House passes compromise tax bill

The House of Representatives made a temporary patch to the tax code on Wednesday evening—a policy adjustment Erica York, senior economist with the Tax Foundation’s Center for Federal Tax Policy, called a preview of bigger things to come.

“These provisions that they’re dealing with will expire at the end of next year, as will the rest of the individual tax cuts from the 2017 tax act,” York said. “It’s going to be a major issue next year in Congress: What do we do with tax policy?”

The Tax Relief for American Families Act of 2024 passed the House by a vote of 357 to 70, relying on bipartisan support. The bill’s success demonstrates House Speaker Mike Johnson’s ability to overcome objections from within his own party about the bill’s costs, provisions, and the manner in which it was passed. It also sets the stage for further tax negotiations in 2025.

With the recent resignation of former House Speaker Kevin McCarthy, R-Calif., the retirement of Rep. Bill Johnson, R-Ohio, and the expulsion of Rep. George Santos, R-N.Y., the already slim Republican majority in Congress has dwindled even more. Add to that the temporary absence of Majority Leader Steve Scalise, who left Washington to receive stem-cell treatment, and Johnson is working with a one-seat majority.

As a result, the tax bill isn’t as comprehensive as many Republicans hoped, and it includes some Democratic priorities. In addition to retroactively implementing tax breaks for businesses and investors that Republicans support, the bill focuses heavily on child tax credits. Specifically, it would bump the credit from $1,600 per child in 2023 to $2,000 by 2025.

Although some of the cost of the bill is offset by eliminating COVID-19 employment retention tax credits, several members of the GOP denounced the hike to the country’s spending obligations. The Congressional Budget Office estimates that over three years, the tax credits by themselves would increase federal spending by $12.8 billion, even with the offset.

“To the extent that this is a tax bill, there are good provisions in it on business expensing for economic growth,” Rep. Matt Gaetz, R-Fla., said on the House floor. “But, my friends, this is not a tax bill. This is a welfare bill masquerading as a tax bill.”

Especially concerning to Republicans is the possibility of incentivizing further illegal immigration into the country for the purpose of using credits on American-born children. People without valid Social Security numbers can file tax returns and claim the credit as long as their dependents have Social Security numbers. And because the credit is partially refundable, the government may write a check to anyone who qualifies for the credit, even if the person pays no taxes.

That’s the chief reason the House Freedom Caucus Chair Bob Good, R-Va., says he opposed the bill.

“I don’t think we should be expanding the welfare state with the growth of the child tax credit, particularly for those who don’t pay any taxes. And I don’t think we ought to pass a tax bill that doesn’t correct the ability for illegals to get that credit,” Good said moments before the vote.

Some Republicans also hoped the bill would provide for state and local tax write-offs (SALT)—a policy item especially sought by the GOP’s New York coalition. The provision would have allowed qualifying earners to deduct some taxes owed at the state level against their federal obligations.

In protest of the measure’s absence, four New York Republicans voted to tank an unrelated procedural vote on Tuesday, sending a public shot across the bow to party leadership. After about 40 minutes of negotiations behind closed doors, the group eventually relented with a tentative promise from Johnson to make SALT its own stand-alone bill at a later date.

Rep. Marcus Molinaro, R-N.Y., didn’t join in the protest but expressed frustration at the decision to advance the bill without SALT.

“Upstate New Yorkers didn’t choose to be overtaxed by state government,” Molinaro said. “But they do shoulder the burden of the highest taxes in the country, and providing some relief from the cap benefits middle-class families. We ultimately ought to be ensuring they feel the same relief that others will receive through the tax package.”

In addition to its cost and substance, some Republicans object to the way Johnson brought the bill to the floor. Through a “suspension of the rules,” Johnson used Democratic support to circumvent possible amendments and objections from his own party.

“I don’t think we should be passing yet another major piece of legislation on suspension of the rule,” Good said. “I don’t think we should be passing it with predominantly Democrat votes.”

Despite the many objections, the bill’s support from 169 Republicans and 188 Democrats tells York that there’s a bipartisan willingness in Congress to tackle the issue of taxes, at least in the House. The bill still has to pass in the Senate.

“It shows how much support there is for the underlying policies here like improving the tax treatment of R&D and business investment—from semiconductors to infrastructure,” York said.

But she’s concerned about its temporary lifespan. Virtually all of the bill’s provisions will only be in place until the end of 2025, creating ambiguity for earners about whether they can count on those breaks in years to come. York hopes that the tax bill, assuming it passes the Senate and becomes law, will provide Congress with a starting point for how to address long-term tax reform.

“Because if we don’t, everyone wakes up in January 2026 to a higher tax bill,” York said.