Gearing Up for a Potential Tax Bill in 2025

To date, the 118th Congress has not been the most legislatively productive. A debt ceiling debate consumed its first six months, then there was an unprecedented leadership change, followed by an FY2024 appropriations process that stretched nearly halfway through the fiscal year. Historic levels of partisan gridlock and split party control held by razor thin margins made it clear early on that little would get done.

But what about next year? The 119th Congress, which begins in just eight months, may prove just as politically divided and unproductive as the current one. It may, however, manage to advance significant legislation.

In January, members of the new Congress will take the oath of office and inherit an unenviably long to-do list. Right out of the gate, the 119th Congress will have to address yet another debt ceiling. It will have the regular annual work of appropriating the government and extending key authorizations for federal programs. The current Congress may also punt a number of items for the remainder of this year to the next Congress’ agenda― an increasingly likely scenario as the remaining days of the 118th Congress dwindle. And finally, major provisions of the Tax Cuts and Jobs Act (TCJA) begin to expire at the end of 2025, teeing up the likelihood of a major tax package next year.

Normal order legislation requires a 60-vote majority to invoke cloture and remove the threat of an indefinite filibuster in the Senate. Congress enacted the TCJA using budget reconciliation, a legislative procedure that works exceptionally well in a narrowly divided Congress since it only requires 51 Senate votes to end debate on and pass fiscal legislation. The process, however, comes with a number of restrictions, including that the cost of such legislation be confined within a ten-year window. Due to federal budget and accounting policies, tax-writers set many of TCJA provisions, particularly those for individual taxes, to sunset at the end of 2025.

The TCJA notoriously eliminated the ability to issue tax-exempt advance refunding bonds. Unfortunately, this permanent change is not among the provisions set to expire next year, but municipal market participants will still need to closely watch how Congress handles the looming sunset of other provisions. Whenever Congress debates major tax reform, all potential pay fors are on the table. While the tax-exemption on municipal bonds is a critically invaluable component of community and infrastructure finance, it is also a large tax-expenditure that frequently comes up as a shortsighted proposal from members of Congress looking to pay for other priorities (new federal spending, lower corporate tax rates, etc.).

As we approach the sunset of TCJA next year, Congress could go in an infinite number of directions. In general, all the options fall into four broad categories:

• Let It All Go: Congress could do nothing and allow the temporary TCJA provisions to sunset, both tax expenditures and some revenue-raisers. While the November elections and time will define the contours of next year’s tax debate, we do know that this sort of inaction is unlikely regardless of the electoral outcome. Both lead contenders for the presidency have made various promises to not raise taxes on low- to middle-income households. Allowing various individual tax breaks to sunset (including the doubling of the standard deduction), while keeping various revenue raisers in place, would likely violate most campaign pledges.
• Clean Extension: Congress could also choose to extend the TCJA, as is, for another 10-year window (unlikely) or on a permanent basis (even more unlikely). The former would cost the federal government another $3.8 trillion over the next decade. It would also deny tax writers the opportunity to make improvements and changes to tax legislation from the last decade.
• Short-Term Extension: We could have yet another unproductive Congress that fails to find a compromise capable of passing both chambers but understands the consequences of inaction. Such a Congress may choose to enact a full or near-full, short-term extension of the TCJA until some point in the future. While this would avoid near-term threats to the tax-exemption on municipal bonds, it merely punts larger discussions to the future.
• Reform, Expand, or Contract: Perhaps the most likely scenario is a split control Congress works to extend various parts of TCJA, expand certain provisions, and reign in or repeal others. The Center for a Responsible Federal Budget (CRFB) launched an interactive tool last month that allows users to adjust, build, and estimate costs of their own tax package.

What Does it All Mean for Munis?

If this article imparts one takeaway, let it be that a wholistic tax package dealing in trillions of dollars is likely next year. The last time we dealt with such a package was during TCJA in 2017. While no members of Congress have directly brought municipal bonds into this discussion, independent think tanks have already proposed taxing interest earned on qualified municipal bonds.

On the flipside, a new tax package in a new Congress also presents an opportunity to expand municipal bonds, but market participants should prepare now for all scenarios. Various proposals to expand existing tax-exempt bonds, alleviate private activity bond (PAB) volume concerns, modernize the small borrower’s exemption (bank qualified debt), and bring back tax-exempt advance refunding bonds have floated around for the past several Congresses. A major tax package could serve as a legislative vehicle for some net-positive changes to public finance as well.

What Are We Doing?

The Public Finance Network (PFN)― a group of municipal bond advocacy groups in Washington― is working to prepare for next year and elevate the importance of tax-exempt municipal bonds, including updating shared statistics and creating a bank of stories how tax-exempt municipal bonds benefit constituents in every congressional district.

How Can You Help?

Over the summer, municipal market groups will reach out to you, our shared memberships, to collect these stories. Stay tuned for more information on how you can get involved. In the meantime, you can start and maintain a dialogue with your federal decision makers now. Meet with your members of Congress, share our advocacy resources, and explain what the tax-exemption means in your community.