Here Are Nine Economic Policy Stories I'll Be Watching Next Year

Whatever else happens, Congress will make major fiscal moves in 2025, including a significant new tax law.

Dear readers,

As we’ve already seen in the first full week of the transition, the next Trump administration will be chaotic and loud, with new controversies and outrages emerging on an almost daily basis — just like the last one. I am already bored thinking about it.

As I’ve been considering how to write about the next administration’s first year, I am resolved to focus on areas where I can add value — not just things I have opinions about, but things where my opinions and analyses are uncommonly useful and interesting. So for one thing, that means I’ll be writing a lot about economic policymaking.

Since the election, I’ve been working to game out what news we can expect in that area, and while a lot is up in the air — the negotiations over the major tax law that will necessarily pass next year have just begun, for example — I thought it would be informative to lay out for you the rough calendar of stories that I am expecting, and the major decision points that will be reached along the way as Donald Trump and a Republican congressional majority once again put their stamp on our country’s approach to the economy.

Here’s what I’m watching:

1. Current-year government funding. The first big fiscal legislation story of next year is probably actually going to happen this year. Federal fiscal year 2025 started on October 1, and Congress (as usual) was not able to agree in advance on bills to fund the government. The government is currently operating under a continuing resolution that expires on December 20. In the next month, lawmakers have two options: They can pass spending bills to fund the government through September 30; or they can pass another short extension through February or March, leaving it to the next Congress to agree on spending for the rest of the fiscal year. Rep. Tom Cole and Sen. Susan Collins, the Republicans who are expected to chair the House and Senate Appropriations Committees next year, are strongly urging the former approach, though some hardline conservatives would prefer the latter, believing they’ll be able to cut spending more if they wait until Trump is president to make the deal. My expectation is that Cole and Collins will get their way because Republicans will want to be able to focus immediately in the new Congress on cutting taxes rather than fighting over appropriations bills. But if Trump weighs in and says he wants to put his stamp on the spending bills, there could be a short continuing resolution instead, meaning next year would start with an appropriations fight and Republicans would lose some momentum in their effort to pass a signature tax law.

2. A budget resolution (as a vehicle to set up tax cuts). While 60 votes are generally required to end debate and bring legislation to a vote in the Senate, there is a “budget reconciliation” process through which legislation can be considered and passed with just a simple majority. But there are a number of restrictions on how budget reconciliation can be used. It can only be used to make fiscal policy (that is, changes to taxes and/or spending). It can’t be used to change the terms of Social Security. And it can’t be used to pass laws that grow expected budget deficits in the long term (that is, the period 10 years from now and beyond). It also can only be used to pass one bill per fiscal year, and that bill has to be written in accordance with a budget resolution, passed by both houses of Congress, that sets out parameters for what the bill will say. So the first step toward passing a tax cut bill is to pass a budget resolution with instructions about how to write the bill. Even though a budget resolution is not a law, it has to pass both chambers with a majority vote, and that will be a fraught process, especially given the extremely narrow Republican House majority. Members will see the budget resolution as an opportunity to restrict the shape of the final tax bill to their desires — for example, by limiting how much the final bill can grow the budget deficit in the near term. But ultimately, with no budget resolution, there can be no tax bill, and Republicans really want to pass a tax bill, so I expect Trump and John Thune and Mike Johnson will crack heads together and there will eventually be agreement among Republicans on the budget resolution. (No Democrats will vote for it.) But the process could take a while.

3. The tax cut bill itself. Once the House and Senate adopt a budget resolution, Republicans can go about writing a bill to pass through reconciliation. They will have three (or possibly four) main objectives with the legislation. One will be to extend the many provisions of the 2017 tax law, the Tax Cuts and Jobs Act, that are set to expire at the end of 2025. A second will be to deliver in some manner on the tax promises Trump made on the campaign trail, like exempting tip income and Social Security benefits from tax. A third is likely to be repealing certain provisions of the Inflation Reduction Act, such as expanded IRS funding and electric vehicle tax credits. And a fourth could be tariffs — while Trump has broad existing statutory authority to impose tariffs, Rep. Jason Smith, who chairs the tax-writing House Ways and Means Committee, is exploring the possibility of including them explicitly in tax legislation. Looming over all of those considerations will be the “score” — the measurement of how much the tax law will change expected federal budget deficits. This is an economic consideration (higher budget deficits will fuel inflation and make it harder for the Fed to lower interest rates), a legal consideration (the budget resolution will set a cap on what the scored deficit increase can be for the first ten years, and the bill cannot score as producing any deficit increase after that), and a political consideration (lawmakers have often in the past set hard limits on how much of a deficit increase they are willing to vote for).¹ Because Republicans are very motivated to cut taxes, and because it will be a big mess if much of the TCJA is simply allowed to expire at the end of next year, I expect they will eventually agree on and pass a bill, but along the way you can expect ferocious fighting over how the limited pool of funds available for tax cuts gets allocated. For example, you can expect Republicans representing high-tax jurisdictions to fight hard for some sort of expansion of the credit for state and local income taxes paid, since a tax law cannot pass the House without their support. And there will also be fighting over the provisions that are supposed to partially offset the deficit increase caused by tax cuts — for example, while most Republicans want to repeal most provisions of the Inflation Reduction Act, some industries are coming to rely on clean-energy subsidies it created, and some moderate Republicans are insisting they will ensure that many of those subsidies are preserved. We’ll see.

   

   This image was generated by prompting ChatGPT for an impressionist painting representing “budget reconciliation.”