The tax landscape is ever evolving, complicated and wrought with uncertainty as the political winds shift form election-to-election. With that in mind, Moneta recently hosted Garrett Watson, Vice President of Federal Tax Policy at the Tax Foundation, for a wide-ranging discussion on current and potential Federal tax policy, especially as fiscal policy merits attention to put on more sustainable path. Below are summary highlights of Garrett’s commentary on the current state of Federal tax policy and outlook for its evolution.
One Big Beautiful Bill Recap
To set the stage, Garrett reviewed key components of the 2025 tax law given the range of permanent and expiring portions in the bill. On the permanent side, the legislation made permanent the lower individual tax rates and brackets; an expanded standard deduction; a higher child-related credit; restrictions on certain itemized deductions; and higher alternative minimum tax exemptions that were all originally passed in 2017. It also permanently retained the 20% pass-through deduction and a higher estate tax exemption of $15 million for single filers and $30 million for joint filers, indexed thereafter. For businesses, they received permanent 100% bonus depreciation, domestic research-and-development expensing, and a more generous business-interest deduction limit. Garrett identified these provisions as important sources of taxpayer stability and economic support.
There were numerous new but, temporary, provisions enacted, such as deductions related to tips, overtime, and seniors; a new 100% deduction for qualifying structures associated with domestic tangible production; an expanded state and local tax deduction; and Trump Accounts for eligible children. Several of these provisions are scheduled to expire between 2028 and 2029, creating future legislative pressure. Garrett expects Congress to revisit the temporary provisions in 2029. Tips, overtime, and senior deductions may attract bipartisan interest because of their popularity, while the expanded state-and-local (SALT) deduction is expected to produce another major negotiation before reverting toward a $10,000 cap in 2030, subject to income limits.
Current Tax Legislation Proposals
The were two proposals Garrett reviewed specifically. First, the Generating Retirement Ownership Through Long-Term Holding (GROWTH) Act is seeking to align mutual funds more closely with ETFs by preventing a taxable realization event when mutual-fund dividends and capital gains are reinvested. ETFs can generally use in-kind redemptions to avoid immediate realization, while mutual funds may generate taxable realization events even when fund earnings are reinvested. The Tax Foundation has estimated that the proposal would reduce federal revenue by approximately $1 billion annually in a steady state environment and cost about $35 billion over ten years. The change would defer taxation rather than permanently eliminate it, and it would need a potential offset if advanced legislatively.
Second, Garrett spoke to roughly six additional proposals to extend qualified-account treatment to purposes such as home purchases, education, and other savings needs. Universal savings accounts could consolidate or simplify the system, while other proposals include changes to the Saver’s Credit and baby bonds. While these may seem worthwhile on the surface, Garrett noted that adding more accounts with separate eligibility, contribution, withdrawal, and tax rules can increase confusion and administrative complexity. The policy debate, therefore, includes a trade-off between expanding incentives and simplifying the overall savings framework.
Midterms and Tax Policy Outlook
With midterm elections on the immediate horizon, Garrett outlined how possible election outcomes could shape tax policy. The extent to which one party controls Congress will go a long way with any movement to maintain or change current tax policy. There are three general scenarios Garrett envisioned the following actions depending on potential November 3rd election outcomes.
- Republican Control: If Republicans retain both chambers, Garrett expects possible consideration of another reconciliation package, including proposals such as $5,000 checks, as well as film and television tax credits. He characterized the fiscal cost of some proposals as a key constraint.
- Divided Control: Under divided government, Garrett expects limited room for modest bipartisan tax legislation. Democrats would likely advocate restoring enhanced Affordable Care Act credits and expanding the investment and child tax credits, while partisan reconciliation would be unlikely.
- Democratic Control: If Democrats control both chambers, Garrett expects more legislative messaging around higher taxes on high earners, corporations, and multinational companies. Such measures could face a presidential veto, leading to positioning for later tax debates rather than immediate enactment.
US Government Fiscal Considerations
Finally, no tax discussion can ignore US fiscal policy given the growing federal fiscal imbalance. Referencing past fiscal reform efforts, Garrett identified several factors behind successful approaches in the 1980s and 1990s: the 1983 Social Security financing crisis; bipartisan commissions and summits that distributed political responsibility; enforcement mechanisms such as PAYGO and spending caps; declining interest rates; productivity gains; and lower defense spending after the Cold War.
However, unlike the earlier period noted, the United States now faces adverse demographics, “higher-for-longer” interest rates and rising fiscal pressure, though, potential productivity gains from artificial intelligence could help. Importantly, Garrett said delaying action will make future spending and tax choices more difficult, especially as entitlement programs, such as Social Security, require structural reforms to remain solvent. Ultimately, prudent changes to fiscal policy will likely require a catalyst to force politicians of all stripes to take concrete actions to improve the fiscal outlook. Garrett said a short-term bond-market disruption—such as a failed auction, a sharp rate spike, or another market signal similar to the United Kingdom’s 2022 gilt crisis—could force policymakers to act. The disruption would ideally be temporary while still demonstrating that fiscal conditions require immediate decisions.
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Used with permission from the Tax Foundation. The views expressed by Garrett Watson are his own and do not necessarily reflect the opinion of the Tax Foundation. The content above does not represent any endorsement or recommendation of any investment, tax or investment strategy or tax strategy
