Key Takeaways
- Democrats won the House and Senate but remain well short of the votes needed to override a veto or break a filibuster, so significant legislation is unlikely over the next two years.
- Expect Democratic tax proposals to restore Medicaid and health care funding, along with bipartisan interest in taxing AI and data center activity.
- Near-term items to watch include the lame duck session, where lawmakers must extend government funding past Dec. 11, and new congressional investigations that could examine IRS operations, taxpayer data sharing, and multinational tax avoidance.
The Democratic Party won a historic victory on Nov. 3, 2026, gaining control of both the House and the Senate. This was one of the largest midterm victories since the 1974 backlash to the Watergate scandal. Following years in the minority, they will return to Washington with strong majorities in Congress and with what they claim is a mandate to strongly challenge President Trump during his final years in office.
The Next Two Years
Despite the Democrats’ strong gains, their ability to enact significant legislation will be limited in a divided Washington. The party is still far short of the 67 Senate votes needed to override a presidential veto of legislation, or the 60 votes necessary to break a Senate filibuster and approve a bill under the current rules.
Much of the 120th Congress will be consumed with symbolic legislation meant to highlight policy differences between Democrats and Republicans, as well as investigations into Trump Administration conduct.
However, Congress will still need to pass some necessary legislation, such as government funding, that will require the parties to negotiate a bipartisan compromise. This could be an opportunity for the Democratic party to push its policy priorities.
Legislation
Democrats are expected to focus on restoring cuts made to Medicaid and other social spending in the One Big Beautiful Bill (OBBB), as well as the expired enhanced premium credits for the Affordable Care Act state health exchanges.
In pushing these priorities, lawmakers may include new revenue sources to cover the cost of increased spending. Revenue sources could include tax provisions that were altered by the OBBB; for instance, raising the corporate or top individual rates, or limits on bonus depreciation or the deduction for research and development spending.
These proposals are unlikely to become law but could characterize Democratic positioning for the years ahead.
Taxes and AI
One area where there could be bipartisan support is taxation of activities related to artificial intelligence, especially data center construction or use. While President Trump remains committed to accelerating the AI buildout, voters in both parties have demonstrated wariness about the effects of the technology. Taxation is one tool which policymakers could use to regulate development and raise revenue.
Already, lawmakers (including some Republicans) have proposed an excise tax on data centers, as well as measures to limit current tax benefits such as bonus depreciation, R&D credits and Opportunity Zone incentives for data centers.
Investigations
While their power to legislate may be limited, by gaining majorities in both chambers of Congress, Democrats will have wide authority to conduct investigations with hearings and subpoena power.
In the tax sphere, this would include the agreement to shield Trump from future tax audits, as well as other allegations of political interference in the audit process. They will also likely investigate the sharing of taxpayer data with departments such as Homeland Security.
Policy issues which Democrats could look into include the dismantling of the IRS Direct File program, which allowed taxpayers to submit returns electronically to the agency directly, and proposed regulations to bar nonprofit status for schools and other institutions engaged in certain diversity programs.
Incoming committee chairs have indicated they may investigate alleged tax avoidance by large multinational companies, as well as the accounting firms advising those companies, and issues related to tariffs and trade.
The Lame Duck Session
Before new elected officials are sworn in, current lawmakers will return to Washington and consider remaining legislative items in November, December and early January. This is known as the lame duck session.
Their first priority will be to extend government funding past the current Dec. 11 expiration. While that usually is not controversial during end-year periods, this political climate adds a degree of unpredictability.
Before Congress adjourned for the campaign season, there was some momentum for bipartisan measures to update the tax rules on cryptocurrencies and digital assets, as well as a package of small administrative changes to the tax code and Internal Revenue Service, which have near-unanimous support.
They also could consider legislation to allow full deductibility of gambling losses, which has some bipartisan support, and proposals for a credit to support the domestic film industry. Lawmakers may also revisit credits that expired in 2025 and 2026, such as the Work Opportunity Tax Credit and the semiconductor manufacturing credit. Outside of the tax sphere, lawmakers are also expected to consider a bipartisan measure on permitting reform and the Protect College Sports Act.
It is unclear whether it is feasible to pass all, some or any of these measures given unpredictable dynamics.
Our National Tax team continues to review the impact of the mid-term elections and can help you make sense of what it means for your organization.
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