Legislative Lowdown
Trump Wins the Presidency, Allowing Him to Bring Signature Tax Policy Proposals to the Table: On Nov. 6, 2024, Donald Trump was declared the winner of the 2024 presidential election, sweeping all seven battleground states (Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin) and earning 312 electoral votes. The president-elect is also projected to win the popular vote by a margin of between 1% and 2% once all votes are counted. With Republican majorities in both chambers of Congress as well, President-elect Trump is expected to pursue an aggressive economic and tax policy agenda. Below are some of his policy priorities:
- Tax Cuts and Jobs Act (TCJA) Extensions. Trump’s top tax priority is cementing the legacy of his signature tax bill, the Tax Cuts and Jobs Act of 2017 (TCJA, Pub. L. 115-97), by extending or making permanent the tax-rate reductions in the bill, including the 20% pass-through business deduction and expanded estate-tax exclusion. However, he reversed course on one TCJA provision, the state and local tax (SALT) deduction limitation, now proposing to completely remove the deduction cap.
- Corporate Taxes. Trump has proposed cutting the corporate tax rate from 21% to 20%, and later proposed lowering the corporate tax rate to 15% for companies that produce their products in the United States. Trump has not provided details on the domestic production requirements that would be required for companies to qualify for the lower rate.
- Tariffs. Throughout his campaign, Donald Trump has proposed using tariffs as a means of funding some of his tax cut proposals or as an offset of extending TCJA provisions. In June, Trump also brought up the idea of replacing the federal income tax with an “all tariff policy.” This proposal signals that the president-elect is considering a trade agenda that is more protectionist than his first administration. Trump has specifically proposed a 10% to 20% universal baseline tariff on all U.S. imports, and further proposed a 60% tariff on all U.S. goods imported from China.
Some additional proposals that President-elect Trump highlighted in the last month on the campaign trail included:
- Double-Tax Relief for Americans Abroad. On Oct. 10, the Trump campaign stated that the former President would “support ending the double-taxation of overseas Americans,” since Americans abroad must pay U.S. taxes on their worldwide income and file returns with the IRS as well as in their country of residence. In contrast, nearly every other country in the world does not tax their citizens on income earned abroad.
- Tax Deduction for Auto Loan Interest. During a speech on Oct. 10, Trump expressed support for making interest on car loans tax-deductible, in an attempt to make buying or leasing a car easier and promoting domestic automobile manufacturing. He also proposed limiting the deduction to domestically produced vehicles, precluding vehicles from Asian or European manufacturers from being eligible for the deduction.
- Write-Off of Generator Purchases. In a post on Oct. 11 on Truth Social, Trump proposed allowing taxpayers facing storms, hurricanes and other natural disasters in the United States a full deduction for the purchase of an electricity generator to power their home temporarily.
- No Taxes for Military and First Responders. During an online program on Oct. 18, Trump said that he would consider exempting police officers, firefighters, military personnel and other first responders from taxation. Currently, the tax code limits the military exemption to active-duty military members serving in combat zones.
- Tax Credits for Family Caregivers. On Oct. 27, at a rally at Madison Square Garden, Trump proposed a tax credit for family caregivers who take care of a parent or a “loved one.” Trump did not provide details on how this credit would be structured or who would qualify as a loved one, but this may signal his support to expand the already-existing Child and Dependent Care Tax Credit. Under current law, the credit provides up to $3,000 for child care expenses for children under 13 or for adult dependents who are incapable of self-care.
The prospects of these campaign proposals being included in a reconciliation tax package remain unclear despite a Republican-controlled legislature. One concern is costs, with Trump’s tax proposals, including but not limited to those listed above, costing about $4 trillion and a clean extension of the TCJA costing about $4.5 trillion. Further, an analysis by the left-leaning Institute on Taxation and Economic Policy (ITEP) estimated that, mostly due to the regressive economic nature of Trump’s tariff policies and their estimated effect on the prices of consumer goods, the bottom 95% of taxpayers by income are estimated to face a net increase in their overall economic liability, with benefits being concentrated among the top 5% of taxpayers.
Republicans Retake Control of Senate: At the time of this writing, Republicans are expected to control the Senate next year with a 53 to 47 margin. This development brings Sen. Mike Crapo (R-ID) to the forefront, as he will lead the Senate Finance Committee in a year that will be heavily driven by negotiations over tax policy, in light of the expiration of several TCJA provisions.
Crapo has signaled that he is open to passing an extension of the TCJA’s major provisions without needing to consider offsets or pay-fors because of past precedent, saying that “extending current tax law has never been offset by Congress.” He also said that the Senate has and will continue to “evaluat[e] what the scores are” and will continue to “deep dive” into the TCJA to prepare for negotiations. He also mentioned several TCJA provisions that he would push to extend, including “the R&D [research and development] tax credits, the bonus depreciation, the fixes to the EBITDA [earnings before interest, taxes, depreciation and amortization] accounting policies, [and] the child tax credit [expansion].”
Crapo also weighed in on the IRA, saying that he would carefully consider which provisions should be kept, saying, “I don’t know that there’s any piece of legislation that every single piece of it should be removed.”
Senate Republican leadership will also undergo a notable shift next session, as Sen. Mitch McConnell (R-KY) is stepping down from his long-held leadership post. His successor for Senate majority leader, Sen. John Thune (R-SD), has experience with the TCJA, having worked on certain TCJA provisions like the Section 199A 20% pass-through business deduction. He has also advocated for measures to eliminate estate taxes and mitigate state double taxation on remote workers.
Republicans Retain House with Narrow Majority: Republicans are also expected to retain control of the House, though a number of races remain too close to call. As of the time of publishing, Republicans are expected to win between 220 and 222 seats, continuing the razor-thin streak that Republicans had from the 118th Congress. While a Republican trifecta allows the party to use budget reconciliation for tax-policy negotiations in 2025, the narrow House majority adds a layer of uncertainty as to whether Republican tax writers and Speaker Mike Johnson (R-LA) will be able to include desired provisions without conflicts between members of the conference. With regard to the energy-tax credits in the Inflation Reduction Act (IRA, Pub. L. 117-169), Speaker Johnson signaled disapproval of many of the bill’s provisions, but left the door open to retaining some IRA credits, preferring to use a ”scalpel and not a sledgehammer” to eliminate wasteful regulations while keeping beneficial ones. Prior to the election, Speaker Johnson indicated that he “probably will” try to repeal the CHIPS and Science Act (Pub. L. 117-167) but quickly backtracked, stating that “the CHIPS Act is not on the agenda for repeal.”
With Republicans securing a trifecta, the possibility for consolidation on the party’s tax priorities has not been this strong since the beginning of Trump’s first term in office. The Brownstein tax team has also put together a two-pager outlining Republicans’ tax priorities, linked here.
Smith Indicates Potential Limited SALT Relief: In an interview on Sept. 30, House Ways and Means Committee Chairman Jason Smith (R-MO) stated that the state and local tax (SALT) deduction cap enacted in the Tax Cuts and Jobs Act should be amended to raise the cap or to eliminate the so-called “marriage penalty” of the deduction, which would allow joint filers to redeem a maximum SALT reduction of $20,000. Chairman Smith’s remarks followed remarks that President-elect Donald Trump made at a rally in which he pledged to repeal the cap altogether, but Smith said that this may not be possible in a Republican-led house.
Energy-Tax Mainlines
IRS Finalizes Guidance on Section 48D Advanced Manufacturing Investment Credit: On Oct. 22, the Treasury Department and Internal Revenue Service released final regulations for the Section 48D Advanced Manufacturing Investment Credit, established by the CHIPS and Science Act of 2022 (Pub. L. 117-167). The credit aims to incentivize the U.S. manufacturing sector through targeted investments, particularly in the semiconductor industry.
The guidance clarifies eligibility requirements for the credit and provides additional information on investment credit recapture provisions and is largely consistent with proposed regulations issued in March 2023. Notably, the guidance extends the credit to include the manufacture of wafers used for solar photovoltaic generation.
IRS Finalizes Guidance on Section 45X Advanced Manufacturing Production Credit: On Oct. 24, the Treasury Department and Internal Revenue Service (IRS) released final regulations for the Section 45X Advanced Manufacturing Production Credit, established under the Inflation Reduction Act of 2022 (Pub. L. 117-169). The credit aims to incentivize U.S. manufacturing of clean energy components, such as batteries, solar and wind energy technologies as well as the production of critical minerals. The final rules build upon the proposed regulations issued in December 2023, providing limited revisions and additional clarity on the credit’s applicability.
The final regulations confirm the credit amounts and eligibility criteria for clean-energy components, including qualifying solar and wind energy components, inverters, batteries and critical minerals. One of the key changes includes a revised definition of “produced by the taxpayer.” The regulations now provide that to produce an eligible component means there must be a substantial transformation of the subcomponents during the production process. The rules also permit taxpayers involved in extraction and refining activities with regard to designated critical minerals to qualify for the tax credit under specific contract manufacturing agreements, allowing extraction and certain material costs to be included in the production costs of critical minerals if specific conditions are met.
The new guidance reinforces the prohibition against taxpayers claiming a credit under both Section 45X and Section 48C (the qualifying advanced energy project credit). Additionally, anti-abuse rules were strengthened to prevent multiple claims for the same component and to encourage genuine domestic production.
Treasury Department Intends to Finalize Section 45V Clean Hydrogen Rules by End of Year: On Oct. 1, Treasury Department Acting Assistant Secretary for Tax Policy Aviva Aron-Dine indicated that the department plans to finalize regulations for the Section 45V Clean Hydrogen Production Tax Credit by the end of the year. Section 45V was established by the Inflation Reduction Act (Pub. L. 117-169), and Aron-Dine said that it is imperative that, by the end of the Biden administration, the Treasury Department finalizes regulations on section 45V and other provisions “that are especially central to the IRA’s climate and economic goals.”
It is unclear whether the Treasury Department will modify the restrictive interpretation of the credit reflected in proposed regulations in 2023, which administration officials have previously said were designed to meet the administration’s climate goals. The proposed regulations remain controversial among some Democratic lawmakers and the hydrogen industry due to the potential they will curb production and development of the nascent hydrogen industry. With regard to these competing concerns, Aron-Dine said that the Treasury Department is looking to “help grow the [hydrogen] industry and move projects forward, while adhering to the law’s emission standards ….”
Brownstein’s client, the Hydrogen Jobs Now Coalition, has advocated making changes to the proposed 45V regulations, supporting the development of two letters sent to the administration urging significant changes.
Tax Worldview
Lawmakers Engage Biden Administration on Taiwan Double Taxation: On Oct. 18, Reps. Gerry Connolly (D-VA), Joe Wilson (R-SC), Gregory Meeks (D-NY), Ami Bera (D-CA) and Greg Stanton (D-AZ) sent a letter to Secretary of State Anthony Blinken and Treasury Secretary Janet Yellen, urging them to address the issue of the double taxation of Taiwanese businesses. The lawmakers cited that, although the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) includes Taiwan double-tax relief, the Senate has not taken action, and that executive agencies should take “interim steps to allow businesses on either side to invest without the burden of double taxation.”
Treasury Announces Initiative to Negotiate Double-Tax Relief with Taiwan: On Oct. 29, the Treasury Department announced that the United States and Taiwan would begin negotiation on an agreement to address double-taxation issues facing Taiwanese businesses with investments in the United States and U.S. businesses with a similar presence in Taiwan. The announcement commends Congress for the introduction of the United States-Taiwan Expedited Double-Tax Relief Act and United States-Taiwan Tax Agreement Authorization Act, indicating that executive negotiations will “build on the initiative” while working with Congress as a “vital partner.” The announcement also emphasizes the benefits to both countries of negotiating double-tax relief, particularly in the semiconductor industry.
Despite the Biden administration’s credit to congressional lawmakers for their efforts in crafting the necessary legislation, House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Ranking Member Mike Crapo (R-ID) criticized the Treasury Department’s announcement for appearing “to be driven more by politics than an effort to provide expedited tax relief.” They also warned that the administration’s approach could risk the intended relief for Taiwan since it “does not harmonize with the Congressionally-endorsed framework.”
Italy and France Considering Implementation of Suspended DSTs: During a press conference on Oct. 16, Italy’s deputy finance minister, Maurizio Leo, stated that the country’s proposed 2025 budget would modify its 2019 “web tax,” its version of a digital services tax. The two changes would remove the €750 million ($810 million) threshold for online activities and would remove the stipulation that, of the €750 million, affected companies would have to earn only €5.5 million ($6 million) in Italy to be subject to the tax. These proposals would broaden Italy’s DST to affect more businesses, in particular U.S. multinational corporations.
At the same time, France’s 2025 budget negotiation process includes several proposed amendments in the National Assembly’s Finance Committee to increase its DST from 3%, with the most reviewed amendment (I-735) proposing to raise it to 5%. In response to these developments, Rep. Kevin Hern (R-OK) warned that these taxes will “threaten U.S. jobs and compromise the digital export market” and urged the Biden administration to “make clear to Italy and France that the U.S. will use its power to combat novel extraterritorial and discriminatory taxes on U.S. business."
1111 Constitution Avenue
Treasury Department, IRS Release Initial 2024-2025 Priority Guidance Plan: On Oct. 3, the Department of the Treasury and Internal Revenue Service (IRS) released the 2024-2025 Priority Guidance Plan (PGP). The PGP sets forth the IRS regulatory priorities and provides taxpayers and practitioners with insight into issues the Treasury Department and the IRS have identified as important and intend to pursue during the year. The PGP is used as a workflow document to prioritize the tax issues the Treasury Department and the IRS plan to address through regulations, revenue rulings, notices, revenue procedures and other published administrative guidance.
IRS Projects Tax Gap to Grow to $696 Billion: On Oct. 10, the Internal Revenue Service (IRS) released a report detailing the tax gap projections for Tax Year 2022, which found that the projected gross tax gap has grown to $696 billion. The tax gap estimates the difference between tax liabilities and tax collected on time. The IRS noted that, despite the growth in the tax gap, the U.S. economy has grown at a similar pace and the agency suspects that taxpayer behavior has not fundamentally changed. IRS Commissioner Daniel Werfel remarked that the results nevertheless show that the IRS needs to be adequately funded to “focus both on compliance efforts to enforce existing laws as well as improving service to help taxpayers with their tax obligations to help address the tax gap.”
Progressive Lawmakers Request IRS to Use Alternative ID Verification System for Direct File: On Oct. 8, Sens. Elizabeth Warren (D-MA) and Ron Wyden (D-OR), as well as Rep. Katie Porter (D-CA), wrote a letter to Treasury Secretary Janet Yellen and Internal Revenue Service (IRS) Commissioner Daniel Werfel, urging them to seek an alternative to using ID.me as a third-party identity verification software for its use in Direct File. The lawmakers cite disadvantages to ID.me’s facial recognition software, stating that it unduly discriminates against people of color and presents barriers for individuals that do not have access to or expertise in the usage of technology. The letter also argues that the IRS is needlessly burdening itself with strict identity verification software, while allowing private-sector companies to use less secure verification systems. The letter calls for the IRS and private-sector software to have the same level of security. The lawmakers request the IRS to respond to inquiries concerning the effects of ID.me on the tax-filing process and whether the IRS has considered using other methods of identity verification. Although the members asserted that the Direct File pilot program was successful in 2024, only 141,000 out of an eligible 19 million taxpayers used the tax-preparation tool.
Congressional Democrats Urge Direct File to Expand for Americans Living Abroad: On Oct. 23, Sen. Michael Bennet (D-CO) and Rep. Dina Titus (D-NV) led a letter to IRS Commissioner Daniel Werfel, calling for the expansion of the Direct File program to allow for Americans living abroad to qualify “as soon as technically feasible.” The lawmakers noted that Americans living abroad face increased difficulties in filing returns, due to complicated tax return considerations and the limited resources to engage with the IRS for assistance. The letter suggests that allowing Direct File to expand to a federal-only option and accept Form 2555, Foreign Earned Income Exclusion, would allow some Americans living abroad to quality for the program. This would “demonstrate the IRS’ commitment to providing free, fast tax preparation options to as many taxpayers as possible.” The letter was co-signed by 55 other congressional Democrats, including Senate Finance Committee Chairman Ron Wyden (D-OR). However, the Direct File eligibility requirements are focused on those with the simplest returns, and taxpayers who itemize their deductions, including many who live abroad, would not be eligible to use Direct File.
At a Glance
IRS Issues Additional Guidance on Sustainable Aviation Fuel Tax Credit: On Oct. 18, the Treasury Department and Internal Revenue Service (IRS) released Notice 2024-74, which provides additional guidance on the Section 40B Sustainable Aviation Fuel (SAF) tax credit, enacted as part of the Inflation Reduction Act (Pub. L. 117-169). The notice instructs taxpayers seeking to claim the credit after Oct. 18, 2024, to use the updated 40BSAF-GREET 2024 model to calculate greenhouse gas emissions data.
IRS Claims that ERTC Processing Delays Leads to Cost Savings: In a reply to a Treasury Department Inspector General for Tax Administration (TIGTA) report released Sept. 30 concerning the IRS’ responses to erroneous Employee Retention Tax Credit (ERTC) claims and the interest that accrues on unpaid and legitimate claims, the agency stated that the delays will lead to cost savings, because savings from preventing potentially erroneous claims will offset the additional interest amount the IRS will accrue on delayed claims.
IRS to Release Additional Guidance on ERTC: On Sept. 25, John McInelly, the Internal Revenue Service (IRS) Executive Lead of the Employee Retention Tax Credit (ERTC), said that the agency is looking to release additional guidance on the ERTC with respect to timing concerns on income tax returns. McInelly elaborated that the forthcoming guidance is intended to prevent a “lengthy correspondence back-and-forth” when companies dispute ERTC claim denials.
Treasury Department, IRS Issue Guidance on Energy Efficient Home Improvement Credit: On Oct. 24, the Treasury Department issued proposed regulations on the Section 25C Energy Efficient Home Improvement Credit as well as Rev. Proc. 2024-31. The Section 25C credit was modified as part of the Inflation Reduction Act (Pub. L. 117-169). The guidance provides procedures for manufacturers of property to qualify for the credit, including procedures for using the IRS Energy Credits Online Portal (IRS ECO) to register with the Internal Revenue Service (IRS).
Brownstein Bookshelf
TPC Report Provides Primer on TCJA: On Oct. 18, the Tax Policy Center published a presentation titled “Understanding the Tax Cuts and Jobs Act: Overview and Issues Ahead,” which provides a primer on the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97), the most important individual and business provisions, its effects on different income brackets, and the potential avenues for extension negotiations.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
On Nov. 14, the Senate Finance Committee will hold a hearing considering the nomination of David Samuel Johnson to serve as the Treasury Department Inspector General for Tax Administration (TIGTA).