Senate Republicans Propose $4.2 Trillion Tax Package to Prevent 62% Tax Hike

Senate Republicans have introduced a $4.2 trillion tax and spending package, aiming to prevent imminent tax hikes and solidify policies from the 2017 Tax Cuts and Jobs Act. The plan, developed with compromises among Republican factions, seeks to boost economic growth and provide tax relief. This proposal is significant as it addresses potentially substantial tax increases for 62% of taxpayers if the Tax Cuts and Jobs Act expires. The enhanced economic growth could indirectly benefit digital asset markets.

The Senate's draft includes permanent extensions for business interest expensing, bonus depreciation, and research and development expensing, known as "the big three." These measures are set to remain in effect indefinitely, unlike the House's proposal, which only extends them through 2029. The Senate's plan also includes a placeholder for the state and local tax (SALT) cap, expected to rise to $40,000, and aims to make permanent the section 199A qualified business income deduction at the current 20% rate. Additionally, the proposal introduces significant international tax changes and more lenient adjustments to the phase-out of certain Inflation Reduction Act (IRA) clean energy credits.

One notable change in the Senate's proposal is the elimination of the disparity in the House’s bill regarding pass-through entity tax (PTET) deductions. The Senate plan aims to prohibit entity-level deductions for all pass-throughs, not just specified service trades or businesses (SSTBs). This proposal would allow a separate PTET deduction for owners of all pass-through entities (PTEs) up to an amount not to exceed the greater of $40,000 ($20,000 for married filing separately) or 50% of PTET. However, this change is expected to result in a tax increase for all PTE owners, raising concerns about the inequitable treatment of PTEs compared to corporations.

The Senate Judiciary Committee has also released its text, which includes a significant limitation on states’ interstate taxing power. This provision would expand the protections afforded to businesses under federal law by defining "solicitation of orders," potentially impacting states' ability to assert nexus over multiple types of business transactions. The Senate Finance Committee's measure is currently undergoing a "Byrd bath" or "Byrd scrub" under the Senate’s reconciliation process. This process aims to remove extraneous provisions and ensure that all provisions have a budgetary effect related to revenue that is not "merely incidental" and won’t increase the deficit generally outside the typical 10-year budget window. Some provisions may be axed from the bill if they do not comply with the Senate Parliamentarian’s assessment, potentially delaying the Republican leadership’s ambitious timeline.

Senate Republicans are working with two different cost estimates from the nonpartisan Joint Committee on Taxation. Under the upper chamber’s novel no-cost approach of estimating revenue effects relative to a current policy baseline, the Senate bill is estimated to cost $442 billion, not including an expected lift in the SALT cap. Using more traditional accounting methods, the tax measure is estimated to cost $4.2 trillion relative to a current-law baseline from 2025 through 2034, which is more than House Republicans have agreed to spend. Senate Majority Leader John Thune has stated that the Senate will not recess as planned for the Fourth of July holiday until it has passed the reconciliation bill and sent it back to the House for its approval. House Speaker Mike Johnson is also asking members to be flexible with holiday plans based on the Senate’s timing. However, disagreements among Republicans in both chambers on key issues, such as the SALT cap, Medicaid reform, certain IRA clean energy credit phase-outs, and the projected increase to the deficit, continue to be primary sticking points. Republicans are hoping to avoid sending the bill to a conference committee, which would be required to reconcile the two chambers’ bills if the House won’t pass the Senate’s as-is.