Changing winds: What’s Likely to Happen to Taxes, Immigration and International Trade Now That the Election is Over
Change is likely with Republicans now controlling the White House, Senate and House of Representatives. But what will that change look like and how bold will it be? How many of the promises made on the campaign trail will become reality? In order to better understand what may lay ahead for businesses of all sizes, the Milwaukee Business Journal recently sat down with local experts to talk about the promises made, the challenges in governing and the looming expiration of tax deductions.
EVAMARIE SCHOENBORN: There will be a lot of activity in Washington as the transition of power takes place. How long do you think it will take before the fog of that transition fades, and we start to have a clearer idea of what types of changes are most likely to happen?
DOMINIC CECI: I think in some ways the fog has already lifted. Trump is coming into office with four years of experience, so he should come out of the gate much quicker than last time. He is naming appointments quickly, which provides clarity on the path forward, and there is already discussion about policies. So, I think it is going to move pretty fast.
SCHOENBORN: Dan, from your perspective, what are you thinking? What are some of the key things you are looking at as the administration gets seated?
DANIEL GLOMSKI: I would say we are looking at immigration, tariffs and tax issues. We are kind of anticipating the tax fog clearing sometime around May or June. That’s when we should see some indications about the kind of legislative changes we might see from a tax perspective. Historically, when the president has both the House and the Senate, it is usually August or September before something gets approved in its final form. We are anticipating a similar kind of outlook. We may see clarity on tariffs and immigration policies sooner than that because I think those issues will be at the forefront of the incoming administration.
JOE TIERNEY: I think there will be two tranches — one tranche of things that will happen rather quickly and another tranche of things that will trickle out over time. The first tranche will include certain TCJA (Tax Cuts and Jobs Act) provisions. Congress and the administration will address making a lot of those things permanent rather quickly because they sunset at the end of 2025. I don’t know if immigration changes are going to come to fruition as proposed any time soon. Creating a large deportation program is going to take time.
SCHOENBORN: What are your clients’ primary concerns with the incoming administration?
CECI: I think the immediate concern is around taxes. If nothing gets done by the end of 2025, tax law will change and that always gives a lot of people heartburn. When it comes to the long term, a lot of people are concerned about the large deficits, the accumulation of debt and the general situation with the budget.
GLOMSKI: Our clients want to know how any changes are going to affect their businesses. Research and development credits and bonus depreciation are in the forefront of their minds for tax policy. They want to know if they should buy equipment or invest in research and development activity. Tariffs may not play out the way the administration wants them to, but supply chain issues and how tariffs will affect them are certainly something our clients are watching. And then there is the labor issue. Obviously, mass deportation could affect the pool of potential employees, so that becomes a consideration. However, the immediate concerns are navigating bonus depreciation and R&D expense deductions.
SCHOENBORN: So, it sounds like tariffs, taxes and talent are all concerns.
TIERNEY: Yes, but I would really focus on the taxes part. I think Dominic is right. In the short term, everyone is looking at the taxes. Clients don’t seem overly concerned about deportation at this point. A lot of my real estate clients are looking for a further decrease in interest rates, but I don’t know if that is actually going to happen. There is an assumption that inflation is going to go down, but I do not know if that assumption is justified. A lot of different things could happen. If Trump does institute substantial tariffs, will that slow growth and development or will it raise prices? Both of those effects are possible with tariffs. Or maybe they offset each other. My clients are really thinking short-term at this moment, but it will be interesting to see how their perceptions change over time as things play out.
SCHOENBORN: Where do you think we will see the most bipartisan cooperation?
TIERNEY: I think you will find cooperation for an increase in the child tax credit. I think restoration of the SALT deduction probably gets done. That will be fairly bipartisan. I think the extension of a number of TCJA provisions on taxes and capital gains will probably get done. Beyond that, not a lot.
CECI: I am not sure there will be much cooperation. Maybe for some of the very specific pieces like Joe mentioned, but based on what we have seen in the past, I don’t think the Democrats are going to line up to help push the Republican agenda.
GLOMSKI: I am not as confident as Joe on the prospects for the child tax credit. I am not sure it is something that is going to make it through with bipartisan approval, but it certainly is something that could be used as leverage in budget negotiations.
SCHOENBORN: What are some of the most significant potential tax changes that businesses should be aware of?
GLOMSKI: There are a lot of things in the TCJA tax bill that will expire at the end of next year if they are not extended. You could be looking at the 20% qualified business income deduction going away. Bonus depreciation is at 60% for this year (2024) but drops to 40% next year (2025). Additionally, you could be looking at a significant portion of an estate tax lifetime exclusion going away and individual tax rates increasing. Those are among the changes that are likely to happen if Congress does not extend provisions of the TCJA.
TIERNEY: I think the question of whether or not Trump reduces the corporate tax rate to 15% for companies that manufacture in the United States is a big deal. How winners and losers are picked with tariffs as tax policy could be a big deal. Another big deal is whether Trump guts the Inflation Reduction Act incentives for purchasing electric vehicles and clean energy sources.
CECI: There has been a lot of discussion about the 15% corporate rate. If it is just applied to “made in America” companies, the potential cost is around $361 billion over 10 years, but that number would double if it were applied to all corporations. If you were to add up all of the potential new tax breaks talked about on the campaign trail, they would cost about $2.7 trillion over 10 years, so a lot of them are not going to get done. I think the tax debate is going to be a big deal. With such a small majority in the House, it will not take that many votes to push back, so there are likely to be concessions.
SCHOENBORN: Tariffs are on people’s minds. How do you think they are going to impact supply chain and production costs and overall possibilities for the business of Wisconsin?
CECI: Trump wants to increase tariffs an additional 10% on China, and add 25% on goods from Mexico and Canada. The Mexico and Canada tariffs are really interesting because three-quarters of their exports come to the U.S. Mexico is huge in the automotive manufacturing space, so if you are dealing with autos at all, tariffs will be impactful. They are a big exporter of electronics and machinery as well. About 40% of what Canada sends us is oil- or energy-related. That could impact oil prices, but I am less concerned about that because oil prices are pretty low. It is uncertain whether the Mexico and Canada tariffs will ultimately get enacted, and if they do, whether they will be long-lived. On the China front, there are already tariffs in place averaging 10 or 15%. If you moved those tariffs all the way up to the 60% that was talked about on the campaign trail, they would potentially increase prices by about one-half percent across the board and could cut imports from China by about 75%. I think the 25% tariffs on Mexico and Canada are probably a negotiating tactic, but the China tariffs are likely to stay in place. The Biden Administration did not remove the China tariffs Trump put in place when he was president, so those are likely to be long-lived.
GLOMSKI: As an operator of a business, you have to plan and think through the risks of tariffs and how to mitigate those risks. We’ve been having discussions with our clients about alternative sources of materials and what Plan B will look like if there are tariffs or other disruptions to their supply chains. From a business budgeting perspective, they should consider building in some increased cost structure — whether it is due to an increase cost in using an alternative supply source or the tariff costs. Note, this is not something businesses are running to solve yesterday, but it is something that is now on their radar and they’re starting to consider how it could impact their operations and long-term strategies.
TIERNEY: I think Trump’s tariff proposals are a negotiating tactic, especially when it comes to Mexico and Canada. I think a lot of the reasons our clients aren’t doing anything yet is because they don’t know what things are going to look like. For small businesses, everything is about timing. Small business owners first want to know what their profit is going to be this year and then what they think their profit is going to look like next year. Maybe they want to arbitrage their taxes by buying more equipment before the end of the year. People are going to look at tariffs the same way. They need to know what they will look like before they can know how to maneuver their business and make investments to optimize the situation. Everyone is kind of waiting to see what happens.
SCHOENBORN: Do you have any thoughts on immigration policy and the impact that could have on small and medium-sized businesses?
TIERNEY: I think the Trump Administration has a massive opportunity to fashion some sort of overall compromise where you remove a lot of the people who came in illegally, especially those with criminal records. At the same time, you provide a shortened path for those people who have been here and have the skills and values we need so we are not suffering from a lack of talent and labor resources. I think there is a compromise to be had and a real opportunity.
CECI: At the macro level, I have seen estimates that immigration policy could potentially remove about a quarter percent of GDP through reduced productivity and a smaller labor force. In Wisconsin, workforce participation is already low, so changes to immigration probably make that a little bit worse. Mass deportation would be really difficult to do because of the costs as some states are not going to participate. What is more likely to happen is border security and deporting people with criminal records.
GLOMSKI: The volume of deportation activity that is going to be necessary to make an impact will be difficult to achieve. So, Joe’s point about the administration having an opportunity to do something in the right direction is probably the best we are going to see out of the current situation, and it is going to take time to get this done. Border security is probably where the immigration policy will start.
SCHOENBORN: What are the one or two things that you would want business owners to take away from this conversation? What should they be thinking about?
GLOMSKI: The tax strategies I think the Trump Administration are likely to embrace and advance are the R&D credit and expense issue and maybe bringing the bonus depreciation back to 100%. But the qualified business income deduction, estate tax deduction and reduced tax brackets are also set to expire at the end of 2025. President-elect Trump is going to have to look at whether to extend all of these tax situations. I don’t think individuals should expect to see their tax rates go down as a result of any budget negotiations. It is going to be more so a battle to hold them where they are currently.
TIERNEY: I think businesses should be very strategic in their thinking. They should be looking at what is happening in Congress, read the tea leaves and think about how those changes are going to affect their businesses. I really think a strategic emphasis is going to be important in dealing with labor, interest rates and debt burdens.
CECI: I agree businesses need to be planful. There are a lot of potential outcomes, but we don’t know which ones will actually occur. Republican control of government gives you a lot more certainty that something will get done on the tax side, but the details will really matter. Budget hawks’ concerns over the deficit and debt combined with slim majorities, especially in the House, means it is very unlikely all of the tax cuts talked about on the campaign trail will get done. On the tariff side, I think what gets done will also look a lot different than what was discussed on the campaign trail. We haven’t talked much about regulation, but we can assume there will be a much easier regulatory environment like we had in the first Trump term, and the biggest beneficiaries of that will be smaller and mid-size businesses.
SCHOENBORN: Finally, what is one thing you want business owners to be thinking about at year-end?
GLOMSKI: It is definitely the Corporate Transparency Act, which requires any business that has less than $5 million in revenue and fewer than 20 full-time employees to file a beneficial ownership information report by Jan. 1.
TIERNEY: I would add to that by saying business owners should take this time of year to get their corporate house in order. Make sure you are doing annual minutes. Make sure you know where your corporate documents are. Make sure you have looked at your employee benefit plans. Take this brief pause before the year changes and make sure your foundations are good.
CECI: Just the idea of being planful. Now is a good time to meet with all of your advisors — financial, accounting and legal.