As the calendar turns toward 2025, policymakers are gearing up to address the looming expiration of several critical provisions under the Tax Cuts and Jobs Act (TCJA) of 2017. While many corporate tax changes were made permanent, the individual tax cuts and several other provisions are set to expire at the end of 2025, setting the stage for a fiscal crossroads. The decisions made over the coming months will have significant implications for the nation’s fiscal health, tax policy, and economic growth.
The TCJA’s Lasting Impact
The TCJA, signed into law by then-President Donald Trump in December 2017, was a landmark tax reform that aimed to boost U.S. economic growth by cutting taxes for businesses and individuals. It also simplified the tax code by lowering individual income tax rates, reducing corporate taxes, and implementing various business incentives. While some of the corporate provisions were designed to be permanent, the individual tax cuts, along with several other important changes, are set to expire in 2025, leading to a potential “tax cliff.”
When the TCJA was passed, it was projected to add $1.5 trillion to the federal deficit over ten years, with tax reductions primarily funded by increased debt. Extending all of the expiring provisions would add a further $4 trillion to the deficit through 2034, according to estimates from the Congressional Budget Office (CBO).
The Expiring Provisions
Several key provisions in the TCJA, particularly those affecting individual income taxes, are slated to expire at the end of 2025. These include:
- Tax Brackets & Rates: The TCJA lowered individual tax rates across most income brackets and adjusted the thresholds for tax brackets, resulting in reduced revenue of approximately $2.2 trillion through 2034 if extended.
- Child Tax Credit: The TCJA doubled the Child Tax Credit (CTC) from $1,000 to $2,000 per child and expanded eligibility. If extended, this provision is estimated to reduce revenues by $748 billion.
- Standard and Itemized Deductions: The TCJA almost doubled the standard deduction while capping the State and Local Tax (SALT) deduction at $10,000. Extending these changes would reduce revenues by $1.3 trillion.
- Alternative Minimum Tax (AMT): The TCJA raised the AMT exemption and phase-out thresholds, impacting fewer taxpayers. Extending this would cost an estimated $1.4 trillion.
- Personal Exemption Suspension: The TCJA eliminated personal exemptions for dependents, which provided significant deductions for many families. Extending this provision would generate $1.7 trillion in revenue.
The Impact on Businesses
For businesses, the TCJA lowered the corporate tax rate from 35% to 21%, provided full expensing of capital investments, and introduced incentives for pass-through businesses. The effects of these provisions on business revenue have been mixed, but it’s clear that the corporate tax rate change alone has led to a significant reduction in federal revenue, estimated at $100–$150 billion annually.
The TCJA also introduced several international tax provisions designed to reduce incentives for profit shifting abroad. These changes, including the Global Intangible Low-Taxed Income (GILTI) provision, are permanent but still subject to potential adjustments based on future international tax reforms.
What Happens Next?
As 2025 approaches, lawmakers must decide whether to extend these provisions or allow them to expire, which would result in tax increases for individuals and businesses. Extending all of the expiring provisions would likely worsen the federal deficit, which is already nearing historic levels. The CBO projects that by 2034, U.S. debt could reach 133% of GDP if the TCJA provisions are fully extended.
Given the expected budgetary pressures, policymakers are considering several approaches:
- Full Extension: Extending all expiring TCJA provisions would likely lead to a $4 trillion increase in the deficit, but proponents argue that the economic growth spurred by these tax cuts could offset some of the cost, potentially boosting GDP by 1.8%. However, critics point out that such an approach would disproportionately benefit the wealthy and exacerbate income inequality, with 71% of the benefits going to the top 20% of earners.
- Partial Extension: Another option is to extend provisions that primarily benefit middle- and lower-income individuals, while letting the tax cuts for high-income earners expire. This could include reinstating higher rates for the wealthiest earners and making targeted tax relief available to families and small businesses. The impact on the deficit would be smaller, but this approach could still generate a $1.9 trillion increase in debt over the next decade.
- Hybrid Reform: A more balanced approach could involve extending certain provisions from the TCJA while introducing new reforms designed to address fiscal sustainability and improve tax progressivity. This could include corporate tax hikes, new carbon taxes, and a more aggressive stance on closing tax loopholes. While this approach might reduce the deficit, it could also dampen short-term economic growth, particularly for businesses.
Key Considerations for Lawmakers
Policymakers will face difficult decisions in 2025 regarding which tax provisions to extend or alter. Among the most pressing considerations are:
- Fiscal Sustainability: Extending the TCJA provisions without addressing the growing budget deficit could lead to unsustainable debt levels, which could have long-term negative impacts on economic stability.
- Equity vs. Efficiency: There is a delicate balance between promoting economic growth and ensuring that tax policy does not disproportionately favor the wealthy. Lawmakers will need to find a way to design a tax system that encourages investment and growth while addressing wealth inequality.
- Business Investment: While businesses have benefited from reduced corporate taxes and investment incentives, lawmakers must carefully weigh the need for continued support for business growth against the need for a more balanced fiscal approach.
Conclusion
As 2025 approaches, the fate of the TCJA’s expiring provisions will be a defining issue for U.S. tax policy. Whether lawmakers opt for a full extension, a partial extension, or a hybrid approach, the decisions made will shape the future of the tax system, the federal deficit, and the broader economy. Policymakers will need to carefully consider the long-term fiscal health of the nation while balancing the need for continued economic growth, tax fairness, and support for businesses. The coming months will be crucial for determining the direction of U.S. tax policy for years to come.
