After a flurry of activity associated with the House and Senate passing their respective budget resolutions last month, March has been relatively quiet on the tax front as Congress has focused on funding the government and is now waiting on the Florida special elections to determine two open House seats. While both chambers are in recess this week, Tax Take looks at the issues to be addressed in the two competing budget plans so that the tax reconciliation bill process can move forward in earnest. Although the details regarding many of these issues will ultimately be determined in the subsequent reconciliation bill, the need to address those issues weighs heavily on the budget resolution negotiations.

Plan A or Plan B? Congress needs to decide between the Senate's two-bill strategy and the House's one-bill strategy. Perhaps the House budget resolution calling for border security, defense, domestic energy production, and tax in one bill will carry the day, but a two-bill strategy could reemerge if intraparty negotiations stall in the House. The need for the GOP to put points on the board with a victory on popular items within the Republican caucus should not be underestimated. 

The House's $4.5 Trillion Tax Package. Although the House and Senate may adopt or adjust the House-proposed $4.5 trillion tax cut married with at least $2 trillion in government spending cuts, the main issue to resolve is the use of the House-proposed current-law baseline or the Senate-favored current-policy baseline, which effectively eliminates the costs of extending the Tax Cuts and Jobs Act (TCJA) for budget scoring purposes. After meeting with Republican members of the Senate Committee on Finance, the president supports the use of a current-policy baseline. That said, the current-policy baseline approach still hinges on the blessing of the Senate parliamentarian and fiscal hawks in the House. 

What Tax Relief Will Be Included? Much has been made of the fact that the House-proposed $4.5 trillion tax relief amount is too small to permanently extend TCJA and other expiring tax provisions. In addition, the House and Senate will need to consider additional tax relief, including the section 174 research and development (R&D) amortization fix, the use of earnings before interest, taxes, depreciation and amortization (EBITDA) for purposes of the section 163(j) interest expense deduction limitation, and an increased individual state and local tax (SALT) deduction cap, as well as a number of new tax relief proposals proposed by President Trump.

How to Address a Shortfall? To the extent the desired amount of tax relief exceeds $4.5 trillion or any other agreed to budget limitation, Congress has some options to address a shortfall, including the use of a current-policy baseline, making government spending cuts in excess of $2 trillion, including acceptable revenue raisers, or abandoning permanency and reducing the length of extension of the TCJA and other expiring provisions. Each approach has pros and cons with supporters and detractors. That leaves Republican leaders and taxwriting committees with the delicate task of "threading the needle" in picking among the least-worst options.

Debt Limit. To the surprise of many, the House budget resolution includes a $4 trillion increase in the federal debt limit, which is projected to come to a head in the early summer. However, Senate Republican support for the debt limit increase is shaky at best and may need to be offloaded for separate consideration, potentially as part of a bipartisan effort later this year.

Congress will return to legislative work next week to focus on constructing a concurrent budget resolution. How the budget resolution comes together – presumably in time for a vote in early April – will set the parameters for the tax reconciliation bill debate. #TaxTake

Upcoming Speaking Engagements and Events

Marc will also speak at the 70th Annual William & Mary Tax Conference on March 20. His session will cover recently enacted tax legislation and the impact of the 2024 presidential and congressional election results on the federal tax legislative agenda for 2025 and beyond.

In the News

Marc commented on the legislative hurdles facing the Trump administration as it pushes to pass a tax cuts bill by July amid rising tariffs in Bloomberg. "The difficulty is exemplified by the fact that we have two competing budget resolutions to even start the process."

Check out the latest episode of tax break!

On this episode, Robert Kovacev interviews former IRS Chief Counsel (and now Miller & Chevalier Member) Michael Desmond, discussing his tenure as Chief Counsel, challenges facing the IRS under the new administration, and the changing legal landscape for Treasury regulations. Subscribe to tax break wherever you get your podcasts.

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.