U.S. Treasury Department, “Debt to the Penny,” https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny (accessed December 10, 2024).

Individuals would face higher tax rates and more complicated tax returns, and businesses would face tax rules that discourage investment. However, Congress must carefully weigh the trade-offs it faces as it considers each expiring TCJA provision.

This report is intended to equip policymakers with essential knowledge of the U.S. tax system and the TCJA to help them navigate the tax debate. The report begins with an overview of the U.S. tax system, including a summary of the sources of federal revenues. Readers who are already familiar with how the tax system functions may wish to skip to the section titled “What Happens If the Tax Cuts and Jobs Act Expires?,” which details the 15 key tax hikes (or in some cases, tax cuts) that would occur if the TCJA were to expire, including:

• General individual income tax provisions (changes to rates, standard deduction, personal exemption, and child tax credit);
• Alternative or overlapping taxes (changes to the alternative minimum tax and estate and gift taxes);
• Individual itemized tax deductions (changes to the state and local tax (SALT) deduction, mortgage interest deduction, other itemized deductions, and the Pease limitation);
• Business-related tax deductions (changes to the pass-through deduction, expensing for machinery and equipment, amortization of research and experimental expenditures, and business-loss limitations); and
• Other changes (opportunity zones and international provisions).

The purpose of the report is not to recommend specific policies that should be enacted or extended. Therefore, the recommendations center around process.

Overview of the Federal Tax System

This section provides an overview of the federal tax system, including a summary of the major sources of federal revenue and the structure of the current tax system.

The effective tax rate of the richest Americans in the 1950s was comparable to the effective tax rate today because of how high the tax brackets were and because of the availability of more generous tax deductions and tax planning opportunities.

U.S. Code § 61. Although it is impossible to fully describe the income tax system in a short summary, this section encapsulates the general structure with a few key concepts:

• Types of tax filings and forms;
• Filing status;
• Tax base;
• Types of income;
• Tax brackets;
• Gross income, adjusted gross income, and taxable income;
• Tax credits, deductions, exclusions, and exemptions;
• Estate and gift taxes; and
• Other features of the tax system.

Partnerships file Form 1065, which determines their combined business income, deductions, and other tax items. However, instead of paying taxes at the business level, partnerships allocate gross income and deductions among the partners, effectively passing the profits or losses through to them to be taxed individually. Certain U.S. businesses with fewer than 100 shareholders and no more than one class of stock may elect to file as S corporations, which also pass profits and losses through to the individual shareholders.15

U.S. Code § 1361. Partnerships and S corporations are referred to as pass-through entities.

U.S. Code § 11. Unlike owners and investors in pass-through entities, investors in corporations directly pay taxes only when they receive their shares of business profits (e.g., dividends) from the corporations. However, the corporate profits that result in dividends are taxed both at the corporate level and then a second time through the individual tax imposed on the shareholders—that is, double taxation.

Filing Status.Taxpayers filing their individual income taxes using Form 1040 must select the appropriate filing status. The key filing statuses are single, married filing jointly, head of household, and married filing separately. Various features of the tax system adjust based on filing status. Because families have more material needs than single taxpayers do, brackets, exemptions, and credits are sometimes more generous for filing statuses that imply more people in the household (e.g., married filing jointly versus single). The tax code also includes a filing status for qualifying widow(ers) with dependent children that aligns with the married filing jointly status.¹⁷ U.S. Code §§ 1 and 2.

The head of household filing status is used by unmarried (including legally separated) individuals who pay at least half the costs of a home with qualifying children or dependents.¹⁸ U.S. Code § 2. The head of household filing status is more favorable than the single filing status.19 U.S. Code § 1.

The earned income tax credit can provide large tax advantages to low- and middle-income parents filing as heads of household.

Other supplemental features of the income tax system, such as tax credits and the alternative minimum tax (discussed below), also cause tax liability to differ from tax rates multiplied by the tax base.

Base broadening involves eliminating or reducing carveouts such as tax credits, exclusions, exemptions, and deductions. For example, the TCJA broadened the tax base by limiting individuals to no more than a $10,000 deduction for state and local taxes, eliminating most other individual itemized deductions, and setting limits on the deductibility of business meal and entertainment expenses. The additional tax revenue from these changes facilitated lower tax rates for individuals and businesses.

A broad tax base with low tax rates is generally preferable to a narrow base with high rates insofar as it avoids double taxation. A narrow tax base with high rates leads businesses and individuals to change their behavior to avoid taxes when the tax incentive to do so is large enough. Companies move into tax-favored industries such as green energy, which benefit from large carveouts and direct subsidies in the tax code. Investors buy municipal bonds because of the special tax exemption for municipal bond interest income.

U.S. Code § 86. Taxes on long-term capital gains and qualified dividend income is taxed at a lower rate than is ordinary income.³⁰

Qualified dividends must also meet a holding period requirement. Non-qualified dividends are taxed as ordinary income, along with some other forms of capital income, including interest income, annuities, royalties, and rent. 26 U.S. Code § 1(h).

U.S. citizens living abroad typically pay taxes in their countries of residence, so they may qualify for foreign tax credits to offset their U.S. tax liability. U.S. businesses may have to include profits earned by foreign subsidiaries in their gross income, but in most cases that income is fully offset by a 100 percent “dividends received deduction” to avoid double taxation.36

U.S. Code §§ 951 and 951A. Instead of qualifying for the 100 percent dividends received deduction, GILTI income qualifies for a 50 percent deduction (as of 2024).

U.S. Code § 1(j). The individual income tax system (including for business income taxed at the individual level) has a progressive rate structure, meaning taxpayers in higher tax brackets pay higher rates. The tax code includes distinct tax brackets for both ordinary income and long-term capital gains and qualified dividend income for each filing status.

News release, “IRS Releases Tax Inflation Adjustments for Tax Year 2025,” Internal Revenue Service, October 22, 2024, https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025 (accessed October 22, 2024).

U.S. Code § 1411. The threshold is $125,000 for married filing separately taxpayers.

U.S. Code § 63. These deductions ensure that businesses are taxed only on the portion of their income that, for tax purposes at least, is considered profits.

U.S. Code §§ 61(a)(2)-(21). Molly F. Sherlock and Donald J. Marples, “Overview of the Federal Tax System in 2022,” Congressional Research Service Report for Congress, updated June 8, 2022, https://crsreports.congress.gov/product/pdf/R/R45145 (accessed October 18, 2024).

The tax code sometimes relies on taxpayers’ AGI to determine, for example, income-based eligibility for various tax credits.

Internal Revenue Service, “SOI Tax Stats—Individual Income Tax Returns Complete Report (Publication 1304)—Basic Tables Part 2,” Table 2.1: Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-complete-report-publication-1304-basic-tables-part-2 (accessed October 18, 2024).

Tax Credits, Deductions, Exclusions, and Exemptions.Tax credits and tax deductions are often confused. Given the choice between a $5,000 tax deduction or a $2,000 tax credit, one might expect that the $5,000 tax deduction would be more beneficial, but the tax credit would be more valuable for taxpayers in every tax bracket.

Author’s calculations based on Joint Committee on Taxation, Estimates of Federal Tax Expenditures For Fiscal Years 2024–2028, December 11, 2024, https://www.jct.gov/publications/2024/jcx-48-24/ (accessed February 21, 2025). Tax credits are expected to drop from $473 billion in 2025 to $380 billion in 2028, driven by the expiration of the TCJA’s changes to the child tax credit and additional child tax credit (ACTC). The JCT estimates that Americans will claim $128 billion in child tax credit and ACTC in 2025, compared to $41 billion in 2028 if the TCJA expires.

Unlike tax credits, tax deductions are used to calculate taxable income before the applicable tax rate is applied. Therefore, the value of a tax deduction for a taxpayer scales up or down with his or her tax rate. So, for example, a $5,000 tax deduction would potentially reduce the tax liability of a taxpayer in the 22 percent tax bracket by $1,100 (the product of the tax rate and the deduction amount).

Exclusions for non-monetary employee compensation are provided for in 26 U.S. Code §§ 103, 117, 119, 125, 127, 129, 132, and 134. The exclusion for municipal bonds is provided for in 26 U.S. Code § 106.

Like excluded income, categories or amounts of income that are exempt are also untaxed. The term exemption carries the connotation of a special carveout more than the term exclusion does, but tax exemptions are functionally the same as tax exclusions. There are many examples of both exclusions and exemptions that are (and are not) special carveouts: While the terms exclusion and exemption are largely interchangeable, entities that are not subject to income taxes are generally referred to as tax-exempt.

Internal Revenue Service, “IRS Releases Tax Inflation Adjustments for Tax Year 2025.” The exemption amount for both the estate tax and the individual AMT will be reduced if the TCJA expires.

Internal Revenue Service, “IRS Releases Tax Inflation Adjustments for Tax Year 2025.”

The GILTI system could also be considered another minimum tax. Taxpayers subject to these minimum taxes must determine whether their taxes would be higher under the regular tax system or under the minimum tax, and they must pay the higher of the two calculated liabilities.

U.S. Code § 55. The corporate AMT (also known as the book minimum tax) is a 15 percent tax on corporations applied to a tax base that roughly approximates their financial statement income (with significant adjustments). The corporate AMT was introduced as part of the 2022 Inflation Reduction Act. The IRS recently released over 600 pages of proposed rules describing how the corporate AMT will operate.⁶⁶

Chandra Wallace, “Treasury Issues Complex, Mammoth Proposed Regs for Corporate AMT,” Tax Notes, September 13, 2024, https://www.taxnotes.com/tax-notes-today-federal/corporate-alternative-minimum-tax/treasury-issues-complex-mammoth-proposed-regs-corporate-amt/2024/09/13/7l69t (accessed October 22, 2024).

U.S. Code § 59A. Tax Complexity and Compliance Costs.The burden of taxes also includes the time and resources spent in complying with and administering the tax code. Researchers with the Tax Foundation estimated that tax compliance cost Americans 7.9 billion hours of their time in 2024.⁶⁸

Bureau of Economic Analysis, “Gross Domestic Product by State, 4th Quarter and Annual 2023,” March 29, 2024, https://apps.bea.gov/histdatacore/Regional_Accounts_new.html (accessed December 9, 2024).

What Happens If the Tax Cuts and Jobs Act Expires?

If Congress allows the TCJA to expire, it would result in major changes to individual and business taxes, mostly with the effect of raising taxes and making the tax code more complex. The major changes to the tax system can be categorized as follows:

• General individual income tax provisions
• Alternative or overlapping taxes
• Individual itemized tax deductions
• Business tax deductions
• Other provisions

1. General Individual Income Tax Provisions. Several basic features and parameters of the individual income tax would change if the TCJA expires. Specifically, individual income tax rates would increase, the standard deduction would be reduced by nearly half, personal exemptions would return, and the child tax credit would be reduced from $2,000 to $1,000.

U.S. Code § 1(j). The median individual taxpayer would face a marginal tax rate that is three percentage points higher in 2026 compared to current rates. For example, the top rate would increase from 37 percent to 39.6 percent, the middle (fourth) bracket would increase from 24 percent to 28 percent, and the second-lowest bracket would increase from 12 percent to 15 percent. While the bottom rate of 10 percent would remain unchanged, individuals in that bracket would face significantly higher taxes because of the reduced standard deduction and (in some cases) the reduced child tax credit. (Changes to the standard deduction and child tax credit are discussed below.) No Americans would receive a tax cut from the changes to the rate structure if the TCJA expires.⁷²

Some Americans, such as those who currently max out their deductions for the SALT deduction or the mortgage interest deduction, may receive a net tax cut if the TCJA expires, but their tax increase would be the result of the expiration of provisions other than the changes to the rate structure.

This assumes that the taxpayer would claim the standard deduction both with and without expiration. This also disregards inflation adjustments for 2026. For married joint filers who do not itemize, losing the standard deduction would be twice as costly within any given tax bracket.

Author’s calculation based on IRS, “SOI Tax Stats—Individual Income Tax Returns Complete Report (Publication 1304)—Basic Tables Part 2,” Table 1.4: All Returns: Sources of Income, Adjustments, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2021 (Filing Year 2022), https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-complete-report-publication-1304-basic-tables-part-2 (accessed October 18, 2024).) Itemizing would become more common among middle-income Americans if the TCJA expires.

Ibid. This shift saved many taxpayers from the hassle of tracking expenses and receipts, decreased the amount of paperwork processed by the IRS, and reduced the potential for audit disputes. If the TCJA expires, taxes would become more complicated and time-consuming for tens of millions of Americans due to the loss of the increased standard deduction.

In 2017, the personal exemption amount was $4,050. Inflation adjustments since then would have increased the personal exemption to about $5,200 today if the TCJA had not been enacted.

These amounts would be higher after accounting for the annual inflation adjustment for 2026. Both the pre-TCJA personal exemption and the child tax credit phase out for higher-income Americans. The personal exemption would phase out for higher incomes, meaning that taxpayers in the top three tax brackets would not benefit from it.

Joint Committee on Taxation, General Explanation of Public Law 115-97.

Internal Revenue Service, “Rev. Proc. 2016-55,” November 7, 2016, https://www.irs.gov/irb/2016-45_IRB#RP-2016-55 (accessed December 9, 2024); Internal Revenue Service, “IRS Releases Tax Inflation Adjustments for Tax Year 2025”; and Joint Committee on Taxation, General Explanation of Public Law 115-97.

U.S. Code § 24(h)(7). This requirement in the TCJA did not apply to the adult relatives who claim the children for purposes of the child credit. Therefore, even under the TCJA, illegal immigrant adults who have children, stepchildren, nephews, nieces, or grandchildren (for example) who are U.S. citizens may still claim the child tax credit in some cases.

2. Changes to Alternative or Overlapping Taxes. Two of the significant expiring provisions involve changes to tax structures that lie outside the standard individual and corporate income tax systems. Specifically, should the TCJA expire, the exemptions for the individual AMT and the estate and gift taxes would be reduced, resulting in more individuals becoming subject to these taxes.

These amounts are subject to an annual inflation adjustment. The inflation adjustment for 2026 has not been factored into the 2026 amounts.

Congressional Budget Office, “Budget and Economic Data,” Revenue Projections by Category, June 2024, https://www.cbo.gov/data/budget-economic-data#7 (accessed September 24, 2024). By 2034, the CBO estimates that 8.6 million Americans would fall under the AMT.

U.S. Code § 2001. After taxpayers use up the $13.99 million exemption, taxable estates and gifts are subject to progressive tax brackets that max out at 40 percent. Tax rates ranging from 18 percent to 39 percent apply to taxable estates and taxable gifts below $1 million. The higher tax exemption amount is scheduled to expire after 2025, but the estate tax rates would remain unchanged.

Office of Management and Budget, “Table 2.1—Receipts by Source: 1934-2029.” The TCJA’s changes to the estate and gift tax may have also affected income tax receipts, though the effect on income taxes is unclear.

Although the estate tax represents a minor revenue source for the United States, it can have severe ramifications for family farms and family businesses. Owners of family farms, in particular, are often “asset rich but cash poor,” so the family members who inherit them are often unable to raise the funds needed to pay the estate tax unless they sell off the inherited property.

3. Changes to Itemized Deductions for Individuals. The TCJA encouraged individuals to take the standard deduction instead of itemized deductions both by making the standard deduction more generous and by limiting the generosity of itemized deductions. If the TCJA expires, individuals would regain the more generous itemized deductions through the elimination of the cap on the SALT deduction, a higher home mortgage interest deduction, and the return of various miscellaneous itemized deductions.

U.S. Code § 164. Other taxes can be deducted through the SALT deduction, but property, income, and sales taxes are the most common.

Internal Revenue Service, “SOI Tax Stats—Individual Income Tax Returns Complete Report (Publication 1304)—Basic Tables Part 2,” Table 2.1 for 2017, 2019, and 2021. Part of the reduction in SALT claims is attributable to the increase in the standard deduction. (See Table 9.) The SALT cap broadened the tax base, enabling significant reductions in tax rates.

Preston Brashers, “SALT Deduction: Debunking the ‘Moocher State’ and Cost-of-Living Justifications,” Heritage Foundation Backgrounder No. 3685, February 18, 2022, https://www.heritage.org/taxes/report/salt-deduction-debunking-the-moocher-state-and-cost-living-justifications. It would not reduce taxes for those who claim (or would claim) the standard deduction.

Rachel Greszler, Kevin Dayaratna, and Michael Sargent, “Why Tax Reform Should Eliminate State and Local Tax Deductions,” Heritage Foundation Backgrounder No. 3256, October 16, 2017, https://www.heritage.org/taxes/report/why-tax-reform-should-eliminate-state-and-local-tax-deductions/.

Internal Revenue Service, “SOI Tax Stats—Individual Income Tax Returns Complete Report (Publication 1304)—Basic Tables Part 2,” Table 2.1 for 2017. (See Table 9.)

The limitation on the home mortgage interest deduction is not inflation-adjusted, and the same amount applies to married and unmarried taxpayers. Taxpayers that are married filing separately can claim the mortgage interest deduction only on $375,000 of mortgage debt. The deduction can be claimed for up to two homes, but the combined indebtedness from the two homes cannot exceed the limitation.

Internal Revenue Service, “SOI Tax Stats—Individual Income Tax Returns Complete Report (Publication 1304)—Basic Tables Part 2,” Table 2.1 for 2017 and 2021. Part of the reduction in SALT claims is attributable to the increase in the standard deduction. Historically low mortgage interest rates also contributed to the reduced volume of claimed deductions in 2021, but rates rose in the years that followed.

Curtis Dubay, “The Proper Tax Treatment of Interest,” Heritage Foundation Backgrounder No. 2868, February 19, 2014, https://www.heritage.org/taxes/report/the-proper-tax-treatment-interest. A neutral tax system would, however, tax income related to the value of lending account services.

Curtis Dubay, “An Alternative Way to Treat Interest Properly in Tax Reform,” Heritage Foundation Issue Brief No. 4465, September 30, 2015, https://www.heritage.org/taxes/report/alternative-way-treat-interest-properly-tax-reform. Piecemeal changes, such as the cap on the mortgage interest deduction, fall short of that ideal.

The CBO estimates that the number of tax returns with itemized deductions will increase from 17.6 million to 57.8 million between 2025 and 2026. Congressional Budget Office, “Budget and Economic Data,” Revenue Projections by Category. These new itemizers would no longer benefit from the simplification of using the standard deduction.

U.S. Code § 67. These deductions would be allowed only to the extent that the deductions exceed 2 percent of AGI. These miscellaneous deductions would be restored alongside the more generous deductions allowed for SALT and mortgage interest described above.

Joint Committee on Taxation, General Explanation of Public Law 115-97.

4. Changes to Business Deductions. The TCJA made several changes to business tax deductions, including adding a new deduction for individuals with pass-through business income and changes affecting the timing of business deductions. The TCJA temporarily replaced the system of depreciation schedules of up to 20 years and instead allowed businesses to fully deduct the cost of equipment and machinery in the tax year that the assets are purchased and put in use. The law also required five-year amortization of research and experimental (R&E) expenditures and placed an annual limitation on how much non-business income individuals could offset with business losses in a given year. Many of the TCJA’s changes to business deductions are set to expire or are currently phasing out.

U.S. Code § 199A. The deduction effectively reduces the bottom individual tax bracket for qualifying small businesses from 10 percent to 8 percent and the top individual tax bracket from 37 percent to 29.6 percent.

The pass-through deduction does not apply to all business income of individuals. Some restrictions and limitations apply:

• Specified services trade and businesses—such as businesses engaged in health services, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services—face a pass-through deduction phaseout if individual taxable income exceeds $197,300 ($394,600 for married joint filers).^{114Code of Federal Regulations § 1.199A-5, and Internal Revenue Service, “IRS Releases Tax Inflation Adjustments for Tax Year 2025.” Amounts listed are for 2024. These amounts are subject to an annual inflation adjustment.}
• The pass-through deduction is limited to the greater of 50 percent of the company’s W-2 wages related to the business or 25 percent of W-2 wages plus 2.5 percent of unadjusted basis in qualifying business property.^{115Joint Committee on Taxation, General Explanation of Public Law 115-97.}

U.S. Code § 1361(b).) While the corporate rate is lower than the current top effective pass-through tax rate, it is inaccurate to say the corporate rate is preferential. Corporate income is also subject to an extra layer of tax at a 15 percent to 23.8 percent rate at the investor level when profits are ultimately distributed to the shareholders or when corporate stock is sold.¹¹⁸

As shown in Table 1, long-term capital gains and qualified dividends are taxed starting at 15 percent for single filers making $48,350 ($96,700 for married joint filers). An extra 3.8 percent surtax kicks in at $200,000 of income ($250,000 for married joint filers). Single taxpayers marking more than $533,400 ($600,050 for joint filers) face a combined 23.8 percent rate between capital gains and the NIIT surtax.

Before the TCJA, corporations could defer investor-level taxes, as they can today. However, because the pre-TCJA corporate tax rate stood at 35 percent, there was usually a significant tax advantage to organizing as a pass-through business where circumstances allowed.

The expiration of the pass-through deduction would make organizing as a pass-through business less attractive than it is now. Some businesses would respond by reorganizing as C corporations.

U.S. Code §§ 167 and 168. Under current law, the bonus depreciation percentage is scheduled to decrease by 20 percent per year in 2023–2026. Assuming no extension of the TCJA, a company would be allowed to fully and immediately expense 40 percent of the basis of a qualifying asset purchased in 2025, while the remaining 60 percent of the asset would be subject to regular depreciation over up to 20 years (depending on the tax code classification of the asset in question).

A cash flow tax would disregard business financing such as equity raised, loans taken, and dividends and interest paid. Such a system is simpler than one that requires capitalization of some expenses, and it has the advantage of neutrality by treating purchases of equipment and machinery the same as expenditures on supplies, utilities, or marketing. Neutrality helps ensure that companies’ budget and cash flow decisions are driven by market forces, not by uneven tax treatment.

The punitive nature of long depreciation schedules for physical capital investments is especially harmful to capital-intensive industries such as manufacturing, construction, mining, and oil extraction. This unfavorable tax treatment reduces investment and inhibits the productivity and wages of workers in affected industries.

The TCJA did not (temporarily or permanently) change the depreciation schedules for certain longer-lived assets such as non-residential structures and residential rental structures, which retained depreciation schedules of 39 years and 27.5 years, respectively.

U.S. Code § 174. Research conducted outside the United States is subject to 15-year amortization. Before the TCJA, taxpayers could fully and immediately deduct R&E costs. Amortization, like depreciation, involves the capitalization of business expenditures—but specifically expenditures involved in creating intangible assets.

Alex Muresianu, “R&D Amortization Hurts Economic Growth, Growth Industries, and Small Businesses,” Tax Foundation, June 1, 2023, https://taxfoundation.org/blog/rd-amortization-impact/ (accessed October 22, 2024).

U.S. Code § 174(a)(2)(B). Therefore, a $100 R&E expenditure in year 1 results in a deduction of $10 in the first tax year, $20 in each of years two through five, and $10 in year six.

The increase in interest rates in recent years has made the delay in deductions related to amortization and depreciation more economically damaging. To the extent that companies borrow to cover an accelerated tax liability, the cost of doing so is on the rise.

Although not technically a TCJA expiration, Congress could use the occasion of the TCJA’s expiration to restore full and immediate expensing for R&E.

Internal Revenue Service, “IRS Releases Tax Inflation Adjustments for Tax Year 2025.” Individuals can carry forward any disallowed losses indefinitely to future tax years as net operating losses.

Joint Committee on Taxation, General Explanation of Public Law 115-97.

5. Other Changes. The TCJA established opportunity zones to incentivize business investments within low-income areas in each state. The TCJA tax advantages for opportunity zones are scheduled to expire in stages. The TCJA also reformed the international business tax code, transitioning toward a territorial tax system, where U.S. multinational companies owe U.S. taxes on foreign operations only in limited circumstances—and at a lower rate (excluding foreign taxes) than the domestic corporate tax rate. If the TCJA’s changes take effect as scheduled, international income will be taxed at higher effective rates starting in 2026.

Internal Revenue Service, IRS Notice 2018-48, https://www.irs.gov/pub/irs-drop/n-18-48.pdf (accessed October 18, 2024).

Joint Committee on Taxation, General Explanation of Public Law 115-97.

Kyle Pomerleau, “A Hybrid Approach: The Treatment of Foreign Profits Under the Tax Cuts and Jobs Act,” Tax Foundation, May 3, 2018, https://taxfoundation.org/research/all/federal/treatment-foreign-profits-tax-cuts-jobs-act/ (accessed October, 22, 2024). However, under the TCJA, foreign corporate income is subject to U.S. taxation in certain limited circumstances. If scheduled TCJA changes occur after 2025, companies would face three separate tax hikes related to these hybrid portions of the international tax code.

Specifically, services eligible for the services cost method under the IRS’s Section 482 transfer pricing regulations are not considered base erosion payments. 26 U.S. Code § 59A(d)(5). If the company’s calculated taxes from the BEAT rate applied to the modified taxable income base are higher than its taxes as calculated using its regular tax base, the company must pay the difference in a “base erosion minimum tax payment.”

Bunn, “U.S. Cross-Border Tax Reform and the Cautionary Tale of GILTI.”

U.S. Code § 250. Early iterations of the TCJA did not include BEAT, GILTI, or FDII. Instead, lawmakers in 2017 originally proposed replacing the worldwide business tax system with a border adjustment mechanism,¹⁴⁷

A border adjustment is different from a tariff, though it has some similarities. It is a way to realign a tax so that it applies equally to goods produced in the United States or abroad. Nearly all developed countries use border adjustments in their value added taxes. Border adjustments are an inherent feature of the value added taxes that most other countries around the world use. Similarly, the sales taxes that most states impose apply on goods and services consumed within the state but exempt products made in the state but sold and consumed elsewhere.

Taxes and America’s Fiscal Position

Office of Management and Budget, “Table 1.2—Summary of Receipts, Outlays, and Surpluses or Deficits as Percentages of GDP: 1930–2029,” https://www.whitehouse.gov/omb/budget/historical-tables/ (accessed October 18, 2024).

Ibid.

The CBO forecasts are based on current law projections, so the forecasts assume the expiration of the TCJA after 2025. The CBO projects that under current law federal revenues as a share of GDP will be 17.9 percent in 2034, 18.4 percent in 2044, and 18.8 percent in 2054. Congressional Budget Office, The Long-Term Budget Outlook: 2024 to 2054, March 20, 2024, https://www.cbo.gov/publication/59711 (accessed October 18, 2024).

Congressional Budget Office, The Long-Term Budget Outlook: 2024 to 2054.

Ibid. If interest rates climb, it could set off a vicious cycle of increasing outlays to service the debt, more rapid debt accumulation, decreasing confidence in U.S. debt and the dollar, and further increases in interest rates. Such a cycle would put downward pressure on economic growth (which the CBO may also be too optimistic about unless government spending is put in check) and would further exacerbate the debt crisis.

Recommendations

The goal of this report is not to advance a specific package of provisions that should be included in a TCJA extension bill in 2025. Instead, the purpose is to help shorten the learning curve for policymakers involved in the debate over TCJA extensions, equipping them to make well-informed decisions. Nevertheless, this report offers the following general recommendations.

Congress should:

• Be realistic about trade-offs. Every dollar the federal government spends imposes a cost on taxpayers whether through higher taxes, more debt (future taxes), or heightened inflation if the Federal Reserve monetizes the debt. Tax cuts do not entail a “cost” to the government; rather, they eliminate a cost on taxpayers. In 2025, Congress will have to decide how to prioritize each of the 15 provisions described above, as well as any other potential tax cuts it may want to consider. Spending cuts and base-broadening reforms—such as the elimination of narrow tax exemptions and credits—would facilitate more tax-cutting reforms. Trade-offs on taxes will become increasingly severe over time if the federal government stays on its current unsustainable fiscal path.
• Take the debt seriously. The national debt is a major problem, and the expected trajectory of the national debt could ultimately prove catastrophic if it is not addressed. Growing deficits can exacerbate inflation, especially if the nation’s creditors lose confidence in the government’s ability to make debt service payments and stop buying U.S. debt. Congress should recognize that reckless growth of the national debt threatens America’s future prosperity and security, but it should also recognize that the national debt exists because Congress spends too much, not because it taxes too little.^{160David Ditch and Richard Stern, “The Road to Inflation: How an Unprecedented Federal Spending Spree Created Economic Turmoil,” Heritage Foundation Special Report No. 276, September 21, 2023, https://www.heritage.org/budget-and-spending/report/the-road-inflation-how-unprecedented-federal-spending-spree-created.}
• Pair tax cuts with spending cuts and regulatory reforms. Whether through budget reconciliation or outside of budget reconciliation, it is imperative that Congress cut spending to ensure that the economic gains from tax cuts are not swamped by the harmful effects of government spending and deficits. Reducing regulations is also critical to promote economic growth. Under the Congressional Budget Act, changes to discretionary appropriations cannot be made through the budget reconciliation process. However, cuts to mandatory or “autopilot” spending are allowable under budget reconciliation. In 2024, 73 percent of the federal budget was on autopilot.^{161Matthew Dickerson, “The Budget Process Must Confront the Challenges of Today and Tomorrow,” Economic Policy Innovation Center, September 6, 2024, https://epicforamerica.org/federal-budget/the-budget-process-must-confront-the-challenges-of-today-and-tomorrow/ (accessed October 22, 2024).} Pairing tax cuts with reduced mandatory spending would instill confidence in taxpayers and global markets that the tax cuts are sustainable. Additionally, Congress should pass regulatory reforms—such as administrative pay as you go (PAYGO) and the Regulations from the Executive in Need of Scrutiny (REINS) Act—to foster economic growth and improve the long-term viability of tax cuts.
• Reject a short-term TCJA extension. Some in Congress may be tempted to avoid making long-term decisions about the tax code. They should resist that temptation. A short-term extension of the TCJA would be scored as having a smaller deficit impact, but it would do so merely by pushing the difficult work and decision-making to the next Congress. This would be a bad precedent to set, enabling future Congresses to justify continuing the pattern of short-term extensions without long-term resolution to the tax code or to America’s spending problem. This would leave the American economy in limbo, with businesses and individuals perpetually unsure of what the tax code might look like in the coming years. Instead, Congress should strive to bring resolution to the existing uncertainty in the tax code during the time they have in Washington.

Conclusion

President Trump and the new Congress face major challenges, and the looming TCJA expirations are at the forefront. If the TCJA expires outright, it would represent the largest U.S. tax hike in generations. The economic consequences could be severe.

Thin Republican majorities, particularly in the House, mean that it will be critical for conservatives to reach consensus or compromise about the right path forward. A strong understanding of what is at stake and the many contours of the tax system and the expiring tax provisions can help enable lawmakers to arrive at the most well-thought-out tax package possible. Americans will rely on lawmakers to step up and act in the best interest of the taxpayers they represent to stave off both unnecessary economic pain and fiscal calamity.

Preston A. Brashers is Research Fellow for Tax Policy in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.

Reprinted with permission from The Heritage Foundation by Preston A. Brashers.

The opinions expressed by columnists are their own and do not necessarily represent the views of AMAC or AMAC Action.