BPC Letter to Tax Committee Leaders on 2025 Tax Priorities

October 16, 2024

The Honorable Ron Wyden
Chairman
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, D.C. 20510

The Honorable Mike Crapo
Ranking Member
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, D.C. 20510

The Honorable Jason Smith
Chairman
House Committee on Ways and Means
1139 Longworth House Office Building
Washington, D.C. 20515

The Honorable Richard Neal
Ranking Member
House Committee on Ways and Means
1139 Longworth House Office Building
Washington, D.C. 20515

Submission of the Bipartisan Policy Center to Tax Committee Leaders

Dear Chairman Wyden, Chairman Smith, Ranking Member Crapo, and Ranking Member Neal,

On behalf of the Bipartisan Policy Center and our (c)(4) affiliate, Bipartisan Policy Center Action, we are pleased to share our views on expiring federal tax provisions with you and your colleagues on the Senate Finance and House Ways and Means Committees. Thank you for your work thus far on these critically important issues, which will play a large role in determining the economic and fiscal trajectory of the United States for years to come.

About BPC and BPC Action

Since 2007, BPC and BPC Action have successfully advanced policies that stimulate a robust economic engine and help unlock our country’s potential for each and every American. We are recognized leaders in producing bipartisan policy solutions that can stand the test of time. We work with stakeholders to promote tax reforms that position large and small businesses to flourish, provide support for workers and families, spur economic growth, and bring in sufficient revenue to meet the nation’s spending obligations.^[i]

Tax Reform and the Budget Outlook

Next year presents both incredible opportunities and daunting challenges for Congress. The prospect of bipartisan tax reform centers around the December 2025 expiration of trillions of dollars in tax provisions from the 2017 Tax Cuts and Jobs Act.^[ii] One leading challenge: ensuring that any tax cut extensions do not add trillions of dollars to the national debt.^[iii]

Adding trillions to the debt or adopting a “current policy” baseline that assumes the tax cuts have no budget impact would be imprudent. We also understand lawmakers in both parties are exploring provisions to offset the cost of tax cut extensions, and we look forward to working with you as BPC develops a menu of practical offset options for consideration.

BPC believes it is achievable to balance the fiscal impact of tax cut extensions with the strong support on both sides of the aisle for extending and expanding tax policies that best support American workers, families, and businesses. Below is a list of targeted tax reform priorities that advance these goals within the context of a fiscally responsible package that can garner broad political support.

Enabling Businesses Large and Small to Flourish

We recognize the importance of catalyzing economic growth, business investment, and job creation through the tax code. A predictable code with permanent rules is an important factor in what many have called a “pro-growth” system, but not all tax provisions are created equal. We believe the following priorities would enable U.S. businesses large and small to flourish:

• Restoring Full Deductions for Research and Development: From 1954 through 2021, a business could deduct the full amount of an R&D investment from its taxable income in the year it made the investment.^[iv] Since 2022, businesses have been required to amortize, or spread out, those deductions over five years, making R&D investment more expensive for businesses, including for start-ups that depend on it to innovate and grow.^[v] Restoring full R&D expensing would grow the economy and treat R&D like the legitimate business expense it is. Hundreds of lawmakers in both parties support restoring full R&D expensing.^[vi]
• Helping Small Businesses Expand Benefits for Workers: We acknowledge that businesses large and small play an indispensable role in strengthening workers and their families. We recommend making permanent the 45S credit for employer-provided paid family and medical leave and expanding 45S and the 45F credit for employer-provided child care. Bipartisan legislation introduced this Congress would make 45S permanent before it expires next year and expand assistance to more small businesses.^[vii] BPC also supports making the 45F credit fully refundable, enhancing it for the smallest businesses, and allowing multiple employers to contract with a child care provider to claim the credit, which would expand the number of businesses eligible to take advantage of 45F and provide child care for their employees.^[viii]
• Ensuring American Leadership in Clean Energy: Recent federal clean energy tax incentives are bolstering our energy security and have put the U.S. on a path to global leadership in building new technologies while supporting domestic jobs and onshoring manufacturing. Companies are already using these tax incentives—many of which have bipartisan support—to make major investments in the domestic energy industry and associated infrastructure. Certainty and stability in the energy tax code is critical for these businesses to invest with confidence and ensure long-term success for projects that have already broken ground.
• Extending Bonus Depreciation for Machinery and Equipment: Normally, businesses must spread out deductions for investments in machinery and equipment over several years. Bonus depreciation provides accelerated tax deductions for those investments during the year that eligible assets are placed into service.^[ix] TCJA provided temporary 100% bonus depreciation from 2018 through 2022, but those bonus deductions are phasing down to 0% through 2026. Extending bonus depreciation would grow the economy and increase business investment.^[x]

While the above list does not cover the depth and breadth of BPC’s tax policy recommendations to support businesses large and small, these are a few options that are capable of securing strong bipartisan support and are sustainable from a budgetary perspective.

Supporting Workers and Families

The Tax Relief for American Families and Workers Act, which the House passed earlier this year, balanced provisions that would grow the economy, responsibly offset tax cuts, and support workers and families. This provides a great starting point heading into next year’s tax policy negotiations. As lawmakers in both parties look to continue and expand support for workers and their families in 2025, we highlight a few critical policies:

• Expanding the Child Tax Credit (CTC) in a Targeted Manner: The CTC has spurred plenty of debate in Congress over the past few years, but at its core the credit has earned the support of both parties and financially boosted millions of families. While large expansions to the CTC next year may not fit within budgetary constraints, targeted reforms can support those who need it most, maintain incentives to work, and be fiscally sustainable.^[xi] A bipartisan vision for the CTC is clear and achievable: ensure the credit sustains parental attachment to the workforce while delivering additional aid to working parents who are struggling to get by.^[xii]
• Improving Housing Affordability: At the heart of today’s housing affordability challenge is an acute shortage of affordable rental homes and entry-level homes for sale. Two of BPC’s recommendations to modernize the Low-Income Housing Tax Credit (LIHTC)—increasing allocations available to states and reducing the amount of bond financing needed to access credits—were included in the House-passed bipartisan tax deal this year.^[xiii] Other recommendations to modernize LIHTC and incentivize new investment in entry-level homes are included in the Affordable Housing Credit Improvement Act (AHCIA) and the Neighborhood Homes Investment Act (NHIA).^[xiv]
• Addressing the Rising Cost of Child Care: Two existing features of the tax code help parents afford the rising cost of child care: the Child and Dependent Care Credit (CDCTC) directly defrays the cost of child and dependent care for parents, while dependent care assistance programs (DCAPs) allow parents and their employers to set aside wage income tax-free for child care purposes.^[xv] Lawmakers should modernize these tax provisions by making the CDCTC fully refundable, allowing low-income families to access it, and decoupling the CDCTC and DCAPs so that parents can tap into a DCAP without having to give up the CDCTC.^[xvi]
• Reducing Improper Payments: Lawmakers and the IRS will need to ensure smooth implementation of any 2025 policy changes for taxpayers. Inefficient administration continues to limit the effectiveness of many tax provisions, including for credits like the Earned Income Tax Credit (EITC) and CTC. Improper payment rates have remained high in recent years for both credits, hovering at 33.5% ($21.9 billion) for the EITC and 14.5% ($0.5 billion) for the refundable portion of the CTC in fiscal year 2023.^[xvii] Congress must make it easier to administer critical tax programs accurately and efficiently. BPC supports policies that would mitigate the impact of these erroneous payments on workers, families, and federal revenues.^[xviii]

We look forward to working with you on these provisions and many more affecting workers and families—such as individual tax rates, the standard deduction, personal exemptions, and the Earned Income Tax Credit (EITC)—as the 2025 tax expirations approach.

BPC is a Resource

BPC commends you and your colleagues for undertaking a fulsome examination of tax policy and we appreciate the ability to provide input into this process. Next year represents a chance for Republican and Democratic lawmakers to demonstrate their commitment to the American people and to fiscal responsibility by engaging with a diverse range of stakeholders in bipartisan policymaking. Together you can enact once-in-a-generation tax reform that enables large and small businesses to flourish, provides support for workers and families, spurs economic growth, and brings in sufficient revenue to meet the nation’s spending obligations.

We know forging enduring tax policy that can garner broad political support is not easy. BPC stands ready to work with Congress as you confront the difficult economic and budgetary questions raised by next year’s tax policy expirations. You can keep up to date with BPC’s latest tax research and policy development at https://bipartisanpolicy.org/tax/.

Thank you for your consideration and for your service to the American people.

Sincerely,

 

Margaret Spellings
President and CEO, Bipartisan Policy Center

Michele Stockwell
President, Bipartisan Policy Center Action

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[i] Andrew Lautz, “How Does U.S. Tax Policy Affect Our National Competitiveness Strategy?” Bipartisan Policy Center, June 26, 2023. Available at: https://bipartisanpolicy.org/blog/tax-policy-national-competitiveness-strategy/.

[ii] Margot L. Crandall-Hollick, Donald J. Marples, Brendan McDermott, “Reference Table: Expiring Provisions in the “Tax Cuts and Jobs Act” (TCJA, P.L. 115-97),” Congressional Research Service, November 21, 2023. Available at: https://crsreports.congress.gov/product/pdf/R/R47846.

[iii] Andrew Lautz, “The New Cost for 2025 Tax Cut Extensions – $5 Trillion,” Bipartisan Policy Center, May 13, 2024. Available at: https://bipartisanpolicy.org/blog/the-new-cost-for-2025-tax-cut-extensions-5-trillion/.

[iv] Congressional Research Service, “TAX EXPENDITURES: Compendium of Background Material on Individual Provisions,” December 2022. Available at: https://www.govinfo.gov/content/pkg/CPRT-117SPRT49569/pdf/CPRT-117SPRT49569.pdf#page=91.

[v] Jack McGee, “Research and Development Expensing: Impacts of Recent Changes on Energy Innovation,” Bipartisan Policy Center, November 14, 2023. Available at: https://bipartisanpolicy.org/blog/research-and-development-expensing-impacts-of-recent-changes-on-energy-innovation/.

[vi] Andrew Lautz and Rachel Snyderman, “Congress is Running Out of Time to Fix a Critical R&D Tax Issue in 2023,” Bipartisan Policy Center, November 2, 2023. Available at: https://bipartisanpolicy.org/blog/congress-is-running-out-of-time-to-fix-a-critical-rd-tax-issue-in-2023/.

[vii] Emily Wielk, “What’s in the Bill: Paid Family and Medical Leave Credit Extension and Enhancement Act,” Bipartisan Policy Center, January 29, 2024. Available at: https://bipartisanpolicy.org/blog/45s-tax-credit-enhancements-2024/.

[viii] Linda K. Smith, Caroline Osborn, and Brittany Walsh, “The Employer-Provided Child Care Credit (45F),” Bipartisan Policy Center, November 8, 2022. Available at: https://bipartisanpolicy.org/explainer/employer-provided-child-care-credit/.

[ix] Andrew Lautz and Arianna Fano, “The 2025 Tax Debate: Cost Recovery Provisions in TCJA,” Bipartisan Policy Center, July 12, 2024. Available at: https://bipartisanpolicy.org/explainer/the-2025-tax-debate-cost-recovery-provisions-in-tcja/.

[x] Alex Arnon, Jon Huntley, and Ed Murphy, “The Build It in America Act: Budgetary and Macroeconomic Effects of Title I,” Penn Wharton Budget Model, July 6, 2023. Available at: https://budgetmodel.wharton.upenn.edu/issues/2023/7/6/build-it-in-america-act-title-i.

[xi] Shai Akabas, Rachel Snyderman, Nicko Gladstone, and Andrew Carothers. “How to Sensibly and Permanently Expand the Child Tax Credit and Earned Income Tax Credit,” Bipartisan Policy Center, August 23, 2021. Available at: https://bipartisanpolicy.org/report/bpc-ctc-eitc/.

[xii] Andrew Lautz and Rachel Snyderman, “Breaking Down the Child Tax Credit: Refundability and Earnings Requirements,” Bipartisan Policy Center, December 18, 2023. Available at: https://bipartisanpolicy.org/blog/breaking-down-the-child-tax-credit-refundability-and-earnings-requirements/.

[xiii] Francis Torres, “Housing Credit Takeaways from the Proposed Bipartisan Tax Deal,” Bipartisan Policy Center, January 22, 2024. Available at: https://bipartisanpolicy.org/blog/housing-credit-takeaways-from-the-proposed-bipartisan-tax-deal/.

[xiv] Advisory Committee of the J. Ronald Terwilliger Center for Housing Policy, “Letter to Congress on AHCIA and NHIA,” Bipartisan Policy Center, November 30, 2023. Available at: https://bipartisanpolicy.org/letter/letter-to-congress-on-ahcia-and-nhia/.

[xv] Caroline Osborn, “Interactions Between the CDCTC, DCAP, and 45F,” Bipartisan Policy Center, July 12, 2023. Available at: https://bipartisanpolicy.org/explainer/interactions-between-the-cdctc-dcap-and-45f/.

[xvi] Bipartisan Policy Center, “Child Care Tax Priorities for the 118th Congress,” May 2023. Available at: https://bipartisanpolicy.org/download/?file=/wp-content/uploads/2023/05/BPC_ECI_Tax_Priorities_for_118th_Congress.pdf.

[xvii] Treasury Inspector General for Tax Administration, “Assessment of Fiscal Year 2023 Compliance with Improper Payment Reporting Requirements,” Report Number 2024-400-026, May 2024. Available at: https://www.tigta.gov/sites/default/files/reports/2024-05/2024400026fr.pdf.

[xviii] Emily Wielk, Andrew Carothers, and Rachel Snyderman, “Claiming Complexity: Solutions to Improve Take-up and Administration of the Child Tax Credit and Earned Income Tax Credit,” Bipartisan Policy Center, September 2022. Available at: https://bipartisanpolicy.org/report/claiming-complexity/.