republican frontrunner for speaker, Rep. Kevin McCarthy (R-CA), has warned that the party will try to use the need to raise the federal debt ceiling and enact a budget next fall to pressure Democrats into accepting significant cuts to spending. Although this attempt is likely to fail, it might delay the passage of any significant legislation. More than either party admitted during the campaign, and the economy will likely be the primary driver of next year's agenda.

Means Committee Needs a New Chairperson

Even if Republicans successfully keep spending at a standstill, they would have a more challenging time cutting taxes if inflation continues high. Budget cuts are off the agenda if the economy experiences a downturn. And while a Republican-controlled House would not raise spending, a downturn may pave the way for moderate tax reductions supported by a majority of both parties. Some potential problems are as follows.

The House Ways and Means Committee needs a new chairperson; who will that be? Jason Smith of Missouri seeks to replace retiring Republican leader Kevin Brady (R-TX) as the panel's head. It's time to talk about the debt ceiling. This fight might get nasty as it stretches into next fall. In the next six weeks, while they still control both chambers of Congress, Democrats can try to avert the problem by hiking the borrowing limit.

Government support by the Internal Revenue Service. Some Republicans have already threatened a shutdown over IRS funding, but with Democrats in charge of the Senate, that threat seems unlikely to materialize. Biden has nominated Danny Werfel to lead the agency, and the Senate will likely try to negotiate spending cuts with the Republicans.

The Act to Reduce Inflation (IRA)

With the Democrats in charge of the Senate, Republican hopes of repealing the minimum tax on book revenue and the 1 percent tax on stock buybacks included in the package passed by the Senate last summer have been dashed. Maintenance of the TCJA. And even if the House adopts a bill to extend them, it would fail in the Senate.

Tax reductions for individuals Something like this might surprise people. During an economic downturn, Congress may decide to impose short-term tax reductions. However, members of both parties in Congress will have to choose between sending a political statement and passing a bill that can be enacted into law.

Provision for old age Increasing tax breaks for retirement savings has widespread support in the current Congress from members of both parties. There is hope for a consensus measure to pass in the lame-duck session. In that case, it might be discussed the following year again.

Mice and Canines

A number of corporate tax laws are set to expire or have already expired, and Congress may decide to fix them in a post-election session this year or next. One of these is reinstituting a Republican-era provision of the TCJA that allowed companies to deduct research expenses in the same year they were incurred.

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