23 February 2025 This Week in Tax Policy for February 24 Congress: The House and Senate are in session. The FY2025 budget resolution is expected to be considered on the House floor as early as Tuesday. The Joint Committee on Taxation will hold an organizational meeting on Wednesday, February 26. The House Ways & Means Trade Subcommittee is holding a hearing on American Trade Enforcement Priorities on Tuesday, February 25 (10 a.m.). Tax cut plans: Even with the House Budget Committee having advanced an FY2025 budget resolution to unlock the reconciliation process for extending Tax Cuts & Jobs Act (TCJA) provisions expiring at the end of 2025, the debate with the Senate regarding one bill vs. two bills for GOP priorities continued as the Senate passed a separate resolution reflecting spending priorities for the border that would delay action on a tax bill until later this year. President Trump did weigh in more forcefully, posting on social media, in part, "We need both Chambers to pass the House Budget to 'kickstart' the Reconciliation process, and move all of our priorities to the concept of, 'ONE BIG BEAUTIFUL BILL.'" The Senate FY2025 budget approved 52-48 February 21 reflects a two-bill plan that would provide more than $340 billion in mostly border security and defense funding in a first bill and push until later this year a separate budget resolution (the FY2026 budget resolution) that would start the process for the tax committees to address the expiring TCJA provisions and other tax matters. Senator Rand Paul (R-KY) and all Democrats voted 'no' on the FY2025 budget resolution, and floor consideration culminated with a vote-a-rama rapid-fire consideration of amendments during which Democrats sought to highlight Republican plans to continue tax cuts and slash programs like Medicaid to pay for them with various amendments that were voted down. The two-bill strategy would have Republicans notch a win on consensus issues relating to the border before what some anticipate will be a difficult path toward consensus on a tax bill later in the year. The strategy gives President Trump an option for moving his agenda and a backup plan if House efforts for packaging border priorities and the tax bill into one bill falter, but some Republicans questioned the need for the Senate to act. Putting the decision into context, Senate Majority Leader John Thune (R-SD) said of the President, "I think he's made it clear for a long time that he would prefer a one big, beautiful bill, and we're fine with that, too. If the House can produce one big, beautiful bill, we're prepared to work with them to get that across the finish line. But we believe that the president also likes optionality … " There are still many outstanding questions surrounding plans for tax cut extensions in budget reconciliation, including whether Republicans can hold sufficient support for deep mandatory spending cuts with only one vote to spare in the 218-215 GOP-led House; whether the instruction to Ways & Means Committee for up to a $4.5 trillion net deficit increase allows sufficient room for the GOP tax cutting agenda; and how both of these elements would be received in the Senate if the one-bill strategy were to prevail. In a Semafor report suggesting House spending cuts and a claw-back to lower the level of tax cuts if the spending cut target can't be met are causing concern in the Senate, Thune said, "There's a lot of stuff in it that makes it really, really complicated over here." The House budget resolution set to be on the floor when House members return next week provides for a comparable amount for border security as the Senate budget plan plus much more, including allowing Ways & Means to increase the deficit by up to $4.5 trillion to accommodate TCJA extensions. It requires other committees to achieve at least $1.5 trillion in mandatory spending savings — Social Security and discretionary spending can't be considered in reconciliation. However, if those committees don't achieve $2 trillion in spending cuts the deficit increase instruction on tax cuts could be reduced to as low as $4 trillion. Among House committees' spending cut instructions, Energy and Commerce, which has jurisdiction over Medicaid, is instructed to lower the deficit by no less than $880 billion, and members have expressed concerns with potential spending cuts affecting health, education, and nutrition programs. House Budget Committee Chairman Jodey Arrington (R-TX) has said the $4.5 trillion net instruction to Ways & Means will cover a 10-year extension of expiring TCJA provisions, and that other tax cut proposals, including those put forward by President Trump, could be paid for with other revenue offsets like paring back Inflation Reduction Act (IRA) energy tax credits. In early January, there were reports about a presentation by Arrington highlighting as revenue sources repeal of IRA energy credits and a state and local tax (SALT) deduction cap for businesses. Politico reported February 18 that the Ways & Means Committee "is looking at limiting corporate state and local tax deductions as one way to offset the costs of a large party-line tax bill." President Trump has proposed additional tax cuts on tip income, overtime income, and Social Security benefits, plus a lower tax rate for domestic manufacturing, but also tax increases related to carried interest and sports team owners. The President said in Miami February 19: "We're going to dramatically cut taxes for families and for workers and for companies, including no tax on tips and hopefully no tax on social security and no tax on overtime. And that overtime one is a sleeper because I think a lot of people are going to be spurred on to do a lot of extra work when they hear that. A lot of companies really like it, and a lot of people really like it. The new Trump Tax Cuts will also include 100% expensing for new factory construction in the United States and anything else that you're going to buy with capital." The Congressional Budget Office (CBO) said in May 2024 that a 10-year extension of expiring TCJA tax provisions would cost $4 trillion over 10 years, irrespective of interest costs. Addressing TCJA pre-cliffs, or already expired provisions, on five-year R&D amortization rather than expensing, reducing the base calculation for interest expense deductions from 30% of Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) to EBIT, and phasing out bonus depreciation would add significantly to those costs. A February 17 New York Times story on TCJA costs said, "there's a coveted business tax break for research and development — which, in an example of the zigzag of tax policy in Washington, Republicans wound down in 2017 and now want to revive. That would be another $150 billion. Allowing companies to once again deduct more of the interest on their debt is another $50 billion. Those changes are the table stakes. They essentially amount to preserving the status quo." The story also raised the issue of increasing the $10,000 SALT deduction cap, as Republicans from high-tax states insist: "Repealing the cap entirely could cost $1 trillion over a decade. More modest proposals to increase the limit would still dramatically add to the cost of the legislation. (Just doubling it to $20,000 for married couples would cost $170 billion.) Republicans pushing to lift the cap acknowledge the headache they are helping create for [Chairman] Jason Smith … " Punchbowl News reported Speaker Mike Johnson (R-LA) as saying he's waiting on a few developments "that might have a big effect" on the reconciliation bill, including the CBO score of the tariffs Trump has instituted and formally quantifying any savings from DOGE. DSTs: President Trump February 21 signed a memorandum that could set the stage for US retaliation against countries that have enacted digital services taxes (DSTs) that could be imposed on US companies. The memorandum directs the US Trade Representative to determine "whether to renew investigations under section 301 of the Trade Act of 1974 (19 U.S.C. 2411) of the DSTs of France, Austria, Italy, Spain, Turkey, and the United Kingdom, which were initiated under my Administration on July 16, 2019, and June 5, 2020. If the United States Trade Representative determines to renew such investigations, he shall take all appropriate and feasible action in response to those DSTs." The USTR is also to determine whether to investigate the DST of any other country and, in consultation with Treasury, "whether to pursue a panel under the United States-Mexico-Canada Agreement on the DST imposed by Canada and whether to investigate Canada's DST under section 302(b)." Further, Treasury, Commerce, and the USTR are to investigate "whether any act, policy, or practice of any country in the European Union or the United Kingdom has the effect of requiring or incentivizing the use or development of United States companies' products or services in ways that undermine freedom of speech and political engagement or otherwise moderate content, and recommend appropriate actions to counter such practices … " Earlier February 21, the President said he would sign a memorandum on the issue: "We are going to be doing that, digital. What they're doing to us in other countries is terrible with digital, so we're going to be announcing that … " Previous executive orders addressing the OECD-led global tax agreement and America First Trade Policy signed on January 20 also could relate to DSTs. Under the January 20 OECD EO, officials are directed to investigate whether any foreign countries are not in compliance with any tax treaty with the US or "have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies, and develop and present … a list of options for protective measures or other actions that" the US should adopt or take in response. The January 20 trade EO said Treasury, Commerce, and the USTR "shall investigate whether any foreign country subjects United States citizens or corporations to discriminatory or extraterritorial taxes pursuant to section 891 of title 26, United States Code." Executive Order: On February 19, President Trump signed an executive order directing federal agencies to "initiate a process to review all regulations subject to their sole or joint jurisdiction for consistency with law and Administration policy," and within 60 days identify those that are unconstitutional, are "based on unlawful delegations of legislative power," etc. Bill intros: As noted in last week's Alert, the American Investment in Manufacturing Act (S. 559), to permanently extend the allowance for depreciation, amortization, or depletion for purposes of determining the income limitation on the deduction for business interest (i.e., EBITDA), was reintroduced February 13 by Senator Shelley Moore Capito (R-WV). Rep Adrian Smith (R-NE) is the House sponsor. Senator Capito has now issued a press release on the introduction.
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