A day after midterm elections, it remains uncertain whether either party will end up with Congressional control or whether it will be a divided Congress — and that has consequences for these tax questions.
Here are 3 those burning tax questions:
• What are the chances of future tax-law changes in 2023 and 2024?
• Can Democrats and Republicans agree to another round of child tax credit payments before the end of the year?
• Does the Internal Revenue Service get to keep its recently-enacted $80 billion infusion to bolster enforcement and improve taxpayer service?
House and Senate control teeters on a razor’s edge as counting continues in tight races. Georgia’s Senate campaign is going to a Dec. 6 runoff election. Neither Democratic incumbent Raphael Warnock nor Republican challenger Herschel Walker were poised to win more than 50% of the vote.
However, the midterms offered some tax clarity, at least at the state level. California voters rejected a ballot measure that would have tacked an extra 1.75% tax on households making at least $2 million. If Proposition 30 passed, the top rate for California’s income taxes would have gone from 13.3% to 15.05%.
On the other hand, Massachusetts voters backed their own millionaires tax. The measure will add an extra 4% surtax for households making at least $1 million. That goes on top of the 5% state’s flat 5% income tax.
Here’s a deeper dive on those 3 outstanding tax questions:
1. What about new tax laws in 2023 and 2024?
Here’s where the Georgia run-off race could really loom large — especially as recession worries keep sticking, observers noted.
It might sound unlikely, given the latest results in race for the House, but let’s start with the chance that Democrats keep majorities in the House and Senate.
There was a time when the Biden administration was pressing for higher individual tax rates and steeper capital-gains rates on rich households. If Democrats maintain control, “I would expect those are going to be right back on the table,” said Jennifer Acuna, principal in KPMG US’ Washington National Tax practice.
If Republicans take one or both chambers of Congress, there would likely be a narrower chance for more tax law changes, she added. The chance for any types of tax hikes would — more likely than not — go out the window, she said.
But if a recession takes hold and lawmakers want to create a stimulus bill to counter the effects of a rapidly cooling economy and rising unemployment, Acuna could see the chance for some kind of tax cut. “That’s the one caveat,” she said.
The deciding factor on any 2023 and 2024 tax law changes is whether Democrats can somehow hold the House and Senate, said Garrett Watson, senior policy analyst at the right-leaning Tax Foundation.
Without that, GOP efforts to change the code would likely just end with a presidential veto, he said.
In the meantime, Watson said many provisions in the Trump-era 2017 Tax Cuts and Jobs Act will expire at the end of 2025, including an array of individual tax cuts.
2. Will there be another round of child tax credit payments?
Before newly-elected Republicans and Democrats take office, Congress still has the lame duck session and big tax questions to consider.
There are several corporate tax provisions that businesses want addressed, including the capacity to keep deducting all research and development costs in the year they occurred. Without congressional action, the tax rules will switch to make corporations spread out the costs over five years on domestic R&D, and 15 years for R&D abroad.
Earlier this month, 178 finance heads at major corporations wrote lawmakers urging a fix, according to the Wall Street Journal. Some Democrats want to make the changes, so long as Republicans agree to another round of enhanced child tax credit payments in some form.
These are the monthly payments the Biden administration authorized for in March 2021’s American Rescue Plan — money that helped bring child poverty to a record low last year, according to the U.S. Census Bureau. Lawmakers boosted the credit just for 2021.
“Those who want to extend child tax credit payments do have a stronger hand today,” said Adam Ruben, director of Economic Security Project Action, the legislative advocacy arm of the Economic Security Project, an organization that focuses on financial wellbeing of low- and middle-income families. (The organization supports permanently increasing the credit.)
After Tuesday, Ruben said, “Voters are looking for help in the economy.” The prospect of gridlock and a divided Congress in 2023 and 2024 will only heighten the pressure from corporate America to work a deal now, he added.
Others don’t think it’s going to happen. That includes Alex Brill, senior fellow at the right-leaning American Enterprise Institute. There may be incentives to authorize tax extensions before the year is through, he said. Still, most Republicans would object to something like the child tax credit payments that came out of the American Rescue Plan on the concern it discourages work, he added.
The end-of-year talks on tax extenders would be revving up amid the Georgia runoff election campaign. “It really does kind of cast a shadow over that negotiation,” Acuna said. If talks happen while the Senate’s power balance hinges on the Georgia seat “neither party is going to have the obvious maximum leverage.”
3. What happens to the $80 billion in funding for the IRS?
The Inflation Reduction Act, passed in August, makes changes to the corporate tax code and authorizes $80 billion over a decade to the IRS. More than half of the money is meant to improve enforcement and tax compliance. The remaining sums go to taxpayer service and operation upgrades at the understaffed and beleaguered agency where it’s been difficult for taxpayers to reach people on the phone.
Republicans voted against the legislation and criticized the extra funding. Ahead of Election Day, experts doubted the GOP could reverse the $80 billion. Even if they controlled the House and Senate and passed bills to undo the funding, they noted Biden could still veto it. Another prospect was reducing IRS funding in yearly budgets and making the agency use the $80 billion to make up the difference.
Even as the results pour in and the “red wave” might be more of a ripple, there’s still a chance Republicans will challenge the funding, said John Gimigliano, principal-in-charge at KPMG US’s Washington National Tax practice.
“We’re going to hear a lot about potentially the IRS funding and looking at an opportunity to take back some of that IRS funding. That is not going to be easy,” he said.
