Tax Reform Requires Stability in the House GOP

T he most important domestic-policy goal of the next Congress is tax reform — that is, addressing the expiration of much of the Tax Cuts and Jobs Act of 2017 (TCJA). There isn’t a mandate to do much else on the fiscal front, since President-elect Donald Trump has said the main drivers of the government’s overspending problem (Social Security and Medicare) are off the table. There may be some ability to cut spending on student loans, food stamps, Medicaid, and federal-employee compensation, but tax policy will be at the top of the agenda.

It’s imperative given the small margin the GOP majority will have in the U.S. House that it addresses tax reform quickly, while political capital is at its height and before there’s any danger of the chamber flipping control to the Democrats in the midterm elections.

What therefore must be avoided at all costs is a repeat of the blood-letting civil war among the House GOP that the country was treated to in 2023. For months, Speaker Kevin McCarthy (R., Calif.) fought to hang onto his job amid constant attacks from his own colleagues. Eventually, like the dog who finally caught the moving car, McCarthy’s opponents succeeded in toppling him. Then the most reluctant interim speaker of all time, Representative Patrick McHenry (R., N.C.), presided over vote after vote to try to find someone — anyone — who could get to 218 Republican votes.

Eventually, after one potential speaker after another fell just short, a compromise candidate emerged — Representative Mike Johnson (R., La.). He was an unknown entity to most of the country, including the Beltway GOP institutions of the conservative-movement groups and the downtown business community. He had no meaningful relationships in the Republican donor world, and had not been a fixture in campaigns and fundraising (which was the bread and butter of his predecessor, McCarthy). He had what was widely considered an impossible job — managing 221 unruly Republicans in a chamber that needs 218 votes to get anything done.

Plowing into the work, by all accounts Johnson pulled it off. He developed good relationships with donors and the campaign world, earned the trust of his members to the point that there were no more coup attempts, and made an effort to get to know coalition allies in the conservative and business communities. What could have been just another GOP self-inflicted disaster turned into a surprisingly good pick. Presiding over relative peace in the U.S. House’s daily work with deft member-management skills, Johnson also managed to raise more campaign cash than any of his predecessors and crisscrossed the country to personally campaign for hundreds of GOP incumbents and challengers.

It would be monumentally stupid for the House GOP to change horses in midstream. The caucus does not have the luxury of wasting all its political capital on a damaging internecine feud that would drag on for weeks or months. Doing so would mean a House GOP majority in name only would emerge, utterly incapable of tackling the very serious business of tax reform and getting spending and debt under control. That would be a wasted opportunity to deliver for American families and businesses.

What are the stakes on taxes? The Tax Cuts and Jobs Act had three main parts, but only one of them (corporate-income-tax reform) was made permanent due to budget-reconciliation constraints. The other two parts — middle-class tax relief and family/non-corporate business-tax reform — expire at the end of 2025. If nothing is done next year, everyone who works in America will see a pay cut in January 2026, and Main Street businesses will face massive tax increases.

Let’s start with working families. Tax rates on the middle class (as the Democrats define it, i.e., roughly those making less than $400,000 per year) used to be spread across four brackets of 10 percent, 15 percent, 25 percent, and 28 percent. The Tax Cuts and Jobs Act reduced these rates to 10 percent, 12 percent, 22 percent, and 24 percent. If you had a job, you got a tax cut right away in the form of a bigger after-tax paycheck and direct deposit.

The child tax credit for middle-class families doubled from $1,000 to $2,000 per child. The dreaded “Alternative Minimum Tax” (or “AMT,” a parallel and more pernicious tax code that millions of families in blue areas were trapped in) was all but repealed. Itemized deductions were replaced (for all but the wealthiest families) by a new, doubled “standard deduction” of (in today’s dollars) about $30,000 for a married couple and half that for singles. The percentage of families choosing this more generous standard deduction instead of the old shoebox of itemized deductions increased from 67 percent before the TCJA to 91 percent today.

As a result, tax filing became simpler for most families, and taxes went down for them by thousands of dollars per year. If Congress doesn’t act, all these tax cuts will permanently expire at the end of 2025. The AMT and the itemized-deduction shoebox will come back. The child tax credit will be cut back in half from $2,000 to $1,000 per child. Tax rates will go up, and payroll direct deposits will go down. Families struggling to deal with the inflation hangover of the Biden years will have even less money to pay the bills and feed their kids.

Main Street businesses will also be on the hook. Successful family businesses saw their effective marginal-income-tax rate drop from nearly 40 percent to nearly 30 percent as a result of the TCJA, a hearty one-quarter reduction. Reversing this tax-rate cut would mean a massive marginal-income-tax hike on hardware stores, car dealers, restaurant franchises, and the like. Job layoffs and shuttered storefronts would surely follow.

That’s not all that’s at stake for family enterprises. The “death tax” has its own standard deduction, and it doubled under the TCJA to $14 million in today’s dollars. That figure would get cut in half, and thousands of successful Main Street companies would again have to meet with the undertaker and their tax accountant on the same day.

The TCJA also freed smaller businesses of complex amortization and depreciation tables that required them to deduct expenses over many years instead of all at once. It included 100 percent full expensing for business equipment such as computers, machinery, and furniture. It increased small-business-expensing levels. It allowed restaurants, retail shops, manufacturers, and office buildings to expense big internal improvements the first year. It continued full expensing of research costs. For companies with revenues of less than $25 million, it allowed things like inventory and goodwill to be immediately deducted. All these, too, would go away with the TCJA’s expiration.

The TCJA, along with the deregulation and anti-deep-state agenda pushed by President-elect Trump, is absolutely essential to increasing economic growth and jobs while bringing down inflation. There is no hope of making a dent in the federal government’s debt spiral without a roaring economy throwing off tax revenues to pair with spending austerity. Letting the TCJA’s tax relief expire risks a recession and electoral disaster for the GOP in the 2026 midterm elections.

Extending this tax relief, ideally on a permanent basis, is the “you had one job” meme of the incoming GOP House. The best way to screw it up would be to have a damaging leadership contest right off the bat. So House Republicans should keep the team that got the majority in place, starting with Speaker Mike Johnson. The American people don’t care who runs the GOP, but they will know whom to blame if their taxes go up.