Candice Horbacz
Following the recent US midterm elections, Democrats have successfully reclaimed majorities in both the US House of Representatives and the US Senate, setting the stage for a significant recalibration of federal tax policy and economic priorities over the next two years. This shift in legislative power, which will formally commence with the convening of the 120th Congress on January 3, 2027, ushers in a new era of policy discourse in Washington, marked by ambitious Democratic proposals for both tax increases and targeted tax cuts, all while navigating the complexities of a divided government and pressing national fiscal challenges.
A New Congressional Landscape: The Mandate and the Constraints
The Democratic victory in the midterm elections represents a pivotal moment, shifting the legislative agenda dramatically after a period of varied control. Prior to these elections, the political landscape had seen different configurations, influencing the feasibility of major legislative overhauls. The Democratic capture of both chambers provides them with the procedural leverage to advance their legislative priorities, control committee assignments, and dictate the terms of floor debate. However, the continued Republican control of the White House, with President Trump at the helm, introduces an inherent constraint: the presidential veto. This reality means that while Democrats can articulate and pass their preferred legislation through Congress, enacting it into law will necessitate either bipartisan compromise or the strategic use of political pressure, particularly during critical junctures like the upcoming debt limit debates. Consequently, many of the proposals put forth by Democrats in 2027 will serve not only as legislative initiatives but also as powerful messaging vehicles, shaping public discourse and laying the groundwork for future policy directions, potentially beyond the current administration.
Democratic Agenda: Bolstering Social Programs Through Tax Increases
A core tenet of the Democratic platform for the 120th Congress involves significant changes to the tax code aimed at expanding social safety nets and addressing perceived income inequality. To fund these ambitious programs, Democrats are prioritizing proposals to raise substantial tax revenue, primarily from corporations and high-income individuals. These initiatives reflect a broader ideological commitment to a more progressive tax structure, seeking to reverse elements of previous tax reforms and ensure that the wealthiest individuals and largest corporations contribute more to federal coffers.
One of the top legislative priorities will be revisiting the corporate income tax rate. Currently standing at 21 percent, a rate established by the 2017 Tax Cuts and Jobs Act (TCJA) under the Trump administration, Democrats are keen to raise it. Discussions will likely revolve around the optimal new rate, with some proposals suggesting a return to levels closer to the pre-TCJA 35 percent, or potentially introducing a graduated corporate tax structure where larger corporations face higher rates. Beyond the headline rate, lawmakers will also scrutinize corporate tax base changes and international tax rules. This includes re-evaluating the taxation of foreign earnings, potentially moving towards a country-by-country liability calculation, and strengthening guardrails against profit shifting—a practice where multinational companies exploit tax differentials by moving profits to lower-tax jurisdictions to reduce their overall tax burden. This global effort aligns with ongoing international discussions around a global minimum tax, which has gained traction among many industrialized nations.
Beyond traditional corporate taxation, some congressional Democrats are also turning their attention to novel revenue sources, particularly in the rapidly expanding sectors of data centers and artificial intelligence (AI). The year 2026 saw several proposals emerge targeting these areas. These included suggestions to disallow or restrict bonus depreciation for data center investments, enact a new "tax on bits" for data transmission, and impose a new excise tax on the electricity consumption of data centers. These ideas represent an attempt to adapt the tax code to the digital economy, acknowledging the significant economic activity and environmental footprint of these emerging industries, though they also raise complex questions about administrative feasibility, economic impact on innovation, and potential competitive disadvantages.
High-income individuals are also squarely in the crosshairs of Democratic tax proposals. Several prominent figures in both chambers have advocated for income surtaxes on millionaires. Senator Chris Van Hollen (D-MD), for instance, has previously proposed a surtax of 12 percent on taxpayers earning over $1 million. Such proposals aim to increase the effective tax rate on top earners, arguing that they can afford to contribute more to public services.
Capital gains taxation will also be a significant area of focus. Proposals are expected to include raising capital gains tax rates, which are currently lower than ordinary income tax rates, to reduce what some see as a preferential treatment for investment income. A key element of this debate will be the "step-up in basis" provision, which adjusts the cost basis of inherited assets to their fair market value at the time of death, effectively eliminating capital gains tax liability for heirs on appreciation that occurred during the decedent’s lifetime. Democrats are expected to push for ending or significantly curtailing this provision. Furthermore, more aggressive proposals, such as annually taxing unrealized capital gains for very-high-net-worth individuals or even levying a direct wealth tax on billionaire assets each year, are anticipated. These latter concepts, while highly ambitious and facing significant legal and administrative hurdles, reflect a growing desire among some Democrats to fundamentally reshape wealth distribution.
The debate over these tax increases will undoubtedly intensify, pitting conventional adjustments to the existing tax code against more novel, and often untested, ideas. While proponents argue for their fairness and revenue-generating potential, critics warn of potential administrative complexities, legal challenges, and significant economic trade-offs, particularly in discouraging saving, investment, and long-term economic growth.
Targeted Tax Cuts: Expanding Social Support and Economic Relief
While focused on raising revenue from the top, Democrats are simultaneously committed to enacting tax cuts that benefit middle- and lower-income households, aligning with their broader social and economic objectives. These proposed tax cuts are primarily designed to enhance access to essential services and provide direct financial relief.
At the forefront of Democratic priorities for tax cuts is the restoration of expanded premium tax credits (PTCs) for health insurance. These credits, which subsidize the purchase of health insurance on Affordable Care Act (ACA) exchanges, saw temporary and significant expansions from 2021 through 2025. House Democratic Leader Hakeem Jeffries (D-NY), the likely next Speaker of the House, has explicitly made restoring more generous PTCs a top agenda item. The Congressional Budget Office (CBO) previously estimated that extending these expanded PTCs would cost approximately $350 billion over a decade, highlighting the substantial fiscal commitment required. The rationale behind this expansion is to make health insurance more affordable and accessible, reducing the financial burden on millions of Americans.
Similarly, expansions of the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) are high on the Democratic agenda. The New York Times reported in October 2026 that Jeffries is prioritizing these expansions. Democrats successfully enacted one-year expansions of these credits in 2021, which were lauded for significantly reducing child poverty, but subsequent efforts to extend them in 2022 faced legislative roadblocks. The proposed CTC expansion could increase the per-child credit from $2,200 in 2026 to $3,000 or more in 2027, potentially making it fully refundable for more families. The EITC expansion would likely focus on increasing the credit for childless adult workers, a demographic often overlooked in traditional tax relief measures. Restoring the 2021 childless EITC expansion could cost between $60 billion and $120 billion over the next decade, while reinstating the full 2021 CTC expansion could exceed $500 billion over the same period, underscoring the significant investment in family and worker support.
Housing tax policy is another area where Democrats may seek changes in 2027, particularly through expansions to the Low-Income Housing Tax Credit (LIHTC). While Republicans expanded the LIHTC in the 2025 One Big Beautiful Bill Act (OBBBA), Democrats may pursue additional modifications to enhance its effectiveness in addressing affordable housing shortages. Some Democrats have also voiced support for legislation that would extend full expensing to multifamily residential housing construction. This measure would allow businesses to immediately deduct the full cost of such investments, thereby lowering the after-tax cost of building new affordable housing units and stimulating supply in a tight market.
Navigating the Fiscal Cliff: OBBBA Expirations and the 2028 Horizon
Adding another layer of complexity to the 120th Congress’s tax policy discussions is a critical deadline looming on December 31, 2028: the expiration of several tax cuts enacted under the 2025 OBBBA. These expiring provisions include deductions for tip income, overtime pay, auto loan interest, and an enhanced senior deduction. Additionally, a key provision allowing manufacturers to immediately deduct the full cost of new factory buildings will also sunset.
The approach Democrats will take to these expiring provisions remains unclear. While some Democratic lawmakers have expressed support for extending and even expanding deductions for tips and overtime, a broader consensus on the other OBBBA expirations is yet to form. The cumulative cost of extending the tips, overtime, auto loan interest, and enhanced senior deductions beyond 2028 has been estimated at $577.3 billion over 10 years, presenting a significant fiscal challenge that will require careful consideration amidst other spending and revenue priorities. The upcoming 2028 presidential election will also undoubtedly influence these decisions, as both parties strategize their positions on popular tax provisions.
Broader Economic Headwinds: Debt, Tariffs, and Entitlements
Beyond the immediate legislative agenda, the 120th Congress will operate against a backdrop of significant macroeconomic challenges that will inevitably influence federal tax policy. The national debt, currently exceeding $32 trillion and surpassing 100 percent of Gross Domestic Product (GDP), presents a formidable long-term fiscal challenge. The Congressional Budget Office (CBO) projects persistent large budget deficits, with the government spending $2 trillion more than it collected in the most recent fiscal year alone.
Rising government borrowing costs, exemplified by the 10-year Treasury yield hovering around five percent in recent weeks, compound this issue. These higher borrowing costs translate directly into increased interest payments on the national debt, diverting resources that could otherwise be allocated to other federal programs. Consumer borrowing costs have also risen in tandem, impacting everything from mortgages to auto loans, potentially putting pressure on lawmakers to address the widening gap between spending and revenue.
The debate over tariffs, a hallmark of the Trump administration’s trade policy, will also resurface. While many Democratic policymakers have opposed President Trump’s imposition of hundreds of billions of dollars in tariffs—criticizing their unilateral nature, broad scope, and impact on allies—the issue is not strictly partisan. Some Democrats do support targeted tariffs on specific goods, such as aluminum and steel, reflecting a growing bipartisan concern about fair trade practices and domestic manufacturing. Even if Democrats can muster the votes to roll back some or all of Trump’s tariffs, assembling a veto-proof majority on such a contentious issue in the next two years is likely to be an uphill battle.
Perhaps the most pressing long-term fiscal challenge is the looming crisis in Social Security. The Social Security Trustees currently project that the program’s trust fund will be fully depleted by 2032. Absent congressional action, Social Security would no longer be able to pay out full benefits, necessitating either benefit reductions or a significant injection of additional revenue. The cohort of US senators elected in the recent midterms will face this critical issue directly within their current six-year terms. Finding a bipartisan and enduring solution for Social Security reform will require a delicate blend of benefit adjustments and new revenue streams, a politically fraught endeavor that could involve changes to payroll taxes, eligibility ages, or benefit formulas.
The Big Picture: A Consequential Two Years Ahead
The shifting balance of power in Washington promises a busy and consequential session for the 120th Congress. Even with the likelihood of legislative gridlock due to a divided government, the proposals advanced by Democrats on tax and trade policy will serve as crucial signals, delineating their priorities and shaping the direction of national policy for years to come. The period between now and the end of 2028 is particularly critical, marked by the 2028 presidential election, the expiration of key OBBBA tax cuts, and the persistent budgetary issues that demand attention.
Democrats enter this new Congress with a clear vision for tax reform, encompassing both significant tax increases on corporations and high earners to fund expanded social programs, and targeted tax cuts aimed at providing relief to middle- and lower-income families. Their ability to enact these ambitious proposals will be tested by the realities of a Republican White House and the formidable national trends of rising budget deficits and an uncertain economic outlook. The legislative battles ahead will not only determine immediate policy outcomes but will also profoundly influence the economic landscape and social contract for the next decade.
