Democrats, Republicans Lay Groundwork for 2025 Tax Priorities

A Senate hearing previewing the 2025 tax debate underscored Democrats’ goals to increase taxes on the rich, while Republicans doubled down on support for a key expiring business tax deduction in the 2017 GOP tax law.

Democrats renewed their dividing line for raising taxes, vowing that their proposals would leave people with an income of $400,000 or less unscathed. Some suggestions included removing stepped-up basis, in which the basis of appreciated assets are adjusted to their fair market value when the original owner dies, and increasing the capital gains tax rate.

“That kind of trickery isn’t available to nurses and firefighters and people in the trades,” Senate Finance Committee Chair Ron Wyden (D-Ore.) said of wealthy tax avoidance strategies during a Thursday committee hearing. Wyden has previously introduced proposals to crack down on tax avoidance by wealthy taxpayers, including a bill that targets certain uses of grantor retained annuity trusts.

Republicans focused on the 20% deduction for pass-through businesses. The goal of the deduction was to put the tax rate for partnerships and S corporations on par with the lowered corporate rate. The GOP tax law slashed the corporate rate from 35% to 21%.

Unless Congress acts, many of the tax cuts in the 2017 law expire, including the pass-through deduction.

That break is key for small business growth, Republican committee members said. Jeff Brabant, vice president of federal government relations at the National Federation of Independent Business, wants the deduction made permanent and said small businesses may raise prices and cut jobs without the deduction.

“Small business owners have repeatedly said that extending this deduction is their top priority,” Finance ranking member Mike Crapo (R-Idaho) said.

Republicans also said removing stepped-up basis or lowering the exemption for estate taxes would be another blow to small businesses. The 2017 law doubled the exemption from taxes for estates.

The parties also disagreed on the level of tax avoidance from high-income people. Republicans pointed to a Joint Committee of Taxation report released Wednesday that said the top 0.01% of earners paid an average federal tax rate of 34% in 2019. Wyden called the report “funny math” that doesn’t include the full picture of wealth for the richest people in the nation.

Republicans argued that allowing the 2017 law to expire would decimate any economic growth that the law encouraged. Democrats pointed to the $78 billion tax bill, which passed the House but was blocked by Senate Republicans, as an example of their willingness to work across party lines. The bill would have restored some expired business tax breaks and boosted the child tax credit.