I’ve avoided it for long enough. Let’s talk about the election and what it means for your money.
We’re going to run through some background on how we got here, what the political landscape looks like, and how each possible outcome could play out.
The 2017 Tax Law
Just as a quick refresher, in late 2017 Congress passed a giant tax reform law (the Tax Cuts and Jobs Act, hereafter referred to as “TCJA”). The law was the biggest set of changes to the tax code since 1986, so I can’t cover everything here, but some highlights of it were:
- Standard deduction roughly doubled
- Personal exemptions were eliminated
- Personal tax rates were lowered across most brackets
- Corporate taxes were lowered from 35% to 21%
- The healthcare mandate penalty was ended
- Child tax credit was expanded to $2000
- Estate tax exemption increased to $13.6 million
- State and Local tax (SALT) capped at $10,000
- Business depreciation expensing (section 179) expanded
- Qualified Business Income (QBI) lets small business owners deduct 20% of their income
Now comes the tricky part. To get it passed under Reconciliation rules (ie, only requiring 50 Senators instead of 60), certain parts of the law had to be set to expire to keep the costs down inside of a 10-year window. Long story short, many of the above things will end in 2025 if Congress doesn’t pass a law explicitly extending them.
A lot of the reporting on this topic has been lazy and/or incorrect. Not ALL of the TCJA changes are going to expire at the end of next year – just some of them. For example, the corporate tax change is permanent and will be unaffected.
What will happen if the law isn’t extended?
- The standard deduction will fall approximately in half
- Tax rates for most taxpayers will go up (from 10%, 12%, 22%, 24%, 32%, 35%, and 37% to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively)
- Child tax credit goes back to $1000
- SALT cap of $10,000 is eliminated
- QBI is eliminated
In total, if the above parts expire on average the typical taxpayer will pay more in taxes. But whether the above changes are “good” or “bad” is entirely subjective and dependent on your personal situation. For example, a small business owner earning $150k per year who has two children and lives in Florida will be worse off by the above changes expiring (his tax rates will go up, his child tax credits will go down, he’ll no longer get QBI, and he doesn’t benefit from the SALT cap). In contrast, an unmarried taxpayer earning $200k per year and living in New York will likely benefit from the above changes (the slight increase in marginal rates is more than offset by the ability to deduct all state taxes).
The Political Landscape
As of this writing, the Presidential race is essentially tied. RealClearPolitics has Kamala Harris with a slight lead in the national vote, but the state-level polling (ie, what actually matters) is extremely close and all within the margin of error. It’s a jump ball at the moment.
The House is also very close (most polling has it around a 1-2 point race), but which party wins more seats will almost certainly be decided by who wins the White House. If Harris wins the presidency, Democrats will likely control the House; if Trump wins, Republicans will likely control the House.
The Senate is a little clearer. Democrats currently have a 51-49 advantage (counting independents that caucus with them). Republicans need to capture two seats to ensure control (or one if Trump wins, as the VP would break the tie.) The GOP has unanimously agreed to win the open seat in West Virginia with Joe Manchin’s retirement, meaning they only need to pick up one more (or none if Trump wins). They currently are strongly favored in Montana, and losing any of their current seats would be seen as a shocking upset. In short, Republicans most likely have this chamber.
All that said, we can still walk through each of the possible outcomes to game out what they would mean for the TCJA.
| Scenario | House | Senate | President | How Likely |
|---|---|---|---|---|
| 1 | Rep | Rep | Trump | Very Possible |
| 2 | Rep | Rep | Harris | Unlikely |
| 3 | Rep | Dem | Trump | Impossible |
| 4 | Rep | Dem | Harris | Unlikely |
| 5 | Dem | Rep | Trump | Possible |
| 6 | Dem | Rep | Harris | Very Possible |
| 7 | Dem | Dem | Trump | Impossible |
| 8 | Dem | Dem | Harris | Possible |
As you can see, there are eight possible outcomes with regards to the balance of power. Two of them are nonsensical, two are extremely unlikely, two are within the realm of possibility, and two are probably what will happen. Let’s walk through them from least to most likely.
Scenario 1: Rep House, Rep Senate, Trump Wins (Likely)
Since the race is currently tied, if Trump overperforms his polling (as he did in both 2016 and 2020) he will win the White House. The House and Senate follow along.
Scenario 2: Rep House, Rep Senate, Harris wins (Unlikely)
This would basically entail Harris winning by the skin of her teeth. Republicans win enough close races and the Senate and Harris squeaks through with 271 EVs. It could happen, but its much more likely that if she wins she drags the House along with her.
Scenario 3: Rep House, Dem Senate, Trump wins. (Impossible)
A Democrat Senate (without a VP tiebreaking vote) would mean that polls vastly underestimated both Jon Tester in Montana AND another candidate (in FL or TX maybe), but also still wound up with Democrats losing the House and the White House. Those things are mutually exclusive.
Scenario 4: Rep House, Dem Senate, Harris Wins (Unlikely)
Same as scenario 2, but with Jon Tester winning and no upsets anywhere else. Dems use a tiebreaking vote to control a 50-50 Senate. Tester is currently down ~6% in the polls so I wouldn’t count on this one.
Scenario 5: Dem House, Rep Senate, Trump Wins (Possible)
This would involve Trump losing the popular vote but winning the Electoral College (which is what happened in 2016). He loses a bunch of House seats in CA and NY but still cobbles together enough states to get to 270.
Scenario 6: Dem House, Rep Senate, Harris Wins (Likely)
Harris maintains her small lead and wins the House alongside her WH win. Tester still loses in Montana and there aren’t any crazy upsets elsewhere.
Scenario 7: Dem House, Dem Senate, Trump wins (Impossible)
Similarly, polls would need to underestimate Democrat enthusiasm significantly, but not enough for Trump to still eke out an Electoral College win. If Democrats won Florida or Texas (to secure a Senate seat) the electoral path for Trump to get to 270 is impossible.
Scenario 8: Dem House, Dem Senate, Harris Wins (Possible)
This would basically just be a systematic polling error and Dems do better across the board than they’re currently projected to. They win in Montana and also the House / Presidency.
What The Political Outcomes Would Mean for the Tax Law
Ignoring the scenarios that I labeled as Impossible or Unlikely (yes, I know that I have now just spoken them into existence), you’ll see that two of the remaining scenarios result in unified control and two result in split government.
With the unified control scenarios (Scenarios 1 and 8 above), the party in power would essentially get to do what they want. During campaign season you have to take tax proposals with a grain of salt, as certain things sound good on the trail but will never actually become law. That said, both parties have mentioned wanting to extend the increased standard deduction, extend the child tax credits, and have some form of QBI going forward. It’s easy to see most TCJA provisions getting extended under these cases, even if there would be some additional tinkering (Trump has mentioned lowering corporate taxes further, and Harris has mentioned increasing top rates, for instance).
Split control scenarios (Scenarios 5 and 6) get more dicey. Much like the quarterback of a football team, the President tends to get too much credit for good things and too much blame for bad things. If the TCJA were set to expire, there’s a strong incentive for the opposition party to do nothing and pin the tax hikes on Trump/Harris when a deal isn’t reached to extend anything. Some things with extremely broad bipartisan support could get extended (like the Child Tax credits), while it’s possible some other parts are only temporarily pushed back (such as moving the sunset date to 2027.) Congress has shown a fondness for kicking things slightly down the road so we can fight about it again in six months, so in a split-control scenario that gets my early prediction.
Now We Wait…
At the moment we’re just waiting for clarity. The morning after the election (or, if it’s close, 2-3 days after when my beloved Pennsylvania finishes counting) we’ll be able to point to one of the above outcomes and describe more fully what could happen. It will also help when we know which party has a majority (and the size of said majority) to better predict how easy or hard future tax changes might be.
I’ll send another update shortly after the election with things around estate law changes, unrealized capital gains tax, loss harvesting, etc. Worst case scenario we should still have ~14 months to get ready for tax increases so no need to panic yet.
As always, if you have any questions or need anything in the meantime please reach out to us.