Tax Experts See Long Standoff Over Expiring Provisions

By Caitlin Reilly
CQ-Roll Call
(TNS)

While 2025 is being hailed as “Tax Super Bowl”—or, in some corners, “Tax Armageddon”—the growing possibility of divided government in Washington next year has some predicting the tax fight could stretch into 2026 and beyond.

Deep ideological differences could make striking a long-term agreement on major expiring tax provisions difficult if control of the House, Senate and White House is split among Democrats and Republicans next year. That raises the odds of a short-term extension, although even that comes with challenges, leading some to speculate Congress could slip past the Dec. 31, 2025, deadline.

“I think we ought to be prepared for the possibility that doesn’t happen by the end of the year,” John Gimigliano, principal-in-charge of federal tax legislative and regulatory services at KPMG, said at a press briefing this month. “I mean, I don’t know what you’ve seen from Congress in recent years to convince you that they’re really good at dealing with deadlines.”

If Congress doesn’t act to replace or extend expiring provisions from the 2017 tax law by the end of next year, households of all incomes would see their taxes increase. They wouldn’t have to file returns reflecting higher tax bills until early 2027, but millions would likely feel the pain sooner, when employers update their paycheck withholding in early 2026 to reflect the changes.

The IRS potentially could delay the release of new withholding tables, keeping workers’ paychecks level temporarily, but that would be a last resort and probably couldn’t keep the pain at bay for long, experts say.

“We won’t know until we get there,” Gimigliano said in an interview. “There’ll be, I’m sure, deep discussions between Congress and the IRS about how they can, what they could do on withholding to give Congress the space to try and pass this bill. But at some point … the IRS can’t wait any longer.”

Delaying the withholding update also would create another risk: If lawmakers can’t reach agreement, taxpayers could get hit with surprisingly high tax bills the following year because employers will have spent months collecting too little for the IRS from worker paychecks.

“Seeing it go all the way to the absolute filing deadline just seems unlikely to me,” Gimigliano said. “The last thing anybody wants is for taxpayers to get hit with a huge tax liability when they eventually do file in 2027. … Politically, if you’re a member of Congress, that’s toxic.”

The ‘real’ deadline

Danielle Rolfes, KPMG partner in charge of Washington national tax, said new withholding tables reflecting the expired provisions would be the first hard deadline in 2026.

“Congress doesn’t work to deadlines the same way we do,” Rolfes, who worked at the Treasury Department during the Obama administration, said at the KPMG event. “What’s the real deadline in 2026? First, it’s the withholding tables. That’s the first time we feel it.”

Mary Burke Baker, government affairs counselor leading K&L Gates’ tax policy practice, was skeptical that the IRS would have much room to delay updating its guidance and systems if the 2017 provisions were to expire without extension or replacement.

“The IRS has to work with the law that is and not what it might be,” she said. Baker, who spent more than 25 years at the IRS, added that even approaching the Dec. 31 deadline without a legislative solution would pose challenges for the agency as it prepares for tax year 2026. She’s betting that Congress will reach a deal ahead of the deadline.

Ray Beeman, a principal and leader at Washington Council Ernst & Young, said even though 2026 taxes aren’t filed until 2027, increased withholding would ensure individual taxpayers feel the effect of going over the cliff much sooner, possibly as early as their first paycheck in the new year. That’s why it’s more challenging to pass individual tax breaks retroactively than it is for businesses, he said.

“Everybody’s going to feel that pretty immediately, at an individual level, and then at a macroeconomic level. Taking $4 trillion out of the economy could be problematic,” he said. That’s a major reason Beeman said he puts the chances of going over the cliff as “fairly low.”

“I’m not saying there’s no chance they’ll go over the cliff, but I think if push comes to shove … that they take some sort of interim action,” he said. “There will be a lot of pushback on them if they actually don’t do something.”

Getting their footing

Those political and economic realities have raised the possibility of a short-term extension to buy time for a deal, rather than simply allowing everything to expire and relying on the IRS to delay the immediate impacts.

Along with ideological differences, lawmakers will likely have to contend with changes in leadership and other pressing deadlines early in the next Congress, including the return to the debt ceiling on Jan. 1. That increases the chances of a short-term, targeted extension, rather than a major overhaul of the tax code, said Marc Gerson, a member at law firm Miller & Chevalier.

“It’ll take them time to get their footing,” Gerson said. “Tax reform is one of a number of really important things that the Congress is going to have to deal with and the White House is going to have to deal with next year, regardless of who’s in control.”

Many have cited Congress’ handling of the expiration of the 2001 and 2003 Bush-era tax cuts as a possible road map for next year’s cliff. Congress extended the cuts fully in 2010 for two years before making most of the tax breaks permanent in 2012, save for upper-income households earning at least $400,000.

But even a short-term extension comes with challenges. Unlike the Bush tax cuts, the expiring 2017 law contains both tax cuts and tax increases, including the $10,000 cap on state and local tax deductions, which has become politically fraught. Another big question is cost.

“I think the biggest wild card is if that is completely paid for, and how and whether that is done through a combination of tax increases, spending cuts, tariffs. I just have no idea,” Gerson said. “And so much of that is obviously just dependent on what happens in the election.”

Gimigliano agreed that whether Congress offsets a short-term extension is a major question, especially if Democrats control one of the chambers.

Even codification of much of the Bush tax cuts during the Obama administration ruffled the feathers of some Democrats at the time. Former Senate Majority Leader Harry Reid, D- Nev., called the bipartisan 2012 deal a “disappointment to a number of people” in an interview before his death in 2021.

“Will Democrats feel like they lost—you know, air-quote ‘lost’—if that’s all they do: a pure extension of a bill that none of them voted for, unpaid for,” Gimigliano said. “We won’t really answer that until we get there.”

Sen. Elizabeth Warren, D- Mass., a leading voice on the left and a member of the tax-writing Finance Committee, is among those pushing a strategy of going over the tax cliff if Republicans won’t agree to her party’s demands. At that point, Warren and others say, the GOP will be forced to come to the table to at least restore tax breaks for middle-class and lower-income households.

“If the 2025 tax bill doesn’t call on wealthy people and giant corporations to shoulder a bigger share of what it costs to run this country, Democrats should reject it outright,” Warren said in a June speech. “Better to let all the Trump tax cuts expire than be accomplices to another slash-and-burn tax bonanza for America’s billionaires.”

Other veteran Hill watchers are looking at the landscape, including a possible softer deadline at the end of next year than many realize, and seeing the prospect for gridlock on the tax bill potentially beyond even the 2026 midterms.

“In divided government, partially because tax returns for 2026 won’t be due until April 2027, you could see people saying, ‘We can’t come to an agreement. We’ll just see what happens in November 2026,’” said Aharon Friedman, a former GOP tax aide on the House Ways and Means Committee who’s now with Federal Policy Group, a lobbying shop.

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