2025 tax reform: Unpacking the challenges ahead

After his inauguration, President Donald Trump embarked on his second term, ready to pursue his ambitious plans and priorities during the critical first 100 days. The 119th Congress holds a narrow Republican majority in both chambers, setting the stage for a robust legislative agenda, including the potential use of a reconciliation bill. This budget reconciliation process allows advancing tax cuts and other key priorities without requiring a 60-vote threshold in the Senate.

A pressing question before Congress is how to effectively implement Trump’s agenda. The key debate among Republicans centers on whether to proceed with a single reconciliation bill (combining measures on border security, energy policy and tax policy) or two separate bills (focusing on border security first, followed by energy and tax policy).  

Much of the 2017 Tax Cuts and Jobs Act will expire by the end of 2025, risking a tax increase on many businesses, families and individuals. Key consequences include:

» Individual tax rates will return to pre-2017 levels, with a top rate of 39.6% instead of 37%.

» The standard deduction will revert to lower pre-2017 levels, adjusted for inflation.

» The $10,000 cap on state and local tax (SALT) deductions will expire.

» The estate and gift tax exemption will drop to about $5 million, adjusted for inflation.

» Pass-through businesses will lose the 199A small-business 20% deduction for qualified income.

Narrow margin in the House

Republicans now control the House of Representatives, but with vacancies caused by departures and appointments to the Trump administration, the majority margin is razor thin. Republicans have a 219-215 margin, which will temporarily shrink to 217-215. Until these seats are filled, even a single defection could jeopardize the passage of legislation. The narrow margin will make it difficult for Speaker Mike Johnson, R-La., to manage and unite the various GOP House factions and groups while granting individual lawmakers enormous leverage over every piece of legislation brought to a vote.

Evidence of internal positioning has already emerged, with factions including the conservative House Freedom Caucus and the SALT Caucus (composed of blue-state Republicans) seeking to assert their own priorities. The House Freedom Caucus suggested increasing the corporate tax rate to offset the cost of the TCJA, while the SALT Caucus is pressing for an increase in or elimination of the cap on individual state and local tax deductions. 

These early power grabs haven’t derailed Johnson yet. He laid out an ambitious timeline for one “big, powerful bill,” with the budget resolution being finalized by Feb. 27 and the reconciliation bill complete by April. Working closely with Trump to ease the concerns of Republicans across the conference, tax reform in the House is full steam ahead.  

Additional campaign promises  

The reconciliation bill will include TCJA tax extenders, a repeal of green energy provisions and some of the campaign promises emphasized by Trump during his election rallies. In addition to raising import tarriffs, tightening border security and reducing the child tax credit, the promises include eliminating federal taxes on tips, removing taxes on Social Security income, eliminating the tax on overtime pay and car loan interest, and further reducing the corporate tax rate. Delivering on these and other campaign commitments will significantly increase the overall cost of the final reconciliation bill.

The question becomes how much lawmakers are willing to add to the deficit. Traditionally, Republicans have had concerns about adding to the deficit, but it’s hard to see how this tax bill will get across the line without doing so. It could create a discussion about restricting the size of the bill, in which case some campaign promises may fall off.

$4.5 trillion price tag and national debt  

The Congressional Budget Office estimates that extending TCJA tax provisions would cost $4.5 trillion over the next decade. This figure excludes any additional provisions that may be included in a budget reconciliation bill beyond simply extending TCJA, which could add trillions of dollars to the total cost. 

Implementing Trump’s extensive agenda will be extremely expensive. Without offsetting measures, it is likely to further increase the already significant national debt, which already exceeds $36 trillion. Recent reporting highlighted the federal deficit is expected to hit $1.9 trillion this year and grow to $2.7 trillion by 2035. In 2035, the deficit is estimated to equal roughly 6.1% of gross domestic product, far more than an average of 3.8% over the past 50 years.   

Congress must address the debt ceiling, which limits the federal government’s ability to incur additional debt. Trump has expressed a preference for raising or eliminating the debt ceiling to facilitate the swift implementation of his agenda. However, a faction of the House Republicans remains firmly opposed to any increase in or elimination of spending limits without accompanying spending reforms

Inflation and interest rate concerns  

Three years of high inflation and heightened interest rates pose challenges to the implementation of Trump’s agenda. Persistent inflation, coupled with increased borrowing costs for the government, businesses and individual Americans, could complicate the passage of the reconciliation bill. Although the impact of higher interest rates on American consumers is well known, these rates also significantly increase the government’s cost of servicing the national debt, with annual interest payments nearing $1 trillion.   

Trump’s campaign pledge to impose across-the-board tariffs and implement mass deportations of undocumented immigrants adds inflationary pressure by increasing costs and reducing a key segment of the U.S. labor force. The administration and Congress must carefully navigate these constraints to advance their legislative agenda without worsening inflation or triggering adverse economic consequences.  

What comes next  

As the first quarter of 2025 unfolds, the reconciliation bill and broader tax reform will take center stage. However, the path forward is fraught with challenges. Legislative strategy, party debates and fiscal concerns will play key roles in shaping its outcome. Republican lawmakers must balance policy goals and Trump’s agenda with economic realities to deliver reforms that address both immediate needs and long-term priorities.  

In the House, Democrats sit on the sideline for now — but are eagerly awaiting opportunities to engage in bipartisan legislation. With government funding expiring in March, the debt ceiling hitting a peak over the summer and the TCJA expiring in December, there are many upcoming inflection points that will challenge Congress.

Jennifer Fox is vice president of federal affairs with Finseca. Contact her at [email protected].