Give House Speaker Mike Johnson (R-LA) credit: last week, he threaded the narrowest needle imaginable to win passage of a Republican budget resolution that includes a proposed $4.5 trillion tax plan, eclipsing the Senate's alternative two-step proposal that sought to put off tax policy for later in the year. Taxes are now front and center in the drive to reconcile the differing House and Senate proposals and each step forward is harder than the last.

The House budget resolution would make room for up to $4.5 trillion in tax reductions, contingent on finding $2 trillion in spending cuts. If that spending reduction target is not met, the $4.5 trillion figure would be reduced dollar-for-dollar for the shortfall. This tax/spending lever helped lock down support for the budget plan among fiscal conservatives.

The $4.5 trillion allocation for tax arguably isn't enough to cover a permanent extension of the expiring provisions of the Tax Cuts and Jobs Act (TCJA). According to the Congressional Budget Office (CBO), it would cost $4.6 trillion to extend the TCJA when accounting for the additional interest on the debt. House Ways and Means Committee Chairman Jason Smith (R-MO) conceded last week that the House budget "does not allow permanency" for the TCJA. He said it could make room for extensions in the range of eight years or so.

Although President Trump is backing the House budget over the Senate's preference to delay work on taxes, he and Senate Republicans view permanency as the coin of the realm. The president also wants to see his campaign tax proposals — no taxes on tips, overtime pay, and Social Security benefits among others — enacted under the budget plan. Internal divisions among House Republicans about potential cuts to Medicaid and how to address the expiring cap on deducting state and local taxes (SALT) further complicate the picture.

Negotiations among Republicans in Congress and the White House are already underway with regular weekly meetings led by Treasury Secretary Scott Bessent.

The task is daunting, but there are dials available to grease the skids. One idea is to use a current policy baseline for scoring the budget plan, essentially ignoring the approaching expiration of the TCJA and assume permanency in the budget projections such that it would not have a deficit impact and therefore not need to be paid for. The president and key Republicans in Congress back that approach, including Speaker Johnson, Chairman Smith, and Senate Finance Committee Chairman Mike Crapo (R-ID). Supporters point out that the Obama administration used a current policy baseline to argue in 2012 that the modified permanent extension of the Bush tax cuts actually reduced deficit spending when compared to current law.

Another option to consider is a mix of permanent and temporary tax extensions balanced to allow room for the president's campaign tax proposals or additional spending cuts in excess of the required $2 trillion. 

The most painful option for Republicans to consider is raising taxes elsewhere to open up room for more tax relief. The slate of potential GOP tax increase options is limited by political forces and are traditionally focused on non-controversial items, like information reporting or proposals directed at true tax avoidance. The more populist-leaning members of the GOP may, however, endorse more traditional tax increases as evidenced by the House Freedom Caucus's recent suggestion regarding a corporate SALT limitation. The president himself recently referenced carried interest and tax incentives of sports team owners as potential targets. We may learn more tomorrow when the president addresses a joint session of Congress for the first time since his return to the White House.

All of this will take time to sort out. And after a busy February, Republicans in Congress and the administration may take the whole month of March to settle on a unified plan. Doing so would allow for the winners of Florida's two special House elections on April 1 to be seated, potentially widening Speaker Johnson's margin for error in corralling the votes to start writing a reconciliation bill. This is where the rubber meets the road and it only gets tougher from there. #TaxTake

Upcoming Speaking Engagements and Events

Today, Jorge and Marc are speaking at the 49th Annual Federal Bar Association Tax Conference where they are co-chairing a panel featuring key Congressional staff from the Senate Committee on Finance, the House Committee on Ways and Means and the Joint Committee on Taxation.

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.

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