What the Midterm Election Results Could Mean for Taxes

The 2022 midterm election results will drive—or stall—very different Democratic and Republican tax priorities.

Midterm elections road sign
(Image credit: Getty Images)

Midterm election day 2022 was November 8. Voters across the country considered significant issues ranging from inflation, immigration, and gun control to abortion, crime, and preserving democracy. And it probably comes as no surprise that even though the midterm election results are mostly in, that voters remain starkly divided on many of those concerns.

But the results from the November midterm elections will also help decide which tax priorities Democratic and Republican lawmakers pursue in the next couple of years (if any). And those priorities—a few of which are highlighted below— involve tax deductions and tax incentives that can directly impact your finances.

Who Won the Midterms?

Democrats currently have control of both the U.S. House of Representatives and the U.S. Senate, by slim margins. Because of the 50-50 split in the Senate, Vice President Kamala Harris can cast a tie-breaking majority vote.

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But now that most ballots have been counted, midterm election voters have decided that the balance of power in Congress will be split in 2023. Democrats will control the Senate and Republicans will control of the House of Representatives.

Georgia Runoff 2022 Date: that said, a closely watched midterm elections state Senate race in Georgia will go to a runoff election on December 6. In that race, incumbent Democratic Sen. Reverend Raphael Warnock is running against former football player, Herschel Walker. Lately, Georgia abortion rights have been in the spotlight. And while Democrats will have control of the Senate, a Warnock win in Georgia would increase the Democrat's Senate majority.

Funding the Government in 2023

While the midterms dust continues to settle, Congress will need to come to an agreement on FY 2023 spending. That creates an opportunity for a potential year-end tax package. There are several tax issues that Congress could address in such a package depending on their appetite for negotiation.

For example, since Republicans will have control of the House of Representatives in the new legislative session, they may not be quick to support so-called lame-duck spending at the end of this year. That reluctance could be enhanced by the fact that the Democratic-controlled Congress already passed the Inflation Reduction Act, which was signed into law by President Biden in August.

The massive climate, energy, healthcare, and tax law provides about $270 billion in clean energy tax incentives that include everything from electric vehicle tax credits to tax credits for energy efficient home improvements.

However, there are some tax provisions regarding R&D credits and bonus depreciation that need attention. Businesses who, beginning this year, must amortize their research and development costs over five years, would like to see R&D tax relief. Lawmakers on both sides of the aisle could have reason to come to the table on bipartisan R&D tax relief.

Child Tax Credit

Congress didn’t pass tax extenders last year, and popular pandemic-related provisions like the expanded child tax credit expired. The expanded child tax credit was enacted with the American Rescue Plan Act (ARPA). ARPA allowed eligible families to in 2021, receive advanced payments of up to either $250 or $300 a month (per qualifying child), for six months, depending on the age of each child. 

Democrats and various advocacy organizations have pushed to reinstate the expanded credit, which some data show effectively helped to reduce the child poverty rate. 

But since the Democrats will keep control of the Senate and maybe pick up an additional seat on the Senate side (i.e., if Warnock prevails in the Georgia runoff), they could have more votes to reinstate the child tax credit. That’s because they wouldn’t have to rely on a yes vote from Sen. Joe Manchin (D-W.Va), who opposed proposals to reinstate the expanded child tax credit. 

But, Democrats wouldn't have an easy legislative path to accomplish that without some Republican support. There’s been some speculation that Democrats could agree to support R&D relief if Republicans agree to reinstate the expanded child tax credit.

Inflation Reduction Act Implementation

Since Democrats won't keep control of the House in 2023, implementing the tax credits and incentives in the Inflation Reduction Act might not proceed full steam ahead. Currently, the Treasury Department and the IRS are seeking public input to propose regulations to implement the many clean energy tax incentives in the new law.

That's because Kevin McCarthy (R-Calif.), who is hoping to become House Speaker, has vowed to block the $80 billion in funds allotted in the Inflation Reduction Act for the IRS. McCarthy and other Republican lawmakers have claimed that the funding will result in an “army” of 87,000 IRS agents coming to audit middle income Americans. It's unclear right now whether McCarthy will have the votes needed to be named Speaker of the House.

Retirement Savings

On the bright side, there appears to be some bipartisan support for potentially major retirement legislation that could come before the end of the year.

Senate Finance Committee Chair and Ranking Member, Senator Ron Wyden (D-Ore.), and Senator Mike Crapo (R-Idaho), recently introduced the bipartisan EARN Act. According to the release accompanying the legislation, the EARN Act is designed to encourage small businesses to adopt retirement plans and make it easier for part-time workers to participate in retirement plans.

The bill would also expand the saver’s credit for low and middle-income workers and allow penalty-free withdrawals during certain emergencies.

Congress will have to reconcile the EARN Act with the bipartisan House-passed SECURE 2.0, which would also make significant changes to retirement plans including raising the age for taking required minimum distributions (RMDs).

Trump Tax Cuts

House Republicans have also pledged to propose legislation to make the so-called Trump tax cuts permanent. The individual tax cuts were enacted with the Tax Cuts and Jobs Act of 2017 and many of the tax breaks tied to individuals are set to expire after 2025.

That proposal appears to be in line with a one-page GOP “Commitment to America.” In a pillar in the document that concerns the economy, Republicans have said that they will fight inflation and lower the cost of living in part through what they describe as a “pro-growth tax economy.” It’s unclear at this time what specific tax policies the GOP would pursue since they will control of the House for the next two years. 

But it's important to keep in mind that President Biden would still have veto power and Congressional override would be highly unlikely.

Kelley R. Taylor
Tax Editor, Kiplinger.com

With more than 20 years experience as an in-house legal counsel and business journalist, Kelley R. Taylor has contributed to numerous national print and digital magazines on key issues spanning education, law, health, finance, and tax. Kelley particularly enjoys translating complex information in ways that help empower people in their daily lives and work.