Capitol Hill Recap: The Coming Tax Clashes

The midterm elections are just over a month away, and by most analyses Democrats are poised to pick up gains in Congress.

In our neck of the woods, this raises some important questions. First and foremost, if Democrats do gain enough leverage to push their agenda, what will that mean for taxes?

It’s no mystery that none of them were fans of the Republican-passed 2025 tax bill, known as the One Big Beautiful Bill Act. While the White House has tried to rebrand it as the “Working Families Tax Cuts,” Democrats have taken to calling it the Big Ugly Bill on the campaign trail. (Officially, it has a long, legal name that very few use.)

House Minority Leader Hakeem Jeffries has said that reversing the bill’s funding reductions to Medicaid and other health and welfare programs will be one of the party’s priorities. In pushing for that, Democrats will also need to propose new revenue-raising measures to cover the cost, and they’ll likely focus on the OBBBA’s tax provisions, especially those benefiting large businesses and wealthy taxpayers.

The new politics of data centers and artificial intelligence will also play a role. Sen. Elizabeth Warren, D-Mass., and several other Democratic senators have sent letters to CEOs at top technology companies, asking them to reveal what tax deductions enabled by the OBBBA they’ve taken related to the surging data center and AI buildout.

Nothing in the OBBBA singles out tax benefits for data centers or AI specifically. But the companies that have been spending on AI-related infrastructure can use some of the provisions that the OBBBA enhanced or made permanent in the tax code, such as bonus depreciation or research and experimentation expensing under Sec. 174. Democrats don’t necessarily oppose those measures in the abstract–many voted to temporarily extend them as part of a bipartisan compromise just a few years ago. But their apparent connection to AI will likely make them part of the discussion when it comes to revenue.

Other OBBBA policies which have been linked to AI spending include the loosening of the Sec. 163(j) limit on interest deductibility and the Opportunity Zone benefits for investment in areas designated as distressed.

Without control of the White House, Democrats won’t be able to enact these policies themselves. But in negotiations with Republicans and the Trump administration over government funding and other issues, they can apply pressure for them to be part of any bipartisan agreement. Where that will lead is hard to predict, but these tax issues will likely continue to be part of the conversation.

Periods of divided government in D.C. are always unpredictable, and in this political climate it will surely be even more so.

Recent Tax Pieces:

Democrats Float AI, Data Center Tax Plans as Tool for Midterms – Lauren Vella, Bloomberg Tax:

Politics watchers say they’re capitalizing on real concerns voters have about the rising cost of electricity, water, and healthcare as well as pollution, job stability, and the sustainability of the American economy.

“There’s a race to the top on taxing AI right now,” said Jeremy Bearer-Friend, associate law professor at George Washington University whose proposal on an AI equity tax was the blueprint for a bill introduced by Sen. Bernie Sanders (I-Vt.). “The Democratic Party has recognized that people are very angry and also very scared, and they want to see action.”

Recent polling bears out the mounting anxiety. An August Pew Research Center poll found that 21% of Americans say data centers are “mostly” bad for tax revenue, compared with just 12% in January. Fifty percent say the facilities are bad for home energy costs, compared with 38% in January.

Senate Unanimously Advances Sweeping Tax Administration Bill – Cady Stanton, Tax Notes ($):

The package of tax administration provisions includes several changes related to IRS taxpayer service, which Crapo referred to as “basic expectations of tax administration.”

Among them is a requirement for the IRS to digitize all paper returns and correspondence — a long-sought goal of the agency that it has historically struggled to implement despite promises of progress.

Another provision to improve taxpayer services would require the IRS to create a dashboard where taxpayers can view real-time data on call volume, backlogs, wait times, and callback availability, and to expand callback technology, IRS online accounts, and the “Where’s My Refund?” tool.

The bill would allow the Tax Court to hear cases on refunds. And the Taxpayer Advocate Service would gain access to more IRS information, among other measures, under the legislation.

Daines releases full text of crypto tax plan – Brian Faler, Politico:

The 56-page bill by Sen. Steve Daines of Montana would make a host of changes, including creating a new tax exemption for when people use so-called stablecoins to make small purchases of goods and services that would otherwise trigger capital gains taxes. He would also impose anti-abuse “wash sale” rules designed to prevent people from manufacturing losses to cut their tax bills.

Daines’ plan won the support of Senate Banking Chair Tim Scott (R-S.C.), as well as Sen. Cynthia Lummis (R-Wyo.) — who, like Daines, is retiring — as well as Sen. Bernie Moreno (R-Ohio). No Democrats signed onto the plan.

Trump Administration Prepares to Ask Tax Filers if They Are U.S. Citizens – Andrew Duehren, The New York Times ($):

The additional question comes as part of what the Trump administration has said is an effort to prevent undocumented immigrants from receiving federal tax benefits. But many tax credits require recipients to have valid Social Security numbers, meaning previous tax forms already screened undocumented immigrants from receiving them. That fact has led several tax and immigration experts to conclude that the question is simply intended to scare undocumented immigrants out of filing their taxes at all.

‘Slash-Bang’ Tax Cuts? Not for Eisenhower – Joseph J. Thorndike, Tax Notes ($):

It’s tempting to be cynical when recollection starts shading into reverence, but honestly, it’s hard to be snarky about Eisenhower. He wasn’t perfect, either as a person or a president, but even a jaded historian can be impressed by his sincerity, his penchant for public candor, and his sober-minded approach to policymaking.

This last quality infused his approach to taxation. Earlier this month, I recounted the story of Eisenhower’s battle to extend the excess profits tax, challenging members of his own party who were eager to see the hated levy wiped from the books. That episode was emblematic of Eisenhower’s entire approach to decision-making, and especially of what I call his fiscal prudentialism.

Public Domain Supervillain of the Week

Every week, a new villain from the Golden Age of comics, who's fallen out of favor.

This week's entry: The Clown.

Debut Year: 1940

Debut Publication: Super-Mystery Comics #5

Arch-nemesis: Magno the Magnetic Man (see May 21 post)

Evil Plan: A psychopath and Nazi spy, he's had several schemes to cause mass death and destruction.

Abilities: Aside from being vicious and without conscience, he is a skilled swordsman and inventor of machines that can control men's minds.