Since Ronald Reagan was first elected president, moments of single-party control of Washington have been infrequent — just 10 years — and short. Divided government, where the president faces a Congress fully or partially controlled by the opposing party, is the default preference of American voters, intended or not.

Divided government likely puts ambitious tax reform out of reach. Some outliers, like the 1986 Tax Reform Act and the Balanced Budget Act in 1997, only underscore how rarely it happens. 

Let's say the next president, regardless of party, faces a Congress with opposing majorities in both chambers. Under this scenario, some interesting possibilities emerge. Knowing that the 2017 Tax Cuts and Jobs Act (TCJA) must be addressed in light of the expiration of individual and estate tax relief at the end of 2025, and with little common ground between the two power centers, Congress is likely to initially go its own way. 

It's possible, perhaps even likely, that Congress would use the budget reconciliation process to assemble a partisan TCJA extension bill. It would be vetoed, of course, but the exercise would get lawmakers and the president on the record for the negotiations that would assuredly follow. Recall that GOP majorities repeatedly sent Presidents Clinton and Obama reconciliation and tax bills as veto bait.

In that same vein, Congress might also provoke vetoes to highlight perceived regulatory mistakes by the IRS and the Department of the Treasury. By using the Congressional Review Act (CRA), Congress can move regulatory nullification resolutions fast. How fast? President Biden has been swatting down CRA resolutions like flies since he took office, vetoing more such resolutions than any other president. And Republicans only control the House. There would certainly be more if they controlled both chambers. The Congressional Research Service (CRS) estimates that the deadline for final regulations to be issued without being subject to the CRA is August 1, 2024. The actual date, however, cannot be ascertained with precision until the end of the 118th Congress.

By contrast, if the next president faces a Congress partially controlled by an opposing party, we expect a long, low-level slog of political positioning by the respective parties in both chambers. And if the White House and the Senate are controlled by the same party, actual legislating may take a back seat to a focus on judicial appointments.

Under any scenario of divided government, our roadmap shows all tax legislative paths leading to the same point — a December 2025 holiday season with high-stakes negotiations between the White House and party leaders in Congress.

The nation faced a similar situation in the closing days of 2012 when the Bush-era tax cuts were set to lapse. Back then, these so-called Fiscal Cliff negotiations went down to the wire with no time to spare. The final bill didn't get signed until two days into the new year. In the end, Congress ultimately made the Bush tax cuts permanent but with new income limitations and other revisions sought by President Obama, including a reinstated estate tax. President Obama's ability to shape the final bill with a Congress that had a new, large, and hostile Republican House majority demonstrates why the presidency is so important to both parties, whether or not they control Congress. 

As for what a "negotiated" TCJA extension bill looks like in divided government, we expect a package extending the expiring the 2017 TCJA individual and estate tax provisions but the length of such extension and the scope of taxpayers benefitting from the extension would likely be limited. 

Deficit concerns, which tend to get magnified in divided government, would likely require a significant amount of offsets so that the bill isn't entirely unpaid-for. Ultimately, the ability to agree on revenue offsets will likely determine the term and scope of the tax relief extensions. #TaxTake

In the News

In Roll Call, Jorge discussed potential replacements for Senator Bob Menendez (D-NJ) on the Senate Finance Committee following his recent bribery conviction. 

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