US state income tax digest April 2025
The US state income tax digest highlights significant income and business tax legislation, regulatory adoptions, judicial decisions, and administrative guidance.
Senate approves amendments to House-passed budget plan for tax and spending reform legislation
April 2025
In brief
What happened?
The Senate on April 5 by a vote of 51 to 48 amended the FY 2025 budget resolution (H. Con. Res. 14), which was approved by the House in late February. The amended budget resolution was approved by all Senate Republicans except for Senators Susan Collins (R-ME) and Rand Paul (R-KY) who joined Senate Democrats in opposing the measure. The Senate amendments maintain the reconciliation instructions for the House committees tasked with drafting a broad range of tax and spending measures but added different budget reconciliation instructions for the Senate.
The House could vote on the proposed Senate amendments to the House-passed FY 2025 budget resolution by April 11, before Congress is scheduled to begin a two-week Spring recess. The House Republican leadership has sent a “dear colleague” letter to its members urging a vote for the amended House resolution. A budget resolution does not require the president’s signature, but both the House and Senate must adopt the identical budget resolution to unlock budget reconciliation procedures that would allow legislation to advance with a simple majority vote in the Senate, instead of the 60 votes generally needed to consider bills in the Senate.
Why is it relevant?
House approval of the Senate amendments to the proposed FY 2025 budget resolution would clear the way for substantive legislative action by House and Senate Republicans to advance a reconciliation bill that would address expiring Tax Cuts and Jobs Act (TCJA) provisions and the other parts of President Trump’s legislative agenda.
Action to consider
Business leaders and individuals will need to evaluate the potential effect of an FY 2025 reconciliation bill on the US economy, business, and individuals.
In detail
If the House approves the Senate amended budget resolution, committees in both chambers could begin consideration of budget reconciliation legislation when Congress returns at the end of April. Any House changes to the Senate-amended budget resolution would require additional action by the Senate and further delay the start of legislative work to produce an FY 2025 reconciliation bill.
The Senate amendments maintain the House reconciliation instructions for a broad range of tax and spending measures but add different budget reconciliation instructions for the Senate. The House and Senate will need to reach agreement on a common set of legislative proposals that meet these differing instructions before a final identical bill can be put to a vote in both chambers and be sent to President Trump.
Observation: In the current narrowly divided Congress, Republicans can lose only three votes in the House or Senate to pass legislation by a simple majority, assuming all members are present and voting and a tie-breaking vote by Vice President JD Vance in the Senate.
Key differences in reconciliation instructions for the House and Senate
The amended resolution retains the House-approved reconciliation instructions that direct the Ways and Means Committee to approve net tax cuts of $4.5 trillion over 10 years under a "current law" baseline that assumes certain TCJA provisions expire or change as scheduled after 2025. The budget resolution directs other House committees to reduce mandatory spending by at least $1.5 trillion but makes the full $4.5 trillion in net tax cuts contingent on Congress achieving a higher goal of $2 trillion in mandatory spending cuts. The House budget resolution also proposes a $4 trillion increase in the current $36.1 trillion statutory limit on federal debt.
In contrast, the amended budget resolution allows the Senate Finance Committee to draft legislation that provides a net tax cut of $1.5 trillion over 10 years under a "current policy" baseline that assumes the continuation of TCJA tax provisions scheduled to expire or change after 2025. The Senate amendments also include different Senate reconciliation instructions related to border security funding, defense spending, and domestic energy production, and set a minimum level of mandatory spending cuts of at least $4 billion across four committees. The Senate amendment also proposes a $5 trillion debt limit increase.
Observation: The Senate’s use of a current-policy baseline would assume away the roughly $3.8 trillion cost of extending expiring TCJA tax provisions within the FY 2025-2034 period covered by the budget resolution, but the more significant effect is that a current-policy baseline would also zero out, for reconciliation scoring purposes only, the deficit effects of current policy in future decades. This means that the Senate will be able to make expiring TJCA provisions permanent without the sunset provisions that were required in 2017. The TCJA sunsets were necessary at the time to comply with Senate rules that prohibit a budget reconciliation measure from increasing federal deficits in future decades.
New tax relief proposals will still be subject to the Senate rule against increasing federal budget deficits beyond the 10-year budget window. Proposals that violate this Senate rule would lose reconciliation protection against a procedural challenge that would require 60 votes to overcome in the Senate. This includes proposals offered by President Trump and various Republican members of the House and Senate. This also includes restoring Section 174 R&D expensing, the EBITDA-based business interest limitation under Section 163(j), and 100% bonus depreciation, which are not part of the current-policy baseline. If drafted correctly, however, the long-term savings from the mandatory spending changes could be used to help offset the long-term costs of the new tax relief provisions.
Each of the more than 40 expiring TCJA provisions also would have to be modified in some manner to decrease or raise revenue to comply with a separate Senate rule requiring reconciliation measures to have a budgetary effect relative to the baseline being used. For example, the income thresholds for applying the current 37% top individual income tax rate could be adjusted up or down.
Observation: Senate Democrats could seek to challenge the use of a current-policy baseline during future Senate floor action on a reconciliation bill by arguing that it violates the intent of the Senate rule against using reconciliation procedures to advance measures that increase federal deficits in future decades. Senate Republican leaders decided against seeking an advance ruling on this issue from the Senate parliamentarian. If the Senate parliamentarian were to rule against the use of a current-policy baseline, it could put at risk the ability of the Senate to pass the legislation with only Republican votes. Senate Republicans could override a possible adverse parliamentarian ruling by a simple majority, but Senate Majority Leader John Thune (R-SD) and other Republican Senators have expressed concerns about the effects of such an action on how the Senate operates.
Note: These Senate rules do not apply in the House, which initially approved TCJA provisions in 2017 without sunsets. However, any final reconciliation bill approved by the House still would have to comply with Senate rules to be passed by a simple majority in the Senate with only Republican votes.
Revenue demands for tax relief likely to exceed reconciliation caps
Both Ways and Means Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Mike Crapo (R-ID) have stated publicly that the House and Senate tax committees may consider revenue-raising measures to offset the gross cost of tax relief measures that are expected to exceed the net tax relief caps set by the budget reconciliation instructions for each committee.
In the House, several House Republicans have insisted that they will not support a bill that does not provide significant relief from the current $10,000 cap on individual itemized deductions for state and local taxes. Other House Republicans have expressed opposition to significant reductions in incentives for clean energy production.
Finance Chairman Crapo has commented that he has received more than 200 tax proposals from Republican Senators for consideration. Issues of interest include measures that would increase the child tax credit and expand opportunity zone investment tax incentives.
President Trump has called for making permanent expiring TJCA individual income tax and estate tax provisions. He has proposed to lower the 21% corporate income tax rate to 15% for companies producing goods in the United States, to reinstate 100% ‘bonus’ depreciation, and to restore current expensing for US-based research activities. He also has called for numerous targeted individual tax cuts, with proposals that include eliminating taxes on tip income, overtime pay, and Social Security benefits, restoring federal individual itemized deductions for state and local taxes, and providing an itemized deduction for interest on loans to purchase US-produced automobiles.
During his campaign, President Trump called for increasing the current 1.4% excise tax that is imposed on certain private college and university endowment funds. On February 6, President Trump called for repealing tax rules that allow certain “carried interests” of investment fund managers to be taxed at capital gains tax rates instead of ordinary income tax rates. He also called for limiting tax benefits for certain sports team owners. Some White House officials reportedly also have recently suggested that President Trump could call for an increase in the current top individual tax rate for individuals with incomes above $1 million or other revenue-raising measures affecting high-income individuals.
Potential revenue-raising offsets that have been identified by the House Budget Committee, various members of Congress, and other policy analysts include:
- Changes to certain business deductions for state and local taxes and restricting the use of elective pass-through entity tax rules that have been enacted by most states that have income taxes could be paired with a change to the current $10,000 cap on individual itemized deductions for state and local taxes.
- Legislation (H.R. 591) recently introduced by Ways and Means Committee Chairman Smith that would provide for retaliation against foreign countries that are determined by the Treasury Department to have imposed extraterritorial or discriminatory taxes on US businesses or individuals.
- Legislation (H.R. 2423) recently introduced by Ways and Means member Ron Estes (R-KS) that would modify the base erosion and anti-abuse tax (BEAT) for “foreign-owned extraterritorial tax regime entities.”
- Measures to limit or repeal various clean energy tax incentives that were enacted as part of the 2022 Inflation Reduction Act.
- Modifications to the $1 million cap on deductible employee compensation for publicly traded corporations.
- Modifications to the Employee Retention Tax Credit.
- Modifications to the current excise tax on certain stock repurchases.
Observation: Potential opposition to various revenue-raising offsets could affect the ability of the House and Senate to enact a final bill with only Republican votes in the narrowly divided House and Senate. However, disagreements over the level of cuts in mandatory spending could be a more significant hurdle to overcome as the reconciliation legislation advances in each chamber. Many “deficit hawks” in the House and Senate have called for significant cuts in federal spending, but other Republicans in Congress have expressed concern about the potential effects of large spending cuts on their constituents.
For example, President Trump has stated that he opposes reductions in Social Security, Medicare, or Medicaid benefits (other than for illegal migrants and measures to reduce fraud, waste, and abuse). Several House and Senate Republicans have expressed concern about potential cuts to Medicaid services and other federal mandatory spending programs. Of particular concern for these Republicans are the House budget resolution instructions that direct the House Energy and Commerce Committee, which has jurisdiction over Medicaid, spectrum auctions, and certain other federal programs, to report legislation that cuts mandatory spending by at least $880 billion over 10 years.
Potential timeline for completing a reconciliation bill
Budget reconciliation authority under the FY 2025 budget resolution expires September 30, which is the end of the federal government's current fiscal year.
While House Speaker Mike Johnson (R-LA) has called for Congress to send a final bill to President Trump before the start of a Memorial Day recess period at the end of May, many Senate leaders have indicated that the House and Senate could need at least six to eight weeks to complete the legislation. Congress is scheduled to take an Independence Day recess the first week of July and begin a month-long recess period at the end of July and return in early September.
Observation: The inclusion of a debt limit increase in the reconciliation instructions could accelerate the timing for completion of budget reconciliation legislation. If the debt limit remains unchanged, the Congressional Budget Office estimates that government's ability to borrow using established "extraordinary measures" will probably be exhausted in August or September 2025. As a result, Congress would likely need to complete a reconciliation bill with an increase in the statutory debt limit before leaving for the annual August recess.
For more on these issues, see PwC’s 2025 Tax Policy Outlook: A year for action.
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