This Week (December 23 - 27)

Congress: The House and Senate are set to be out of session for the planned holiday break, to return in January. The 119th Congress will begin on January 3, 2025, when members will be sworn in.

With Congress away, the next edition of This Week in Tax Policy won't be published until January.

Last Week (December 16 - 20)

Government funding: A continuing resolution (CR) to fund the government through March 14, 2025, was approved by the House last night (December 20) and the Senate overnight, averting a government shutdown and clearing the way for Congress to depart for the holiday break. After two versions of the funding measure with various add-ons were rejected this week, House Republican negotiators settled on a third version with some disaster relief, farm, and health provisions, but without a further suspension of the debt limit. The House passed the bill 366-34, with the only "no" votes coming from Republicans and no Democrats opposed. The Senate passed the funding bill, the American Relief Act, 2025 (H.R. 10545), by an 85-11 vote after midnight. "Biden will sign the bill, which extends government funding to March 14 and includes more than $100 billion in aid for natural disaster victims and farmers, the White House said," Bloomberg reported. Tax wasn't really part of the government funding discussion this week, with the original version of the CR leaving out the issues of US-Taiwan double tax relief and frozen IRS funds.

The debt limit issue was introduced to the negotiations by President-elect Trump, after he, other members of the incoming administration, and some House Republicans criticized the original 1,500-page December 17 CR as too broad and as giving too much away to Democrats. That version to extend government funding plus many other provisions, which had been developed over weeks of bipartisan discussions, was toppled less than two days after its release due to the objections from Trump and others. A second version of the CR dropped provisions deemed by some to be extraneous — including a congressional pay raise, funding for the Key Bridge in Baltimore, and provisions addressing outbound investment and pharmacy benefit managers — but added a suspension of the federal debt limit through January 30, 2027. That version failed in a December 19 House vote, sending House GOP leaders back to the drawing board.

The suspension of the debt limit enacted under the June 2023 Fiscal Responsibility Act (FRA) expires January 1, but action was not expected to be required until perhaps mid-year, taking into account the ability of the Treasury Department to use extraordinary measures in the near term. "The most foolish and inept thing ever done by Congressional Republicans was allowing our country to hit the debt ceiling in 2025. It was a mistake and is now something that must be addressed … " Trump said in a joint statement with VP-elect JD Vance. "Increasing the debt ceiling is not great but we'd rather do it on Biden's watch." The President-elect suggested the debt limit issue could hamstring his incoming administration, referring to it as "Democratic quicksand." However, even Republicans had doubts about addressing that major issue in the funding bill. Senator Rand Paul (R-KY), who played a role in prior congressional budget disagreements, said, "It's a little bit late in the game to be putting debt ceiling on this anyway," CNN reported. Democratic support for the second CR evaporated not only with negotiated items dropped, but suspicions that the impetus for a debt limit increase before it is required was clearing the decks for tax legislation in 2025. "Why would we help them pass the tax cut for billionaires and corporations?" Senator Chris Murphy (D-CT) said.

Committee assignments: In another late Friday night development, incoming Senate Majority Leader John Thune (R-SD) announced the Senate Republican Conference committee assignments for the 119th Congress. These include the addition of Senator Roger Marshall (R-KS) to the Finance Committee. The assignments have been ratified by the Senate Republican Conference and are expected to be ratified by the full Senate early next Congress, according to a release.

Looking ahead: Democratic votes had always been expected to be required to pass the government funding measure, with some conservatives opposed to disaster relief spending and to CRs generally. Following the House vote, Speaker Mike Johnson (R-LA) noted the bipartisan support for the funding bill but looked ahead to the "sea change" in Washington beginning in January 2025, with President-elect Trump returning to the White House and "Republican control of the Senate and the House — things are going to be very different around here." However, grumbling over the original bipartisan CR loaded with year-end priorities was viewed by some as portending the difficulty Republicans could have moving their priorities next year with narrow majorities in Congress. The events surrounding government funding in total were seen by some as foreshadowing a mercurial style of governing with a role for social media to dash, or prop up, what Congress is doing. "The episode could preview a new dynamic for Republicans next year, as Musk and other Trump allies hover over the party's ambitious legislative agenda, offering counsel privately and then publicly whipping up opposition online and in conservative media if they don't like the results," a December 18 Wall Street Journal story said. Similarly, the Washington Post December 18 said, "The speed with which the GOP deserted Johnson's bill on Wednesday underscored how difficult the party's task could be next year, when Republicans will have control of the Senate and White House, but an even smaller margin in the House."

Reconciliation in 2025: The eleventh-hour difficulties in passing a government funding bill prompted some observers to suggest that concerns that Congress won't be able to move two budget reconciliation bills in 2025 are warranted. While some, including House Ways & Means Committee Chairman Jason Smith (R-MO), want one big bill headlined by border and tax issues early on, a group of conservatives led by Senator Rick Scott (R-FL) and House Freedom Caucus Chair Andy Harris (R-MD) wrote to GOP leaders December 18 saying, "a two-step reconciliation process gives us the best chance of securing passage of this transformational border security legislation." They called for a second budget reconciliation bill to be primarily focused on preventing tax increases from taking effect on January 1, 2026, when some TCJA provisions are set to expire. Their position aligns with the two-bill plan envisioned by incoming Leader Thune. "To ensure passage, after factoring in the dynamic score of extending the Trump Tax Cuts, that reconciliation bill should reduce the deficit by including necessary spending reforms and cuts," the letter stated. "This includes, but is not limited to, repealing the green tax credits in Democrats' so-called 'Inflation Reduction Act' and the estimated $2.5 trillion worth of cuts that the Department of Government Efficiency will identify as necessary to restore the fiscal health of the nation."

While the focus has been on the sequencing of reconciliation bills, a December 16 Wall Street Journal story contemplated the view shared by Smith and incoming Senate Finance Committee Chairman Mike Crapo (R-ID) that existing tax policy needn't be offset. "'It is in the DNA of a Republican to say, 'Cut taxes.' And I support that, generally speaking,' said Rep. Chip Roy (R., Texas), who said that he won't blindly support tax bills without a clear path to reducing budget deficits and that spending too much is morally reprehensible. 'A majority of Republicans' impulse is to spend money we don't have, and I would dare anybody to prove otherwise.' The fight is still in its first rounds," the story said. "Top Republican lawmakers haven't set fiscal parameters for next year's tax bill, which they can advance through Congress without Democrats. They may offset some tax cuts by limiting clean-energy tax credits and cutting spending outside Social Security and Medicare." The story said, "because of their slim margins in the House and Senate, Republicans need near-unanimity to enact a new tax law. So even a handful of ardent deficit hawks, particularly in the House, can insist on attaching spending cuts to tax cuts and pull the party in their direction."

Corporate rate: In a December 16 news conference, his first since the election, President-elect Trump restated his proposal for a corporate rate reduction: "I'll keep my promise to pass historic tax cuts for American families, workers, and businesses that create jobs in America. As you know, we're giving tax cuts if they do it here. We brought it down from 44%, 42%; in some cases, it was 39. We brought it all the way down to 21%. And now we're bringing it down to 15, but only if they make their product — their car, or whatever they're doing, in the United States …

"Between that and our taxing and tariff policies, we're going to have business like nobody's ever seen in this country before … And I'll keep my promise to pass historic tax cuts for families, workers, and businesses that create jobs in America. Any business that invests $1 billion or more in the United States will be eligible for fully expedited permits and approvals, including environmental approvals, from the federal government."

Tariffs: Regarding tariffs, President-elect Trump said, "Reciprocal. If they tax us, we tax them the same amount. If they tax us … Forgetting just for a second about the word 'tariff.' They tax us, we tax them, and they tax us — almost in all cases, they're taxing us, and we haven't been taxing them … We're going to make great deals, and we have all the cards … We're going to be treating people very fairly. But the word 'reciprocal' is important, because if somebody charges us … If they want to charge us, that's fine, but we're going to charge them the same thing."

Insurance: On December 16, Senate Finance Committee Chair Ron Wyden (D-OR) released draft legislation addressing the use of private placement life insurance (PPLI) contracts that are "designed to mimic hedge funds and other vehicles for the benefit of sophisticated investors." The Protecting Proper Life Insurance from Abuse Act would protect the preferential tax treatment of traditional life insurance, separating PPLI policies, and deeming them Private Placement Contracts.

Global tax: Treasury and the IRS issued Notice 2025-4 this week, announcing their intent to issue proposed regulations to implement "in its entirety" the substance of the OECD's February 2024 report on BEPS 2.0 Pillar One Amount B, including supplemental statements released in June 2024. The simplified and streamlined approach (SSA) would apply for pricing certain controlled transactions involving baseline marketing and distribution activities. The proposed regulations will incorporate the SSA as a taxpayer safe harbor. Taxpayers subject to US tax on in-scope transactions may rely on the Notice and elect to apply the SSA for tax years beginning on or after January 1, 2025.