How Republicans Have Leverage on Next Year’s “Fiscal Cliff”
Even though the calendar still reads 2024, many observers in Washington have begun planning for 2025. Regardless of who wins control of Congress in November’s elections, the decisions lawmakers make in the year ahead will have a major effect on the nation’s fiscal direction.
While a new president and new Congress always bring changes, provisions in law guarantee a budgetary “Big Bang” next year. Most of the individual income tax provisions of the 2017 tax law expire at the end of 2025, as do expanded Obamacare insurance subsidies enacted by President Biden and Democrats during the last Congress. Negotiating — and posturing — over this large “fiscal cliff” will likely consume much of the new 119th Congress that begins in January.
Negotiating Positions
While we don’t yet know the players in this negotiation, the positions of either side seem fairly clear. If granted one-party control of Congress and the executive, Donald Trump and Republicans would likely use budget reconciliation to extend most or all of the tax relief enacted during Trump’s first term as president. On the other hand, Republicans would likely allow the increased Obamacare subsidies — which have been plagued by recent reports of fraud, not to mention the fact that they flow to wealthy individuals — to expire by not taking action.
If they have complete control of Washington next year, Kamala Harris and the Democrats would take the inverse approach. They would likely use reconciliation to enact a permanent extension of the Obamacare subsidies — or as long an extension as fiscally possible. They would also use reconciliation to raise taxes on individuals making over $400,000 and/or corporations, while extending the Trump tax relief (though they wouldn’t dare mention Trump’s name) for the “middle class” as they define it.
Of course, if neither party controls both houses of Congress and the White House, more detailed bipartisan negotiations would have to take place. The template for those discussions may hark back to the end of 2010 and 2012, when major components of the Bush tax package ended at the same time as several elements of economic relief during the Great Recession.
Different Timelines
But a recent Kaiser Family Foundation brief regarding the expiration of the insurance subsidies highlighted a noteworthy difference between the last “fiscal cliff” in 2012 and next year’s deadlines:
Insurers will have to submit their proposed premiums and justifications in early 2025 and finalize their premiums by August 2025, in advance of the 2026 open enrollment period beginning November 1, 2025. Because of this lengthy process, insurers and state and federal regulators will want to know whether enhanced subsidies will expire or be renewed well in advance of their expiration or renewal.
As a practical matter, Congress would likely have to pass any extension of the increased Obamacare subsidies by next year’s August recess to ensure the subsidies remain in effect for the 2026 plan year. That’s what Democrats did with their misnamed Inflation Reduction Act, which extended the increased Obamacare subsidies for three additional years (from 2023 through 2025). Biden signed that bill into law on Aug. 16, 2022, and when the Exchanges opened for the 2023 plan year later that fall, they reflected the extension of the increased subsidies.
But in 2012, Congress didn’t pass legislation addressing that year’s “fiscal cliff” until the first days of 2013. The House and Senate passed the bill on New Year’s Day, and President Obama signed it into law on Jan. 2 — one day before the 112th Congress officially ended, at noon on Jan. 3, 2013.
Republican Leverage Point
My point isn’t to argue that Congress should extend the Obamacare subsidies quickly — I don’t think lawmakers should extend them at all. My point is that, should divided government remain a reality next year, Republicans have a major leverage point to use in fiscal negotiations, in the form of the diverging deadlines.
Republicans will want any fiscal agreement to pass by early January 2026, in time for the Internal Revenue Service to update withholding tables for employers, so that Americans don’t get hit with a tax increase as 2026 begins. By contrast, Democrats will want the package to pass months sooner than that, or otherwise, insurers and the Exchanges will run into logistical obstacles ahead of open enrollment for the 2026 plan year, which starts in November 2025.
The bottom line: Democrats have an incentive to cut a deal much earlier than Republicans do. And all sides — Democrats and Republicans — should recognize that fact going in. Maybe this dynamic means that — for once — Republicans won’t cut and run by giving up their leverage and cutting a horrible deal.
This post was originally published at The Federalist.