On the rocky road to tax cuts

A Republican-controlled Congress is determined to extend the 2017 Tax Cuts & Jobs Act (TCJA), many provisions of which are scheduled to expire at midnight on New Year’s Eve. How to do that is no simple matter, though. Not surprisingly, Congressional negotiations are in a “fluid” state. That’s the consensus view of analysts who shared their insights at a J.P. Morgan Private Bank conference in early February.

As negotiations move forward, we expect to hear a lot of noise on Capitol Hill. By the end of the year, we think most TCJA provisions will be extended. Here’s the current lay of the land as we see it.

Republicans command small majorities in Congress: 53-47 in the Senate and 218-215 in the House of Representatives. Realistically, they can count on no Democratic support for extending TCJA provisions.

Broadly, the GOP is unanimously committed to extending most of those measures. Republicans know that if the TCJA provisions were to expire, taxes would increase for more than 60% of taxpayers. But to pass tax legislation without getting 60 votes in the Senate, preserving TCJA tax cuts must effectively be paired with spending cuts and/or tax increases elsewhere. That’s where strains in the GOP caucus will need to be resolved.

Several Republican legislators—so-called deficit hawks—have voiced concern that a complete extension of the TCJA would boost the deficit and add roughly an extra $5 trillion to U.S. government debt over the next 10 years.

Other Republicans in Congress—especially those who represent states with high income tax rates—are focused particularly on hiking the $10,000 cap paid on the deduction for state and local taxes (SALT). However, any significant increase to the SALT deduction cap would likely be quite costly.

Of course, President Trump will likely play a critical role in shaping the final legislation. During the presidential election campaign, he proposed several costly tax law changes, such as no taxes on tips, overtime or Social Security income, as well as a reduction in the corporate tax rate for domestic manufacturers. He has recently reiterated his support for some of those proposals.

In short, Republicans agree on their overarching goal—extending the TCJA—but differ significantly on both strategy and tactics. Among the key questions they’re debating:

1. Enact a TCJA extension later in 2025 as standalone tax legislation (the second of two pieces of legislation to be passed via a two-bill strategy currently favored by Senate Republicans), or instead as part of a larger package that includes provisions on border security, defense and immigration (the one-bill approach favored by the House GOP). President Trump recently waded back into the debate, urging Congress to pass a single “big beautiful bill.”
2. Extend all the expiring provisions for 10 years, or instead for a shorter period.
3. Take the view that any projected additions to the debt should be based on either “current law” (the traditional approach, which would add $5 trillion or so to the deficit) or “current policy” (which on paper would add nothing to the deficit).
4. Add to any legislation tax increases on targeted constituencies (such as private equity principals who own “carried interest” and large university endowments creating a SALT cap for businesses) to offset some of the projected costs.

The GOP caucus recently made some progress in finding common ground. The House Budget Committee in mid-February passed a budget resolution that calls for a maximum of $4.5 trillion in tax cuts, at least $1.5 trillion in spending cuts, and an additional $300 billion for defense and border security. In a concession to deficit hawks, the bill stipulates that if spending cuts don’t reach $2 trillion, the tax cuts would be scaled back. (The day before, the Senate Budget Committee had passed a budget resolution—one that notably did not address tax policy.) However, there is a growing belief that the House’s budget bill does not have the votes to pass the full chamber and may get pulled from consideration.

Because Congress tends not to act until it faces a real or artificial deadline, analysts see scheduled adjournments and recesses as likely dates for final passage of a TCJA extension. House Speaker Mike Johnson at one point suggested that Congress could pass a bill by Easter (April 20 this year). More likely milestones: the Memorial Day recess (late May), the Independence Day recess (late June/early July), the August recess (late July—which lasts until after Labor Day in September), and finally, late December, when the first session of the current Congress ends. It is worth noting that in 2017, the Senate did not pass the original version of the Tax Cuts and Jobs Act until mid-November.

Analysts suggest another possible scenario: President Trump says, in effect, “I’m planning to sign a tax bill by X date,” thus creating an artificial deadline, and pressuring GOP holdouts to abandon any resistance.

Republicans believe they would pay a heavy political price in the 2026 midterm elections if they fail to extend the expiring provisions of the TCJA and thereby increase taxes on many taxpayers/voters. Most observers expect that Congress will, before the end of the year, enact an extension of most of the TCJA’s expiring provisions. One potential caveat: Legislation might not be passed until shortly after January 1, retroactive to the beginning of the year.

Expect more twists and turns ahead.

We can help

We at the Private Bank are monitoring the tax legislation closely along with our government relations colleagues, tax policy experts, consultants and many others. Talk to your J.P. Morgan team about how best to prepare for various legislative outcomes.