This year’s presidential election may become one of the most significant in recent memory for the U.S. tax system, Accounting Today reported. This is primarily because of the sunsetting provisions of the 2017 Tax Cuts and Jobs Act (TCJA). These provisions will either expire and revert to their pre-TCJA status or be replaced by new legislation.

"The conversation will change once we understand the balance of power heading into the 119th Congress," Kasey Pittman, director of tax policy at Baker Tilly, told Accounting Today. "We'll be able to be a little bit more focused on potential outcomes."

For instance, Pittman said that research and development (R&D) deductions are on the table. "We saw pervasive support for that in a bipartisan bill in the House at the beginning of the year," she noted. She said the vote tally was 374 for the bill, while only 70 were against it. The bill included three TCJA provisions that have changed or started to sunset, which are: the Section 174 deduction, the calculation of adjusted taxable income for the Section 163(j) business interest expense deductibility limitation and the phaseout of bonus depreciation.

The bill failed in the Senate but not because of lack of support for the business provisions, said Pittman. Politics was one of the culprits for the failure. She highlighted that Sen. Mike Crapo (R-Idaho), thinking that Republicans would have more leverage after the 2024 election, did not offer as much support to Child Tax Credit changes as the bipartisan bill required. Pittman explained that the credit’s top-line amount was not the problem; its refundability was. The bottom line was that “there's just an ideological difference between the parties on how the credit should function," she stated.

Pittman explained why so many TCJA provisions are set to sunset at the end of 2025. "It was passed using reconciliation, which takes the use of the filibuster off the table in the Senate but comes with certain restrictions, including revenue restrictions within the budget window and an inability to increase the federal deficit outside of the budget window," she said. "Republicans weren't able to fit all of their priorities into these parameters permanently, so some provisions were made temporary. The corporate tax rate, which was what I consider the headline of the tax bill, was made permanent, but a lot of other provisions, including the individual rate cuts, were temporary and will expire at the end of 2025."

Although not discussed often, a bipartisan consensus exists in that Democrats would also like to extend tax cuts—the TCJA or an equivalent regime, Pittman noted. "We haven't seen the details for taxpayers making under $400,000, and that's the vast majority of taxpayers," she said. "So I think there is alignment in that Democrats and Republicans don't want to see tax increases. They don't want the TCJA to sunset for taxpayers making under $400,000 a year. The parties diverge on cuts for those making over $400,000."

Pittman said there is now much misinformation regarding the taxation of unrealized gains. For instance, an example on TikTok that indicated a $200,000 house where the value increases to $400,000 would cost the owner $50,000 on the $200,000 appreciation. "That's just not the case, so we're combating misinformation here," she said.

She added that Democrats have at least three proposals for a wealth tax. Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee, and Sen.Elizabeth Warren (D-Mass.) have two different proposals. The Biden Fiscal Year 2025 Green Book, which vice president and presidential contender Kamala Harris supports, has a third. 

"All three of these proposals are different," said Pittman. "But we don't think it's likely that this will become law,” and she explained why. For any of these proposals to become law, there would need to be a Democratic sweep, and the math in the Senate does not support that, she said. Even with a Democratic sweep, everyone would need to agree, and not all of the Democratic lawmakers have expressed support for such a tax, she added. Additionally, even if the Democrats successfully passed a wealth tax on unrealized appreciation in assets, it is highly probable that it will be challenged by the right.

"A recent Supreme Court decision was ultimately silent on whether there needs to be a realization to have a tax," Pittman said. "Four justices noted that they believe that there is a realization requirement, one justice noted that she does not believe there is such a requirement, and the other four justices were silent.” Thus, the likelihood of enacting a wealth tax while withstanding these pitfalls seems very low.

David Wagner, head of equity and portfolio manager at Aptus Capital Advisors, also expects that there will be a split Congress. He expects Republicans to take control of the Senate. He thinks that the Republicans will possibly win both West Virginia and Montana, giving them control of the Senate. This outcome will limit the size and level of tax increases if they pass.

The current statutory rate on domestic corporate income is 21%, which dipped from 35% in 2017, Accounting Today noted. However,  the total effective tax rate paid by the typical S&P 500 firm is 19%. Even though many individual cuts will be sunset in 2025, the corporate rate will remain unchanged.

When looking back at the TCJA in 2017, Wagner observed that the S&P 500 rallied by the same amount as the earnings boost it had gotten. From November 2017 to January 2018, the market rallied by 10%, as earnings were anticipated to receive a one-time boost of 11%. He said that this example indicates that making a material investment call solely based on taxes would be premature.

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