All the stuff expiring next year, explained

This is what the new administration will actually be dealing with

Like any presidential election year, this one features a lot of discussion of the two presidential candidates and their various plans.

In reality, though, the biggest thing happening after the election isn’t going to be the implementation of anyone’s plan — it’s going to be the unfolding of deadline-driven activities in Congress.

The continuing resolution that is currently funding the government, for example, expires on December 20. I assume the lame-duck Congress will pass a new one that simply pushes the date forward a bit without much fuss. But that still means the new Congress in 2025 will face a new series of appropriations deadlines. Congress some time ago stopped voting to raise the statutory debt ceiling, and instead periodically votes to “suspend” its application for a given quantum of time. Right now, that suspension expires at midnight on January 1, 2025, so that’s another thing for the new administration to deal with.

Over and above this kind of routine congressional business, we have the legacy of the two signature bills of the two previous presidencies: Donald Trump’s Tax Cuts and Jobs Act and Joe Biden’s Inflation Reduction Act.

If everything goes according to schedule, a bunch of TCJA provisions will expire and federal revenue will go up. A bunch of IRA provisions related to health care will also expire, and federal spending will go down.

That’s structurally similar to the “fiscal cliff” Congress faced after the 2012 election, but the macroeconomic situation is completely different. Back then, even though there was a lot of stated political concern about the long-term budget deficit, there wasn’t really a big short-term substantive worry about fiscal issues. These days, things are different. Inflation was very high in the recent past. It’s under control now, but interest rates went up a lot higher than they had previously been. The Fed recently started bringing rates down, but that hasn’t passed through to mortgages yet and the strong jobs report we got last week called further rate cuts somewhat into question. Higher revenue plus lower spending would deal a blow to the demand side of the economy, but by the same token, it would facilitate faster and steeper interest rate cuts, which might have benefits for housebuilding and other supply-side aspects.

Nevertheless, Republicans are determined not to let TCJA provisions expire, and Democrats are determined to keep their health care subsidies intact. Both sides have other tax and spending priorities they would like to pass, and it’s really not clear what’s going to happen. The answer will be driven in part by the post-election balance of power, but also by the negotiating decisions the parties make. Would a Kamala Harris administration prioritize her spending ideas, even if that meant giving the GOP more on tax cuts, or would she do the opposite? Would Trump really be as fiscally reckless as his campaign promises? It’s very hard to predict the future here because it requires stacking a big series of conditional probabilities against each other.

But I think we’ll all be able to see things more clearly if we keep the scheduled expirations straight in our heads.

The long arm of reconciliation

Of course, you might ask yourself why this is happening, and to understand that, it’s helpful to recall the arcana of the budget reconciliation process.

Passing bills via the United States Senate requires 60 votes to overcome the filibuster. This filibustering norm is itself forever evolving. Within the span of my career, I’ve been around to cover the Medicare Modernization Act of 2003, which passed the Senate with more than 50 but fewer than 60 votes. I also saw, in 2005, Samuel Alito confirmed to a seat on the Supreme Court with 58 votes because a handful of Democrats agreed to vote “yes” on cloture but “no” on confirmation. But it’s more recently become the norm to filibuster absolutely everything, which via a series of standoffs, led to changing the rules such that confirmations can now be done by majority vote, but legislation always requires 60 votes.

Except, that is, for reconciliation bills.

But a budget reconciliation bill has a number of limitations. The most important one is that it has to be fiscal in nature (related to taxes and spending), but it can’t touch Social Security. That means you can’t address voting rights or NEPA reform or abortion or gun control or many other issues that people argue about. The other thing is that the budget reconciliation process was originally crafted to be a deficit reduction tool, so a reconciliation bill needs to reduce the long-term budget deficit (this is the reason for the Social Security carveout).

Politicians, of course, often want to pass bills that don’t reduce the deficit, so they’ve monkeyed around with phase-ins and phase-outs.

The Bush tax cuts, for example, were passed in a reconciliation bill. The fact that they would raise rather than lower the deficit was handled by simply having the tax cuts expire after 10 years so that there was (on its face) no long-term increase in the deficit. Except the moment they passed, Republicans turned around and started to characterize failing to extend them as a tax increase. These tax cuts then got extended for several years as part of some budget deals, but finally, in the winter of 2012-2013, there was a showdown in which some of the tax cuts were made permanent on a bipartisan vote (no reconciliation needed) and some expired.

Obama’s signature reconciliation bill, the Patient Protection and Affordable Care Act, hewed close to the spirit of reconciliation and was all permanent provisions, with the new spending written to total less than the combined amount of new revenue (some, though not all, of which got repealed later) and offsetting spending cuts. But with TCJA, Republicans returned to the use of expirations to squeeze a tax cut bill into the reconciliation framework. This time, though, they decided to make things more complicated. TCJA was, in its concept, “tax reform” legislation that broadened the tax base and used that revenue to cut tax rates. Except Republicans’ tax-cutting eyes were bigger than their base-broadening stomach, so they wanted to write a bill that would increase the long-term deficit by a lot. What they came up with was a scheme to make the bill’s least-popular tax cutting provisions permanent, and make temporary a bunch of stuff that they felt was popular enough to bully Democrats into extending down the road.

Then came the Democrats. The American Rescue Plan (ARP) was chock full of temporary provisions framed as emergency responses to the dueling public health and economic crises unleashed by Covid. And many of them were! But others, like the expanded Child Tax Credit (CTC), were just things progressives wanted to do on a permanent basis and did for a year as part of ARP to preview them. The CTC gambit didn’t work politically. But they also wrote a two-year provision that made ACA exchange subsidies more generous. This proved to be something that moderate Democrats liked enough that they agreed to include it in the Inflation Reduction Act, alongside the energy provisions. Except Kyrsten Sinema killed a few revenue-raising ideas that Joe Manchin was willing to do, so some things had to be cut from the Schumer-Manchin-Wyden agreement, and that ended up being the ACA subsidies. They were extended to cover 2023-2025, but will end after that.

The fire next year

With TCJA, the following tax cuts are all set to expire next year (you can read more details in Brookings’s “Which provisions of the Tax Cuts and Jobs Act will expire in 2025?”):

• Child Tax Credit, which would revert to $1,000 from $2,000, making “the real value of the credit about 25% lower than it was in 2017,” according to Brookings

• The 20% deduction for small business income, which currently applies to “qualified pass-through income (section 199A) for sole proprietorships, partnerships, and S-corporations”

• Alternative minimum tax (AMT) increase, which would mean “the 2026 AMT exemption for married couples filing jointly will be about $110,075, compared to about $140,300 if the provision is extended”

• Estate taxes, which means “the exemption in 2026 will be about $14.3 million for married couples, compared to $28.6 million if the provision is extended”

• Increase in the Standard Deduction, which, if it expires,“for a married couple will be approximately $16,525 in 2026, while the personal exemption will be about $5,275.” If extended through 2026, “the standard deduction would be roughly $30,725, and the personal exemption would be zero.”

• Individual income tax rates, which would mean the top marginal tax rate increases from 37 percent back to the pre-TCJA 39.6 percent.

Basically, Republicans made business tax cuts permanent, but scheduled lots of individual income tax cuts to expire.

But part of their “reform” effort was capping the State and Local Tax Deduction (SALT) at $10,000. This pretty straightforwardly just raises taxes on rich people because you need to be pretty rich to go over that cap by a large amount. But it specifically raises taxes on rich people who live in high-tax states, and in this context, it was done in order to cut other taxes on rich people. Most Republicans felt that was a fine idea. But Republicans from California, New York, and New Jersey didn’t like it, so they split the difference with a temporary SALT cap that a bipartisan group of legislators (from basically just those three states) have been promising not to extend.

Trump’s position is that all of this should be extended, except the SALT cap should be removed, and there should be big new additional tax cuts on top of TCJA extension.

Harris’s position is that she favors extending tax cuts that benefit households earning less than $450,000, but not those that exclusively benefit people who are richer than that.

This is, I think, a more regressive position than a lot of people understand. It’s common for a tax provision (SALT is, in fact, a good example here) to have the overwhelming majority of the financial benefit accrue to rich people, even while a non-zero number of middle class people also benefit. I am “in” the top income tax bracket, which is to say that the marginal dollar I earn is taxed at the top rate. But everyone in that tax bracket still pays all the lower rates on their inframarginal income, so a middle class tax cut also delivers big tax cuts to rich people. I think Democrats need to admit to themselves at some point that their own position on taxation is fundamentally inconsistent with a big expansion of the welfare state, and rethink some of their positioning in multiple directions. But that’s a story for another time.

Along with that tax cut, Harris wants to make the more generous ACA subsidies permanent (Republicans want to end them) and make the Child Tax Credit more generous than the TCJA level.

What’s going to happen?