The 2024 election has the potential to be one of the most consequential for the American tax system in recent memory.
This is largely due to the sunsetting provisions of the 2017 Tax Cuts and Jobs Act, which will either expire and revert to their pre-TCJA rules or will be replaced by new legislation — making who wins what on Nov. 5 especially critical.
"The conversation will change once we understand the balance of power heading into the 119th Congress," said Kasey Pittman, director of tax policy at the Washington tax council practice of Top 10 Firm Baker Tilly. "We'll be able to be a little bit more focused on potential outcomes."
For example, research and experimental deductions are certainly on the table, according to Pittman. "We saw pervasive support for that in a bipartisan bill in the House at the beginning of the year," she said. "The vote tally was 374 for the bill, and 70 against. The bill included three TCJA provisions that have already changed or begun to sunset — the Section 174 deduction, the calculation of [adjusted taxable income] for the Section 163(j) limitation, and the phaseout of bonus depreciation."
The bill failed in the Senate but not due to lack of support for the business provisions, according to Pittman.
"There was some politics involved. For example Senator Crapo, believing that Republicans will have more leverage after the 2024 election, didn't wish to provide as much support for changes to the Child Tax Credit as the bipartisan bill called for. The stumbling block in the Child Tax Credit wasn't the top line amount of the credit, but the refundability of the credit," she said. "I think there's just an ideological difference between the parties on how the credit should function."
The TCJA was passed in late 2017 and took effect in 2018, Pittman observed, and the circumstances of its passage had important ramifications.
"It was passed using reconciliation, which takes the use of the filibuster off the table in the Senate but comes with certain restrictions, including revenue restrictions within the budget window and an inability to increase the federal deficit outside of the budget window," Pittman explained. "Republicans weren't able to fit all of their priorities into these parameters permanently, so some provisions were made temporary. The corporate tax rate, which was what I consider the headline of the tax bill, was made permanent, but a lot of other provisions, including the individual rate cuts, were temporary and will expire at the end of 2025."
"The Child Tax Credit was increased from $1,000 to $2,000," she continued. "Personal exemptions were eliminated, and itemized deductions changed to include the SALT cap. Less of a factor will be the sunset of the increased estate tax exemption. But overall, there is no individual taxpayer in the United States who will not be affected by the Tax Cuts and Jobs Act expirations."
Although it's not talked about as much, there is a bipartisan consensus in that Democrats also would like to extend tax cuts — the TCJA or an equivalent regime, according to Pittman.
"We haven't seen the detail for taxpayers making under $400,000 and that's the vast majority of taxpayers," she said. "So I think there is alignment in that Democrats and Republicans don't want to see tax increases. They don't want the TCJA to sunset for taxpayers making under $400,000 a year. The parties diverge on cuts for those making over $400,000."
Wealth and gains
There is currently much misinformation going around regarding the taxation of unrealized gains, according to Pittman. There was an example on TikTok that suggested that if you buy a house for $200,000 and its value increases to $400,000, you have to fork over $50,000 on the $200,000 appreciation. "That's just not the case, so we're combating misinformation here."
There are actually at least three proposals for a wealth tax, according to Pittman. Sen. Ron Wyden, chairman of the Senate Finance Committee, has one proposal, Senator Elizabeth Warren has a separate proposal, and the Biden Fiscal Year 2025 Green Book, which vice president and presidential contender Kamala Harris has said she supports, has a third.
"All three of these proposals are different," said Pittman. "But we don't think it's likely that this will become law, and here's why: First, there would need to be a Democratic sweep, and the math in the Senate isn't supportive of that. There are 33 normal seats and one special election, so there are 34 seats up for election. Of these, 23 are Democratic seats and only 10 are Republican seats. So Democrats have to defend more than double the number of seats than Republicans do, and we already know that Sen. Joe Manchin's seat is very, very likely to flip. So if you flip Sen. Manchin's seat, that means Democrats have to defend every single other seat, just to wind up with a 50-50 split in the Senate. And almost all of the toss-up or competitive states currently have Democratic incumbents. And even with a Democratic sweep, it would still be necessary to get everyone on the same page, and not every Democrat has voiced support for such a tax."
Moreover, if they were successful in passing a wealth tax on unrealized appreciation in assets, it's very likely to face a challenge from the right.
"A recent Supreme Court decision was ultimately silent on whether there needs to be a realization to have a tax," Pittman said. "Four justices noted that they believe that there is a realization requirement, one justice noted that she does not believe there is such a requirement, and the other four justices were silent. So the likelihood of it being enacted and then withstanding challenges seems very low."
David Wagner, head of equity and portfolio manager at Aptus Capital Advisors, agreed that there is likely to be at least a split Congress, with Republicans taking control of the Senate. He believes that the Republicans are likely to win both West Virginia and Montana, giving them control of the Senate. This will limit the size and level of tax increases if it happens. The current statutory rate on domestic corporate income is 21% — down from 35% in 2017 — but the total effective tax rate paid by the typical S&P 500 company is 19%. Although many of the individual cuts will sunset in 2025, the corporate rate will not change.
Looking back at the TCJA in 2017, Wagner said that the S&P 500 rallied by the same amount as the earnings boost it received. From November 2017 to January 2018, the market rallied 10%, as earnings were expected to get a one-time boost of 11%. This suggests that it is too early to make a tangible investment call solely due to taxes.
