Insight A Quiet 2024 Will be Followed by a Busy 2025 for Tax Legislation

There were few significant developments in either federal or state tax law during 2024. But it was likely a calm before the storm; we can be sure that 2025 will be a busy year for those who make tax policy and for those who follow it.

Looking Back

On the federal level, perhaps the most important development in 2024 was a U.S. Supreme Court case with uncertain tax effects – the Loper Bright case that overruled the Chevron case regarding the level of deference to be given to administrative agencies. The Chevron standard, as applied to an ambiguous statute, required a court to determine whether the agency’s regulation was a reasonable interpretation of the statute. If so, the court was obligated to defer to the agency’s interpretation, even if the court would have read the statute differently. In Loper Bright, the court stressed that interpretation of statutes is a judicial function: “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” Now, a court may defer to an agency interpretation when it is reasonable, but not simply because the statute is ambiguous. When a statute explicitly delegates authority to an agency, Loper Bright states that courts must respect that delegation, while also “ensuring that the agency acts within it.” The Internal Revenue Code includes many delegations of rulemaking authority as well as an overarching direction in Code section 7805(a) to “prescribe all needful rules and regulations for the enforcement of this title.” Thus, we are likely to have two levels of scrutiny – one where there is specific direction to promulgate rules and another applying (or not) the general authority under section 7805(a).

The Loper Bright case will not apply at the state level, although it could affect the Idaho Supreme Court’s analysis of state issues if it were to adopt the same reasoning. Deference to agencies is currently governed by a complex set of standards from the 1991 case of J.R. Simplot Co. v. Idaho State Tax Commission, including whether the statutory language expressly treats the question at issue and whether the agency’s interpretation of the statute was “contemporaneous” with its enactment.

There was little federal tax legislation in 2024, and even at the state level the changes were modest. The legislature continued property tax relief by enacting House Bill 521, which followed H.B. 292 from the 2023 session in using sales tax revenues to reduce property taxes. House Bill 521 appropriated money to school districts to reduce the funding that otherwise would be provided by the property tax. The same bill reduced the income tax rate from 5.8% to 5.695%.

Looking Ahead

The 2025 Idaho Legislature will arguably be the most conservative ever, and accordingly we can expect to see the return of tax bills that have fallen short of passage in recent years. This could include an exemption for sales tax on groceries, and a tax exemption for or subsidies to private or homeschool education. There likely will be some move to further reduce the income tax rate, and to increase or at least maintain the state’s efforts to reduce the property tax burden.

Federal legislation will likely have an effect on Idaho tax policy, and certainly will affect Idaho taxpayers. How soon we are affected depends on how quickly the new administration and Congress act on tax bills. This will certainly happen in the first two years of the administration, since the House and Senate Republican majorities may change in the mid-term elections in 2026. It could happen as early as the first 100 days of the administration – a key marker for a new President – and that could affect the 2025 Idaho legislature if changes are retroactive. But it seems more likely that federal tax changes will be effective for the 2026 tax year.

It is virtually certain that the new administration will seek to extend the tax cuts implemented in the first Trump administration in 2017. The following are among the 2017 provisions set to expire after 2025:

1. the reduction in individual income tax rates, notably the top rate from 39.6% to 37% for the highest earners, and from 28% to 24% in a key middle bracket;

2. the nearly doubling of the standard deduction so only about 10% of filers now itemize their deductions;

3. elimination of the personal and dependent exemptions;

4. a cap on the state and local tax deduction at $10,000 per filer;

5. the doubling of the annual child tax credit to $2,000 with more higher-income parents eligible to claim it;

6. the doubling of the estate and gift tax exemption to almost $14 million in value per person (as adjusted for inflation) in 2025;

7. the deduction available under section 199A to make the small business owner’s individual tax rate comparable to the corporate tax rate of 21%.

The 2017 corporate tax rate reductions from 35% to 21% are not set to expire but could be put into the mix in the legislative process. The Trump campaign also supported an exemption for Social Security benefits (already exempt at the Idaho state level) and for tips, and has suggested that green energy tax credits may be curtailed.

The federal tax bills will likely be affected by concerns over the national debt, currently over $37 trillion. Federal Reserve Chair Jerome Powell has warned that the nation is on “an unsustainable fiscal path.” Extending the individual and estate tax provisions would add more than $3.4 trillion to the federal deficits over a decade. While tax cuts are often justified by proponents as paying for themselves through economic growth, at some point the growth in the deficit and associated interest costs will presumably be a blockade to economic growth.

Ironically, the consequence of new federal legislation may be more to maintain the status quo than to introduce new tax policy by leaving in place the 2017 tax cuts. In any event, the next year promises to be exciting for those concerned with tax policy and fiscal security.

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