Trump tax cuts pose ongoing challenges for Congress

Placeholder while article actions load

Washington may have gotten a hint of the future of President Donald Trump’s tax law last week, when virtually every Senate Democrat joined Senate Republicans in voting to restore a tax cut that benefits corporate America.

When crafting Trump’s tax cuts in 2017, congressional Republicans tried to contain the overall cost through a variety of well-worn Washington budget strategies. They set the law’s most popular tax cuts to expire in a few years, with the expectation that future lawmakers would feel compelled to extend them, and scheduled unpopular tax hikes to go into effect in later years, believing future members of Congress would be forced to repeal them. These tactics helped keep the total price of the law — which slashed the corporate tax rate from 35 percent to 21 percent — to $1.5 trillion over 10 years, as scored by Congress’s official scorekeeper.

Five years later, that strategy is getting its first test.

The recent vote over a corporate research and development tax incentive offers a preview of upcoming battles over trillions of dollars in provisions that are set to expire over the next several years. The fate of these policies will prove crucial to both to the nation’s tax code and its fiscal health. (Congress could add $4 trillion to the deficit if it extends all the tax cuts and does not extend other measures that bring in revenue, according to nonpartisan estimates.) These fights also will test the priorities of a Democratic Party that has been unable to act on pledges to raise trillions of dollars in taxes on corporations and the rich.

Democrats’ lofty tax agenda imperiled by resistance from within

On Wednesday, the Senate voted overwhelmingly on a nonbinding measure to recommend that the research and development corporate tax incentive be included in a bill aimed at keeping the U.S. economy competitive with China’s. With some exceptions, most Democrats support the concept behind the measure, which allows corporations to immediately deduct their research costs instead of spreading them out over five years. Trump’s tax cuts had imposed the longer time horizon, which brings in more money; this year was the first year the change was in effect, and business immediately sought to undo it.

But many liberals had argued Democrats should not agree to reinstate it without some concession from the GOP, such as an extension of the Child Tax Credit or an increase in the corporate tax rate. At a time of rampant inflation and record corporate profits, the provision adds roughly $130 billion to the deficit — or about half the cost of some versions of President Biden’s plans to cancel student debt. It also approximately doubles the overall cost of the China-related legislation.

Democrats’ willingness to support the measure raises questions about dozens of similar debates that await as provisions of Trump’s tax law begin to expire. A popular deduction on interest expenses, for instance, is set to shrink. Another fight looms over tax deductions on large capital investments. Global tax rates on large corporations are set to increase in 2026.

“This fight is a preview of the big show to come,” said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget, a Washington-based think tank. “And it’s a bad omen.”

An even bigger battle — over provisions that affect voters directly — looms: All of the GOP tax law’s rate cuts for households are set to expire in 2025. Depending on who controls Congress and the White House, Democrats may face choices over whether to back extensions of tax provisions that don’t mostly benefit the richest Americans — the doubling of the standard deduction claimed by most taxpayers, for instance, and lower rates for middle-class income brackets. If they reject extending those measures, they risk giving the GOP a potentially powerful political weapon; if they accept them, they will expand the federal budget deficit and make permanent a key part of Trump’s legislative record.

Extending all of the GOP tax cuts that are set to expire would add roughly $3 trillion to the deficit in the decade through 2035, on top of the existing $1.9 trillion cost of the GOP tax law through 2026, according to Goldwein. If Congress allows the GOP’s cap on deductions of state and local taxes to expire — as many Democrats are insisting — that cost balloons to a $4 trillion increase in the federal deficit, Goldwein said. Many of these provisions will be far harder for Democrats to oppose than the research and development incentive, which does not directly affect middle-class households.

The debate over the future of the Trump tax cuts echoes similar jockeying around tax changes championed by President George W. Bush. Democrats pilloried that legislation for a decade before ultimately agreeing to extend to about 82 percent of the cost of the Bush tax cuts, according to the Center on Budget and Policy Priorities, a left-leaning think tank. Further complicating matters is that the 2017 GOP tax act made permanent the reduction in the corporate tax rate from 35 percent to 21 percent, meaning the least popular part of the bill is also the hardest to reverse because it has no expiration date.

“The GOP tax law was extremely controversial. But the corporate policies will not expire, and on the individual side, Democrats are not going to get themselves blamed for raising taxes on lower and middle class voters by letting that extension expire,” said Brian Riedl, a policy expert at the Manhattan Institute, a right-leaning think tank.

Democratic supporters of the research and development incentive say it’s an important provision to ensure American business competitiveness. It’s been the target of a major lobbying push from those eager to see it reversed, including the National Association of Manufacturers and the Association of Equipment Manufacturers, according to interviews and federal lobbying disclosures.

Sens. Maggie Hassan (D-N.H.) and Todd C. Young (R-Ind.) are leading a bipartisan group pressuring Senate leadership to reinstate the incentive through legislation focused on competition and innovation aiming to counter the rise of China. Democrats initially sought to include the incentive in their Build Back Better agenda, but when that collapsed, lawmakers pivoted to include it in the China legislation instead. Wednesday night’s vote was nonbinding, meaning it remains unclear if lawmakers will ultimately incorporate the provision into the final China-related legislation. The House has already passed its version of that bill, and it would have to agree to incorporate the tax measure.

After the first few years, the cost of reinstating the incentive would go down, because the main hit to federal revenue comes from the one-time increase in corporate deductions.

“At a time when countries like China and others are aggressively expanding their own R & D incentives, the bipartisan R & D measure helps fuel American innovation,” Hassan said in a statement to The Washington Post. “This will help small businesses grow and power our economy, and I am pleased that we have strong bipartisan support for it.”

The breadth of business support for extending the provision reflects the challenge Democrats will face in allowing parts of the 2017 tax law to expire. Influential lobbyists have worked for years to ensure the restoration of the research incentive in some legislative vehicle. They latched onto the China bill as one of a dwindling number of opportunities to do so this year.

The richest Americans get a $33,000 tax break under the GOP tax law. The poorest get $40.

Removal of the incentive “was never meant to be a permanent feature of the tax code,” said Kip Eideberg, senior vice president for government and industry relations at the Association of Equipment Manufacturers, which includes companies like John Deere and Caterpillar. It was included in the Tax Cuts and Jobs Act to lower the overall price of the bill “to where it could be appealing for lawmakers,” he said.

The tax incentive “allows us to spend time on projects where the return on investment is untested or unclear, and these are often the projects that make the biggest impact,” Eideberg said.

Christopher Netram, managing vice president of tax and domestic economic policy at the National Association of Manufacturers, which has taken a lead role in lobbying for the change, cited a 2019 analysis by the accounting firm EY, which estimated that companies would cut their spending on U.S. research and development by $4.1 billion annually and shed tens of thousands of jobs without the incentive. The analysis was done for the R&D Coalition, an industry group representing major tech and defense companies. (Amazon, whose founder Jeff Bezos owns The Washington Post, is a member of the coalition.)

“Anything that drives up the cost of those investments obviously makes it more difficult,” Netram said.

But critics say this is an awkward time for Congress to act on the measure, particularly when contrasted with the failure of Biden’s plans to shore up the social safety net and raise taxes on corporations and the rich.

Democrats intended to include the tax incentive in Biden’s Build Back Better agenda, paired with measures that aimed to bring in more tax revenue by giving the Internal Revenue Service more funding to crack down on tax evasion by the wealthy, implementing a minimum tax on large corporations and other moves that liberals favored. That would have come amid a broader rebalancing of the tax code after Trump’s 2017 tax cuts, which Democrats have long argued were skewed to the benefit of large firms.

“That’s a fair trade,” said Frank Clemente, executive director of Americans for Tax Fairness, a left-leaning group that has along with the Institute on Taxation and Economic Policy voiced opposition to the incentive being restored. “It’s a deal, whereas this is not a deal.”

Conservative groups mount opposition to increase in IRS budget, threatening White House infrastructure plan

But it’s unclear whether a better deal is on the table. The White House’s plans to change federal spending so it more directly helped the poor and middle class have crumbled amid opposition from Senate Republicans and Sen. Joe Manchin III (D-W.Va.). Child poverty, for instance, spiked by roughly 41 percent after the Child Tax Credit expired at the end of last year. A one-year extension of that policy would cost roughly the same amount as the research and development incentive.

“At a time when Congress has allowed the CTC expansion to expire — purportedly because of cost concerns — there is no excuse for moving forward with these expensive corporate tax breaks now,” states a memo by Americans for Tax Fairness and the Institute on Taxation and Economic Policy.