Impending Expiry of the 2017 Tax Cuts and Jobs Act: Potential Market and Economic Implications

As the 2024 election cycle unfolds, a key policy issue looms on the horizon: the expiration of the 2017 Tax Cuts and Jobs Act (TCJA) at the end of 2025. While political gridlock has often been seen as a stabilizing factor for markets due to the prevention of sweeping legislative changes, this assumption may not hold in the context of expiring tax provisions. The outcome of this election and the legislative approach that follows will be critical in shaping the economic landscape and investor sentiment moving forward.

The TCJA, enacted in 2017, introduced significant changes to the tax framework, impacting corporations, small businesses, and individual taxpayers. Its expiration is set to reverse some of these adjustments, which could have far-reaching effects on disposable income, business investments, and overall market behavior.

One of the major components of the TCJA was the reduction of the corporate tax rate to 21%, a move that significantly bolstered corporate earnings and investment. Importantly, this lower rate is not subject to expiration and will remain in place beyond 2025. However, the anticipated end of several other key provisions will create substantial shifts, especially for smaller enterprises and individual taxpayers.

For sole proprietorships, S-corporations, and partnerships, the TCJA's 20% deduction on qualified pass-through income is slated to disappear. This deduction has been a crucial tax benefit for many small business owners, reducing their taxable income and supporting reinvestment and growth. Its removal could lead to higher effective tax rates for these entities, potentially discouraging investment and expansion.

Individual taxpayers will also feel the impact of the TCJA's sunset, as reduced marginal tax rates revert to their pre-2017 levels. This reversion means higher tax liabilities for many households, which could reduce disposable personal income and affect consumer spending—a key driver of economic growth. Additionally, the reduction in the child tax credit from $2,000 back to $1,000 will further strain household finances, particularly for families with dependents.

On the other hand, some aspects of the TCJA's expiration could provide modest offsets. The $10,000 cap on the state and local tax (SALT) deduction will be lifted, restoring full deductibility of state and local property and income taxes. This change could benefit taxpayers in higher-tax states by increasing their potential deductions and slightly alleviating the burden of higher federal tax rates.

The legislative path to addressing the impending TCJA expiration is uncertain. A divided Congress may struggle to agree on significant tax reforms, potentially leading to a default return to the pre-2017 tax structure. Such an outcome could inject volatility into markets as investors and businesses grapple with the implications of higher taxes and altered economic behavior.

The election's outcome will play a pivotal role in determining how these tax changes are managed. With tax policy on the line, market participants will need to watch closely for signs of bipartisan cooperation or continued gridlock. The ability of Congress to negotiate new tax legislation or extensions will shape not only the tax landscape but also broader economic trends, potentially influencing market performance through 2025 and beyond.