Tax policy continued to be a central feature during the first full month of the Trump administration. Republicans in Congress pursued alternative strategies for legislation, which highlights a fundamental disagreement as to whether tax changes should be included in the first significant legislation of 2025. The conclusion of that phase of the debate is expected during March, which will confirm whether an extension of the Tax Cuts and Jobs Act (TCJA) and key tax promises from the campaign trail can be implemented during either the first half of 2025 or the second half of 2025. President Trump also undertook many executive actions related to tariffs, government funding, and the scale of the federal workforce. Viewing many of those executive actions together can provide clarity about the general terms of what will come next even if specific details are yet to be determined.
Read on for a roundup of some of the most significant recent tax policy developments.
- Competing strategies for tax legislation collide in Congress
- Trump includes some surprises in his tax legislation goals
- Tariffs move to the forefront
- A shrinking federal government? Sorting through many executive actions
- March outlook: Government funding complicates matters
Competing strategies for tax legislation collide in Congress
The Trump administration and Republican leadership in Congress have stated many policy goals that they wish to accomplish during 2025. Some of those can be pursued through executive action, as evidenced by the flurry of executive orders since inauguration day. However, the most significant policy aims require congressional action to create new laws and modify existing ones. In Congress, the month of February was largely consumed by consideration of presidential appointments, initiation of smaller legislative proposals, and procedural actions to set the stage for things to come.
Despite broad consensus among Republicans in Congress about the need for legislative actions, the details will be critical, as divergent views about relative priorities, the scale of change, and overall cost are readily found in public statements. Those dynamics are magnified when it comes to tax legislation given the pervasive impact of tax on the economy, social policy, and individuals across the country. However, before debate over the substance of tax legislation can begin, procedural questions about when and how such legislation will be pursued needed to be answered. That process oriented discussion intensified during the second half of February and will ultimately determine the path for tax legislation this year.
House and Senate leaders pursue alternative strategies
Tax legislation is enormously complicated even when it’s being negotiated among members of one political party. That dynamic could suggest one of two legislative strategies. The one bill approach would integrate tax changes into a more expansive bill. That process could allow each Republican member of Congress to find supportable aspects of such bill to facilitate compromise. The contrary approach would acknowledge that tax changes might simply add too much complexity that will significantly delay or even impede passage. Accordingly, a multi-bill strategy would accelerate other legislative priorities while saving the tax debate for another day.
The debate over the legislative approach began prior to February with House leaders favoring one bill and Senate leaders advocating for multiple bills. A sequence of events this month accelerated the collision course for these competing strategies.
- Early negotiations failed to bring consensus: Much discussion over tax changes and other legislation occurred during the month of January. However, questions about process and substance persisted. During the last week in January, House Republicans gathered for their annual policy retreat but failed to unify on key legislative matters.
- The Senate takes action: The lingering debate over one bill or two bills led Budget Committee Chairman Lindsey Graham (R-SC) to accelerate matters by advancing a multi-bill strategy in early February. Accordingly, that committee held a markup of its own resolution that focuses narrowly on border, defense, and energy measures while excluding tax. Advancing out of committee, this resolution, S.Con.Res.7, was adopted by a 52-48 margin by the full Senate on February 21, with one Republican voting against the measure.
- The House responds with its own plan: While the House was slower to act initially, it was quick to react with a resolution of its own. Following the announcement that the Senate Budget Committee would advance a multi-bill approach, House Republicans met with Trump at the White House on February 6. House leadership remained committed to its one bill approach, and Trump also expressed his support. The House Budget Committee completed a markup of its proposal on February 13 and approved a resolution that would include tax changes. That resolution, H.Con.Res.14, would allow for up to $4.5 trillion in tax cuts while also targeting $2.0 trillion in cuts to other programs. The House passed that resolution on February 25 by a 217-215 margin, with one Republican voting against the measure.
What comes next?
A budget resolution is a predicate for the budget reconciliation process, which is the legislative procedure by which tax changes and other policy goals will be enacted by Republicans. Given the passage of competing resolutions by the House and Senate, some form of compromise will be necessary to move forward. It’s worth noting that this is the very beginning stage in the legislative process, so consideration of specific details is still forthcoming. However, advancing budget resolutions albeit with competing strategies is a meaningful step.
As the House and Senate look to reconcile their competing strategies, two major topics will drive the conversation:
- The role of taxes. In the first place, related questions must be answered as to whether tax changes will be included and how significant they can be. The House resolution authorized pursuit of up to $4.5 trillion in tax cuts, but such amount may be insufficient to implement the permanent TCJA extension demanded by Senate Republicans or implement various campaign promises made by Trump.
- The hunt for spending cuts. The second topic is the question of the scope of spending cuts that must be included to offset tax changes and reduce the deficit. The House resolution targeted $2.0 trillion in spending cuts, with a corresponding reduction in the tax cuts that can be pursued if such spending cuts aren’t achieved. A wide variety of spending cuts have been discussed publicly, and this subject will likely be influenced by recent actions of the Department of Government Efficiency (DOGE).
Fundamentally, we do know that the process is rapidly coming to a conclusion about whether tax changes will be included in the first significant bill of Trump’s second term. As February draws to a close, there’s still a reasonable chance that taxes will be included in a one bill compromise agreed to between the House and Senate. However, continued friction on the legislative path could also cause Trump and Republican leaders to pivot to the muti-bill strategy in order to complete something earlier in the year.
Trump includes some surprises in his tax legislation goals
While the debate over legislative process has consumed most of the attention, some details have emerged about what might be included in a tax bill. Following the February 6 meeting with House Republicans at the White House, Trump outlined his goals for tax legislation. Many of the stated preferences aligned with campaign pledges but new details did emerge.
- Campaign promises: Trump campaigned on promises to exclude many types of income from taxation. In early February, he reiterated his expectation that tips, Social Security benefits, and overtime pay would be excluded from income. Additional details weren’t provided but will be important moving forward. Excluding such income, which is recognized by tens of millions of taxpayers, would reduce tax revenue by a substantial amount. The question of how to offset such costs through revenue-raising provisions (or cutting other spending) will be critical to the viability of income exclusions.
- Permanent extension of TCJA: The TCJA was a signature piece of legislation during the first Trump administration. The vast majority of that law will expire at the end of 2025, and Trump restated his desire for it to be extended on a permanent basis. Republicans are generally aligned behind the idea of a TCJA extension, but key questions remain unanswered. Congress could extend TCJA only temporarily, phase back in, or rework some of its provisions. More recently, key Senate Republicans went on the record stating their opposition to any TCJA extension that’s not permanent.
- SALT cap relief: The TCJA included an annual limitation on state and local tax deductions (the SALT cap) equal to $10,000 per individual or married couple filing jointly. Since enactment, such limitation has generated considerable interest and calls for its elimination. Earlier this month, Trump reiterated his support for providing relief from the cap. Additional details weren’t clarified, but the most recent statements may suggest that Trump prefers an increased deduction amount rather than full elimination of the SALT cap. Providing relief from, rather than elimination of, the SALT cap would reduce the overall cost of tax legislation, which may be important for congressional negotiations.
- Carried interest: The taxation of carried interests is routinely the subject of tax policy debates. A focus on carried interests ultimately led to the enactment of a new rule, under Section 1061 of the Code, as part of the TCJA. Since Trump signed the TCJA into law, it’s notable that he is raising the subject again. Unfortunately, additional details weren’t provided, so it’s unclear how Trump would prefer to amend or augment the existing rules. Coincidentally, the Biden administration also tried to curtail the favorable tax treatment of carried interests, but those efforts fell short during the negotiations over the Build Back Better Act.
- Sports team “tax breaks”: Trump’s focus on carried interest wasn’t the only surprising tax policy announcement he made following his meeting. He also called for ending, as the Press Secretary put it, “special tax breaks for sports team owners.” What exactly this means is unclear, although it could be that Trump is referring to the way in which owners generate tax amortization deductions on intangible assets or to the way tax-exempt municipal bonds are used to finance stadiums.
Tariffs move to the forefront
Tariffs aren’t income taxes, but they’re becoming increasingly intertwined with the broader tax and trade story in the United States. More specifically, the U.S. government is increasing its reliance on tariffs to achieve goals related to international trade, domestic production, national security, and more. This cycle was spurred on during Trump’s first administration, but the Biden administration also retained many of those tariffs. On the campaign trail, Trump made it clear that significant increases in all manner of tariffs would be a key policy tool. With a little more than a month in office, Trump has begun executing on those plans to achieve specific purposes, from raising nontax revenue to creating leverage over noneconomic policy matters.
- An “America First” trade policy: Trump set to work on tariffs immediately on inauguration day through a trade policy memorandum. The memo outlined an “America First” trade policy and directed federal agencies and the U.S. Trade Representative to evaluate U.S. trade policies and identify measures to reduce trade deficits, eliminate barriers that are considered unfair, and restrict trade that is consider a threat to national security. This document largely establishes a process for actions to come but is the foundation on which subsequent actions have been built.
- Canada and Mexico: The Trump administration in early February ordered the imposition of 25% tariffs on goods imported from Canada. But just hours before the tariffs were set to take effect, the U.S. agreed to delay the tariffs for a month after Canada agreed to commit more resources toward border security and drug trafficking. Similarly, tariffs on Mexican goods were initially ordered on February 1, but were also paused until early March for the same basic reasons: the Mexican government agreed to send more officers to police the border for drug trafficking and illegal immigration. The transactional nature of these developments might suggest that future tariffs may also be avoided pending broader trade negotiations.
- Steel/Aluminum: The tariff story became more complicated as Trump ordered a 25% tariff on all imports of both steel and aluminum. These tariffs are set to go into effect March 12 and will apply without exception to Canada and Mexico. During his first term, Trump imposed a 25% tariff on steel and a 10% tariff on aluminum. There were few exemptions during the first term, and it took Trump roughly a year to allow exemptions for Canada and Mexico. It’s too early to say whether these tariffs might follow a similar pattern, although Trump has signaled he may be open to some exemptions.
- China: China stands apart from Canada and Mexico. Beyond steel and aluminum, Trump announced a 10% tariff on all goods imported from China on February 1. And unlike the announced tariffs as to Canada and Mexico, this tariff went into effect without pause, and with very limited exemptions. That order was quickly amended on February 5 with respect to duty-free de minimis imports. China responded immediately with levies of its own, mostly directed at its imports of U.S. energy. This early exchange follows a pattern going back to the first Trump presidency, when the two countries began to act and react in a series of tariff actions that extended through the Biden administration.
- Reciprocal tariffs: In mid-February, Trump directed the Secretary of Commerce and the U.S. Trade Representative to propose levies on a country-by-country basis to begin imposing reciprocal tariffs. Such policy was memorialized in a February 21 order and focuses on tariffs, taxes, regulations, or any other policies of foreign governments that serve to undermine the competitiveness of U.S. companies. Part of the focus is on countries that impose digital taxes on U.S. tech multinationals, but the order goes further. Commerce Secretary Lutnick has indicated the administration might be open to easing reciprocal measures to the extent other countries lower their own levies or otherwise move to remove trade barriers. Lutnick also indicated that initial reports would be completed by April 1, which would allow Trump to take action following that date.
- Copper: During the last week of February, Trump also issued an order directing Lutnick to consult with other departments to evaluate national security risks associated with copper imports. Such order calls for recommended actions to mitigate such risks and strengthen the U.S. copper supply chain.
Business planning in an evolving landscape
It’s now abundantly clear that tariffs will continue to play a prominent role in the economy even if the specific details are not yet clear. To that end, businesses would be well-advised to evaluate all available options for managing the impact of tariffs that have been implemented, proposed, or might be considered moving forward. The starting point for such planning is a holistic review of trade policy implications for the business. Individual developments should also be monitored to confirm when additional tariffs are expected to be imposed and what planning actions might be taken to counter their impact. Finally, businesses should continue to engage with their elected representatives and trade organizations to identify impacts of tariffs and advocate for potential modifications.
A shrinking federal government? Sorting through many executive actions
The Trump administration has set off on a breakneck pace with new orders being announced every few days. One notable aspect of this was the establishment of the DOGE on January 20, which has led to a flurry of news, including the identification of spending programs that may be slated for cuts and corresponding litigation over actions taken by DOGE. In that environment, it’s possible to get lost in the headlines and details of each action. But, what do they all add up to? In simple terms, it appears that we are headed toward a future with a federal government that will be reduced in terms of total spending and headcount. That apparent trend has direct implications for tax administration, but the ripple effects will likely be felt across the country for months or years to come.
- Federal spending under a microscope: Many different actions can be viewed together as an attempt to find ways to reduce overall spending, even for programs that were previously authorized by Congress. Those include many public actions by DOGE to identify perceived waste and abuse, as well as a funding freeze ordered and then rescinded by the Department of Office and Management budget. Going further, Trump issued an order stating the policy of reducing the size of the federal government, and an order requiring departments and agencies to disclose the details of every government program, contract, or grant that’s found to be wasteful and subject to cancellation. The focus on reducing spending can also be read together with actions in Congress, where key Republicans are requiring significant cuts to spending programs to offset any tax cuts.
- An evolving federal workforce: Similar to the spending targets discussed above, the White House is pursuing cuts to the headcount found within the federal workforce. A sequence of events on this front include the implementation of a hiring freeze, establishment of a directive for federal workers to return to the office, extension of buyout offers for workers to leave their positions, and publication of a new order established a plan that limits hiring to one worker for every four workers that depart the federal government, among others.
Planning for an evolving federal government
There will be many developments and legal challenges to come. However, the following are key impacts that are anticipated based on recent developments.
- Taxpayers interfacing with the IRS: Current reporting indicates that there are already significant changes to staffing within the IRS. Such changes will have varied impact but do suggest an upcoming period involving customer service challenges, delayed examination and appeal activities, and limited publication of guidance. Operational changes at the IRS could alleviate challenges over some future timeline. However, the simple answer is that taxpayers should plan for communication and coordination challenges with the IRS over the coming weeks and months.
- Businesses providing goods/services to the federal government: Those directly engaged with the federal government are likely subject to new challenges as spending programs across the board are reviewed. In the short term, delays in payment may be possible even if the spending is ultimately confirmed. Business planning in this environment may evaluate the significance of payments from the federal government, the likelihood of changes, and alternative markets for the underlying goods and services.
- Businesses and organizations receiving federal grants/loans: Similarly, organizations and businesses relying on federal grants and loans should carefully monitor developments and review their potential implications. Current actions by DOGE and directions from Trump may pause payments in the short term. However, legal disputes will clarify the extent to which the Trump administration may alter funded programs. Looking ahead, Congress could also take action, so it’s important to understand the extent of financial exposure if changes are made to a particular program.
March outlook: Government funding complicates matters
Irrespective of the path forward for tax legislation or other policy goals, the government will run out of funding on March 14. In recent years, Congress has periodically utilized short-term continuing resolutions to fund the government based on policies previously approved. The current deadline was established in December through a deal brokered among Republicans and Democratic members of Congress, which included some last-minute negotiations. With that date rapidly approaching, the funding debate is expected to consume significant attention during the first half of March.
Negotiations over government funding both complicate other legislative activity and are influenced by such other developments. For example, Democratic members will likely push for limitations on DOGE or confirmation that certain spending programs will not be altered given recent developments. Similarly, the budget resolution debate discussed above has entrenched the positions of many Republicans regarding deficits and spending programs. Ultimately, a bipartisan compromise will be necessary to avoid a government shutdown. The substance of that legislation and the resulting impact on tax legislation remain key questions to be answered over the coming weeks.
