TCJA Individual Tax Cuts Expiring Soon: Details & Analysis
The expiration of the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
Cuts and Jobs Act’s (TCJA) reforms to the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
in 2025 will be a major political issue. Many of the provisions are popular among legislators and the public, so why are they expiring? Why didn’t policymakers make the individual income tax reforms permanent in the first place?
What Did the TCJA Do, and What Is Expiring?
The individual-side tax reforms of the TCJA can be categorized into a few major buckets. The law reduced personal income tax rates across the board. The law also included changes that collectively simplified the tax filing process. By simultaneously expanding the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
and limiting major itemized deductions like the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction.
(MID) and the state and local tax (SALT) deduction, the law pushed more taxpayers toward using the simpler standard deduction and reduced the economic distortions associated with itemized deductions. The TCJA also expanded the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
: doubling the maximum amount and increasing the maximum refundable amount. For non-corporate businesses, the TCJA introduced a 20 percent pass-through deduction and a limitation on noncorporate loss deductions.
Conversely, the TCJA included few permanent individual-side tax changes. It switched the inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
metric used to adjust tax brackets from the Consumer Price Index (CPI) to chained CPI, and it effectively repealed the Affordable Care Act’s individual mandate for insurance purchases by reducing the penalty amount to $0.
While the changes were not perfect, they overall constituted a significant simplification and tax cut across the board for U.S. taxpayers. So why were they not made permanent?
The Law: Reconciliation and the Byrd Rule
The TCJA was passed under a process known as reconciliation. Reconciliation means a bill cannot be filibustered in the Senate and can pass with a simple majority, rather than being subject to the 60-vote threshold. While the reconciliation process offers an easier route to passing a bill, it also comes with restrictions.
The Byrd Rule says reconciliation legislation must be budget-related and cannot include non-budget changes even if they come with ancillary budget consequences. The Byrd Rule also means a reconciliation bill cannot increase the deficit in years outside the 10-year budget window. And in addition to that limit, the budget resolution that allowed the reconciliation process to begin included a self-imposed limit of $1.5 trillion in revenue costs within the 10-year budget window.
The Politics
The two cost constraints necessitated some compromises on the original vision for tax reform. The foundational document for the tax reform process was the 2016 House GOP blueprint, which outlined a tax reform that would convert the corporate tax to a destination-based cash flow tax. Tax Foundation estimated it would cost $2.4 trillion over 10 years on a static basis at the time, while Tax Policy Center estimated the bill would cost $3.1 trillion over 10 years.
Next came the “Big Six” tax reform framework, negotiated by then-Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S.
The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others.
Chairman Kevin Brady, and Senate Finance Committee Chairman Orrin Hatch. This framework provided a broad outline to reduce business and individual taxes but left many details up to the tax-writing committees to determine later. It represented a shift away from the more visionary approach of the 2016 House GOP blueprint, and instead largely remained within the confines of the existing income tax system.
The first House version and the initial Senate version of the TCJA were not identical, but crucially, both proposed permanent structural reforms to the individual income tax. However, to bring down the cost to meet the Byrd Rule requirements, Sen. Orrin Hatch amended the individual provisions to expire after 2025. Once the amended Senate version passed, the bill went to a conference committee to “reconcile” the House and Senate versions before sending a final bill to the White House. While the conference committee made some further changes, they kept the amended Senate version’s decision to sunset most individual tax reforms after 2025.
Congress made the individual tax cuts (and the accompanying revenue offsets) temporary and large rather than permanent but scaled back. One reason is the precedent for “temporarily” cutting taxes only to ultimately extend them when they are scheduled to expire. The Bush tax cuts were scheduled to expire at the end of 2010, but policymakers fully extended them for another two years, setting up the 2012 fiscal cliff. Ultimately, most of the tax cuts were made permanent, with the exception of the reduction in the top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax.
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Another reason is the political dimension. Frontloading benefits and backloading costs is (unfortunately) a feature of Washington policymaking. A common piece of folk wisdom says that politicians can only see as far as their next election. That might be slightly exaggerated, but regular elections create incentives to deliver large short-term benefits rather than steady long-term benefits.
What About the Corporate Side?
So far, we’ve focused on the individual side of the TCJA. But the law included reforms to the corporate tax as well, including a (permanent) cut to the corporate tax rate. Why was that tax cut permanent?
The benefit of reducing the corporate tax rate is that it changes long-run investment decisions by making more projects economically viable. If companies know they will be able to keep more of the potential returns to investment, then they will invest more. And investments pay returns over long periods. If the corporate tax rate will only remain low for a few years, then it provides little incentive to make long-term investments. So a temporary corporate tax cut would not drive new investment and would instead primarily provide a windfall benefit to shareholders. Making it permanent creates a long-run benefit by increasing the long-run level of investment.
Similarly, to permanently increase economic output from individual tax changes, they would need to be permanent. People may respond in the short-term to increased returns to working or investing in the pass-through sector, but that increased economic activity will fall back down in response to higher taxes upon the TCJA’s expiration. So, the law’s authors left economic growth on the table by making the individual rate cuts temporary, but they would have left more growth on the table had they made the corporate tax rate cut temporary instead.
Corporate taxpayers did not escape from Byrd Rule constraints as they also faced temporary provisions and phaseouts. The amortization of research and development expenses (which requires companies to spread deductions out over several years instead of taking them immediately) took effect in 2022. The policy was never intended to take effect but was included in the TCJA as a revenue raiser within the budget window. New limits on the deductibility of interest payments tightened over time to raise revenue in later years, as did new international provisions. Furthermore, full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
for capital investment, the most visionary component of the original House blueprint, was made temporary and watered down to only apply to short-lived capital assets. One hundred percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
began phasing out in 2023.
The TCJA improved the U.S. tax code, but the meandering voyage of its passing and the compromises made to get it into law show the challenges of the legislative process. As policymakers contend with the expirations that resulted from the TCJA’s compromises, they should consider the advantages of permanent, stable policy, and the compromises that it will take to get there.
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