The incoming administration and Congress will make decisions over the first half of 2025 in five key economic policy domains: tariffs and trade, industrial and innovation policy, business regulation, the national debt, and tax reform. Here is our take:
Most Americans will experience large tax increases if Congress doesn’t act in 2025 to avoid tax policy changes neither party wants.
- Why it’s happening: Most provisions of the 2017 Tax Cuts and Jobs Act (TCJA) expire at the end of 2025. Unjustifiable deductions that the TCJA rightly limited – like the state and local tax deduction and the mortgage interest deduction – will balloon back, making the tax code significantly more anti-growth.
- Why it matters: In addition to personal tax increases, changes to corporate expensing already phasing in will likely reduce business investment in the United States. This will have lasting negative effects on economic growth and opportunity.
- The details: Most TCJA provisions relating to the individual income tax code will expire, including lower tax rates for all taxpayers as well as limitations on tax deductions. Temporary measures allowing businesses to immediately expense some capital expenditures have already started to end. Meanwhile, companies now get fewer tax benefits from investments in research and development because of a recently implemented requirement to capitalize R&D spending and amortize it over time.
- Our take: Congress should permanently end the state and local tax deduction since it incentivizes overspending by states and unfairly treats comparable people living across state lines from each other differently. It should eliminate the mortgage interest deduction since it needlessly subsidizes affluent households and drives up home prices. And it should permanently allow full expensing of capital and R&D expenditures by businesses to promote business investment and economic growth in the United States.
If Congress decides to pursue deficit reduction, additional revenues should come primarily from reducing deductions to avoid disincentivizing work, savings, and investment rather than form large increases in tax rates.
