House and Senate Republicans appear to be drifting apart on key tax policy questions as they head into the biggest and most complex tax negotiations in decades.
Interviews with senior GOP leadership on the Senate Finance Committee show a deep commitment to the traditional idea that extending existing tax policy — particularly pro-growth tax policy — doesn’t have to be paid for.
In the House, where budget hawks hold greater sway, there has been a growing sense that with the national debt approaching $35 trillion, offsets, or pay-fors, for tax provisions must be more than an afterthought.
Which view takes precedence in next year’s negotiations over the extension of expiring Tax Cuts and Jobs Act provisions likely will depend on election outcomes, including whether Republicans can retain their shaky control of the House or win control of the Senate. A no-harm pledge from President Biden to households making under $400,000, or a pledge from a President Trump to reverse the Inflation Reduction Act, could drive negotiations, or a clean sweep by either party could make a partisan reconciliation package possible.
“Our policy has been — I can’t really speak for the House — if you’re extending existing tax policy, that isn’t offset,” said Senate Finance Committee member and Minority Whip John Thune, R-S.D. “And secondly, if it’s a pro-growth tax policy, it’s going to generate more revenue.”
“We need to look more closely at what we’re referring to because some people call these economy-growing tax cuts, which I agree would not need to be paid for,” Finance Committee member John Cornyn, R-Texas, said. “But things like income transfers, like the child tax credit — which is merely a welfare payment, giving people a check who don’t even pay income tax — that certainly doesn’t grow the economy and I think certainly would need to be paid for.”
Thune and Cornyn are vying to replace Senate Minority Leader Mitch McConnell, R-Ky., in the next Congress.
As High-Stakes as It Gets
Members of both parties in both chambers have happily looked the other way during the near-annual rite of tacking an extenders package onto an omnibus spending bill or other vehicle. But in past years those tax titles have typically included just a handful of temporary tax breaks scored at perhaps $10 billion or $20 billion. A full extension of the individual tax provisions in the TCJA has been scored at $3.5 trillion over 10 years by the Congressional Budget Office.
And $3.5 trillion could be the low end — adding expiring business provisions and not extending pay-fors such as the mortgage interest deduction limitation would push the cost well beyond even the $3.9 trillion price tag for the American Taxpayer Relief Act’s extension of the George W. Bush tax cuts in 2012. Add Biden’s insistence on a $400,000 threshold and the interplay of more than 100 individual, business, and international provisions in the TCJA, and former tax staffers see these extender talks as far more complex than the 2012 negotiations.
“I think the 2025 tax reform effort really in a lot of ways is going to be this clash between a recognition of the current deficit situation running up against a traditional Republican position that tax cuts — particularly the extension of tax cuts — shouldn’t be paid for,” said Marc Gerson, former House Ways and Means Committee tax counsel.
“So it’s really a question of how that clash between those two things ultimately gets resolved in a really kind of high-stakes environment,” he said.
Gerson, now with Miller & Chevalier Chtd., is referring to an argument by many congressional Republicans that the TCJA’s business tax cuts paid for themselves. Their proof is that corporate income tax collections in 2022 and 2023 exceeded projections the CBO made in June 2017, before the 2017 tax code overhaul. Detractors say that may be true but note that corporate income tax collections were more than $100 billion below the CBO’s projections for 2018-2020.
Using dynamic scoring to include the economic effects of tax cuts could play a role in debates over what segment of the spending could be covered by offsets, Marc Goldwein of the Committee for a Responsible Federal Budget said, adding that he hopes it’s not an outsized one.
“If their argument is, we think we had a score that’s using dynamic scoring and so that means that if they paid for 20 percent themselves, we only have to pay for 80 percent,” Goldwein said. “I’d rather them pay for it on a conventional basis, and get extra money for deficit reduction, but it’s a very reasonable argument to say we should dynamically score this.”
A Little Matter of $35 Trillion
The trend among budget-conscious House Republicans to pay for new spending — including tax expenditures — appears widespread. They don’t disagree with Senate assertions that the TCJA’s business tax cuts generated new revenue, but they appear more focused on paying for at least a bigger portion of any extension.
“I think it’s a positive, don’t you, that we’re paying for things on the House side?” said House Ways and Means Committee member Kevin Hern, R-Okla., who also chairs the biggest House GOP caucus, the Republican Study Committee.
The $79 billion Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), which is stalled in the Senate, passed the House with 99.5 percent of its costs paid for. And in June 2023, Ways and Means Republicans pushed their $237 billion collection of individual and business tax breaks through the committee with more than 90 percent of costs covered by a proposed repeal of much of the IRA’s energy tax incentives.
Hern is not alone, based on comments from fellow committee members:
“I don’t think anyone on our side is interested in growing the deficit,” said Rep. Lloyd Smucker, R-Pa., who has built his own spreadsheet model in an effort to find the optimum tax rate that delivers economy-growing incentives but enough revenue to run the government.
“We’re going into a big tax year next year, and this is going to be front and center,” said Rep. Brian K. Fitzpatrick, R-Pa. “I think that we should pay for as much as we can — the goal being growth, not just slashing or reducing rates. For me that’s always been about finding a point of equilibrium.”
“We’re $35 trillion in debt. We’re adding a trillion dollars every 100 days. We have to have pay-fors. It’s just not sustainable,” said Rep. Beth Van Duyne, R-Texas.
“So as we look at what’s at stake in terms of the expiring tax provisions, we need to be on the same page,” Rep. Darin LaHood, R-Ill., said of Senate and House Republicans as they approach 2025. “We should always be looking for ways for it to be paid for, particularly when we’re $34 trillion in debt,” he said, adding that economic growth from legislation should also be acknowledged.
Regarding offsets, the cupboard is far barer than it was in 2017: Republicans used up a lot of pay-fors in their tax code overhaul, and Democrats grabbed some of what they didn’t use for the IRA.
Ending full research and development expensing, restoring and then phasing out bonus depreciation, and curtailing net interest expensing by the highly leveraged amounted to nearly $500 billion in offsets in 2017. But they’re no longer on the table.
And Democrats partly paid for the IRA by grabbing the excess business loss limitation that was scored at raising $250 billion in 2017. When that happened in August 2022, Thune complained that Republicans had planned to use that pay-for to offset an extension of the section 199A deduction. That suggests Senate Republicans had planned to pay for at least a portion of the TCJA’s extension.
“We’ll litigate that next year,” Thune said of the section 199A pay-for.
The foreshadowing of a potential clash over tax politics arose recently when Finance Committee ranking member Mike Crapo, R-Idaho, said he had a problem with the House-passed $79 billion tax package being completely paid for. Crapo said that if a compromise on the bill can be reached, it needs to be “very clear that this is not a precedent” heading into next year’s Trump tax cut negotiations.
George Callas, former tax counsel to House Speaker Paul Ryan, remarked last month on the apparent growing split between Republicans in the two chambers at a Committee for a Responsible Federal Budget event. He noted that the last two tax bills to come out of Ways and Means were largely paid for.
“In a divided-government scenario, I think that’s going to make for a really interesting dynamic — if House Republicans continue to feel like you have to worry about deficits, interest rates, inflation, etc.; Senate Republicans maybe not so much; [and] Democrats are going to be in whatever place they’re in. It could be interesting,” said Callas, now with Arnold Ventures.
Should a more populist Republican Senate makeup appear after the November elections, that would heighten debate on the importance of the nation’s debt, and as a result, the size of the package needed to address the expirations, according to former Senate Finance Committee tax counsel Joshua Odintz.
“That’s the first debate that will have to take place on tax reform. And it’s not going to be an easy debate,” said Odintz, now with Holland & Knight LLP.
What Senators Say
The Senate Republican assumption that extenders and economy-growing tax cuts don’t have to be paid for is the only avenue to extending the TCJA, according to Finance Committee member Thom Tillis, R-N.C.
“What they are saying is that they are against the extension,” Tillis said of House members who say the bill must be paid for. “How do you pay for a two- or three-trillion-dollar tax package?”
But not extending at least a big chunk of the TCJA could be politically unpalatable, as about 100 million households would be hit with a tax increase in 2026. The Tax Foundation estimates that 62 percent of households would see a hike.
Tax rates, along with taxes, across the income brackets would rise. The only income cohorts that wouldn’t see most of their members get hit with tax increases after the expirations are those making more than $500,000 a year, mostly because the TCJA cut the corporate income tax rate from 35 percent to 21 percent.
At a recent Finance Committee hearing, Treasury Secretary Janet Yellen hinted that whatever deal is reached on extending the TCJA provisions, Biden’s key insistence would be that no household earning less than $400,000 would see a tax increase. Because most households earning under that threshold would see a tax increase if the provisions expired, the implication was that the administration would support keeping most of the TCJA’s individual tax rates, its doubling of the standard deduction, and the child tax credit.
But Biden appeared to add confusion to negotiations before they began with an April 23 post on the social platform X, in which he said he would allow the $2 trillion tax cut to expire and “stay expired.” A White House official, speaking on condition of anonymity, quickly clarified that statement, saying the president would continue to pursue an extension of the TCJA tax provisions for those earning less than $400,000.
Senate Republicans believe there should be pay-fors for new spending and for any new tax policies, even though the latest CBO estimate said the TCJA fell $1.6 trillion short of paying for itself. Democrats have a long wish list, with a child tax credit expansion remaining at the top.
“If there’s new things like the [child tax credit] expansion, arguably that should be offset because that’s not going to be an extension,” Thune said. “And there’ll be a lot of things that Dems want to do, so how the election comes out will shape how this issue gets dealt with.”
Alexander Rifaat contributed to this article.