Republicans won a sweeping election victory last week, capturing the Senate and changing the landscape for tax legislation. Republicans picked up at least seven Senate seats and are likely to gain two more for a 54–46 majority when all the results are final. They also extended their control over the House, where they hold a commanding 243–79 majority, with several races still not decided.
But before the new Congress convenes in January, the current Congress will return on Nov. 12 for a lame duck session. The top items on the agenda will be extending the more-than-50 tax provisions that expired at the end of 2013 and avoiding a government shutdown on Dec. 11, when the continuing resolution on spending expires.
Negotiations over the expired tax provisions are expected to begin immediately. Republicans will not take over the Senate until January, but the election results give them more leverage. There is broad agreement on the basic approach taken by the Senate Finance Committee bill, which would extend nearly all the provisions for 2014 and 2015 without any revenue offsets. But Republicans are also pushing to make permanent and reform many of the provisions. Democrats generally oppose making the provisions permanent without revenue offsets.
Republicans have threatened to walk away from negotiations if they think they aren't getting enough from Democrats, and claim that there may not be enough Republican support in the House to pass a straight two-year extension. Republicans have hinted that without concessions from Democrats, they would rather postpone action until they take office in January or settle on just a one-year extension. Such an outcome could greatly delay the filing season and affect financial statements, and for now, the most likely outcome still appears to be an agreement on a two-year extension before the end of the year. See our Tax Legislative Update for a table detailing the status of each expired provision.
Republicans will be charged with resurrecting a floundering tax reform effort when they take over in January. Senate Minority Leader Mitch McConnell, R-Ky., is expected to become the new Senate majority leader. He said he spoke with President Obama after the election and that they agreed they can find common ground on tax reform in 2015. McConnell does have a track record of compromise. He and Vice President Joe Biden brokered the fiscal cliff tax agreement that made permanent most of the 2001 and 2003 Bush-era tax cuts, but allowed some to expire for high-income taxpayers.
Current Senate Finance Committee ranking minority member Orrin Hatch, R-Utah, is expected to become the new chair in 2015. He is a long-time member of the committee and has long been a champion of the research credit and easing restrictions on S corporations.
On the House side, both Paul Ryan, R-Wis., and Kevin Brady, R- Texas, are vying to replace former Ways and Means Committee Chair Dave Camp, R-Mich., who is retiring. Ryan is considered the heavy favorite. He is a long-time advocate of entitlement reform. While he was Budget Committee chair, his budgets consistently called for tax reform to reduce individual and corporate rates to 25%. House Speaker John Boehner, R-Ohio, is expected to retain his post in 2015. He has not been considered a strong advocate for tax reform over the last two years.
Major tax legislation remains an uphill battle. Republicans now control both chambers of Congress, but the Senate majority is well short of the 60 votes needed to overcome procedural hurdles like filibusters. Senate Democrats can still effectively block Senate legislation, and President Obama still retains veto power. The reality is that any tax reform in 2015 or 2016 would still need to be a bipartisan effort.
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