Limited tax legislation expected with possible return to divided government

In brief

The 2022 midterm election results point to a return to divided control of the federal government with the new 118th Congress that will begin in January 2023, when Democratic President Joe Biden will be at the midpoint of his current term in office. Initial election results show that Republicans appear on track to win control of the US House of Representatives from Congressional Democrats, although with a narrower majority than Republicans had expected. Control of the Senate remains unclear, with the outcome of races in Georgia and several other states still undecided. 

Divided government control -- with one party controlling the executive branch and the other party controlling at least one body of Congress -- will limit the scope of new tax legislation. President Biden and Congressional Democrats will no longer be able to use budget reconciliation procedures to enact legislation with only Democratic votes. Budget reconciliation was used to enact the 2022 Inflation Reduction Act (IRA) and the 2021 American Rescue Plan Act (ARPA), which included various tax and spending provisions opposed by Congressional Republicans. 

Observation: Republican control of the House would mean that any tax legislation would require bipartisan agreement to clear both chambers of Congress and be signed by President Biden. At the same time, House Republicans would be expected to advance legislative proposals that would highlight policy differences in advance of the 2024 elections for president and Congress. 

Meanwhile, the current Democratic-led Congress is set to return the week of November 14 to begin a “lame-duck” session. Key legislation to be addressed will include a bill to fund the federal government beyond December 16, when a temporary spending measure expires, and a defense authorization bill. Other issues that the current Congress could consider include a year-end tax package, reforms to the Electoral Count Act, a marriage protection proposal, and energy permitting legislation. 

Observation: The outcome of the 2022 midterm elections may make it more challenging for the current Congress to reach an agreement on a year-end tax package that could, among other things, restore business-favorable provisions like the research expenditure deduction. Democrats are seeking to renew all or parts of the ARPA expanded child tax credit provisions that expired at the end of last year. In response, some GOP leaders have called for delaying any action on tax legislation until next year when Republicans could control the House and possibly the Senate. 

Action item: A recent PwC Pulse survey found that business leaders are focused on how to manage operations at a time when the United States is facing significant macroeconomic risks — a possible recession, elevated inflation, rising interest rates, and geopolitical uncertainty. Businesses and individuals will want to assess the impact of the 2022 midterm elections on potential tax legislative and regulatory changes in this environment.