The direction of future tax policies is intrinsically linked to the shifting dynamics of political power in the White House and Congress. With an election year just on the horizon, it is prudent to look at how 2024 electoral results may result in policy shifts that impact the agriculture sector and manufacturing industries, as well as tax planning strategies for businesses.
Insights without Guarantees
We do not yet know who the candidates for the White House will be, but President Biden is likely to be the Democratic nominee and former President Donald Trump is the presumptive favorite to be the GOP nominee. In our estimation, there is a >50% chance Congress switches hands next year with Democrats taking control of the House of Representatives and Republicans taking control of the U.S. Senate. If this comes to pass then, regardless of who wins the White House, we will continue to have a divided government in 2025-2026.
As we have seen recently, the current political climate is loaded with uncertainty. While it is too early to say anything definitive, we try to provide insights necessary to navigate the evolving political landscape and make informed decisions for the future.
Tariffs: Prepping for Differing Scenarios and Impacts
Former President Donald Trump has stated his plans to impose a universal 10% tariff on all imported goods if sent back to the White House and to also impose additional “retribution” tariffs on top of the 10% increase. This “ring around the collar” of the U.S. economy as Trump calls it, would apply to all countries. This dramatic expansion of tariffs would likely be extremely detrimental to U.S. agriculture. With 20% of U.S. agriculture revenue derived from exports, trade is vital to the agricultural economy.
In 2018, the United States imposed tariffs on steel and aluminum imports from major trading partners. In response six trading partners responded with retaliatory tariffs on a range of U.S. agricultural exports, leading to a significant reduction in exports. The USDA estimates that from mid-2018 to the end of 2019, retaliatory tariffs caused a drop of more than $27 billion in U.S. agricultural exports.
An across-the-board 10% tariff, coupled with additional retribution tariffs is likely to bring about a new wave of retaliatory tariffs imposed by other countries. Many of these tariffs will fall on U.S. agricultural exports, disrupting U.S. ag export markets for many years. A 10% tariff on imports would also raise the prices of farm inputs and imported consumer goods.
These proposed tariffs would constitute a dramatic intensification of trade policies Trump launched while in office. It would lead to significantly more retaliatory tariffs with much greater impacts than in 2018 and 2019. The net result will almost certainly be a decrease in U.S. ag exports and lower economic output.
Estate and Gift Tax Exemptions: Benefits are Likely ‘As Good as It Gets’
The upcoming elections could also usher in substantial tax changes. In 2017, the Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption, increasing the exemption from $5 million to $10 million, accounting for inflation. The current estate and gift tax exemption is $12.92 million for individuals and $25.84 for married couples. However, these increases are set to expire in 2025.
If Congress does not intervene, this exemption will drop to around $7 million per person and $14 million for married couples by the end of 2025. If President Biden wins reelection or if the Congress remains divided between Democrats and Republicans, then it is highly likely that we will see these increases expire in 2025.
Because individuals and families can currently take advantage of these higher exemptions, high-net-worth individuals and families should revisit their estate planning in 2023 and 2024 to ensure they maximize their use of these exemptions before they sunset in 2025.
Other Tax Implications: Expected Changes to Tax Codes, Regardless of Election Outcome
Estate and gift taxes are not the only sunsetting tax provisions in the Tax Cuts and Jobs Act. Other major provisions will expire by the end of 2025 including:
- Bonus depreciation – The TCJA enacted 100% bonus depreciation, allowing businesses to immediately write off 100% of the cost of eligible property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The 100% write-off expired Dec. 31, 2022. Unless the law changes, the bonus percentage will decrease by 20 points each year before expiring completely.
- Individual income tax rates – the TCJA lowered tax rates across the board and restructured bracket spans. Barring action from Congress, income-tax brackets will revert to their higher pre-2017 levels.
- Standard deduction – The TCJA significantly increased the standard deduction.
- Limitation on deduction for state and local taxes – The TCJA capped the state and local tax (SALT) deduction at $10,000 per year, consisting of property taxes plus state income or sales taxes. Before the TCJA, there was no cap to the value of the SALT deduction.
- Qualified business income deduction – The TCJA allows non-corporate taxpayers to deduct up to 20% of their qualified business income.
It is likely changes to the tax code are in the future. While a second Trump administration would push for the renewal of all the TCJA provision, a divided Congress would alter that calculus. Conversely, a second Biden administration would likely seek changes to existing provisions but, as with a Trump presidency, a divided Congress, along with some moderate Democrats in both the House and Senate, would limit the scope of any changes that would be proposed by President Biden.
In the end, we anticipate that some, but not all, these provisions will get renewed. Which ones are renewed will likely depend on the makeup of the next Congress. As always, it’s imperative to be prepared for any scenario and consider proactive planning measures considering potential policy shifts.
Reach out to a Pinion tax advisor to reassess and shore up your company’s strategy and tax structure ahead of this election year.