Early results from the United States midterm elections have confirmed a major shift in Washington, with Democrats successfully retaking control of both the US House of Representatives and the US Senate. This sweeping change in legislative power is set to dramatically alter the landscape of federal tax policy over the next two years. It will redefine which tax issues dominate congressional debates and dictate which policy proposals ultimately receive floor votes in Capitol Hill. As the 120th Congress prepares to convene on January 3, 2027, both new tax cuts and aggressive tax increases are officially back on the table, creating a high-stakes legislative environment defined by divided government.
Several core pillars of the Democratic legislative agenda for the upcoming congressional term will require sweeping overdowns and major structural changes to federal tax policy. Among their top priorities, Democrats plan to push for the restoration of larger, expanded tax credits designed to subsidize the purchase of private health insurance. In addition, they intend to advocate for the reinstatement of a larger child tax credit and an enhanced earned income tax credit. To offset the substantial costs of these credits and finance new federal spending programs, Democrats are preparing to advance proposals that would raise taxes on high-income earners and major corporations.
Despite their newfound majorities in both chambers, Democrats will face severe legislative constraints in 2027 due to continued Republican control of the White House. President Trump retains the power of the veto, meaning that major Democratic tax hikes are unlikely to be signed into law. However, the policy proposals introduced and debated over the next two years will serve as crucial messaging vehicles, laying down the ideological markers and shaping the long-term direction of future tax policy. Furthermore, Democrats must confront stark economic and fiscal trade-offs. Existing federal spending commitments and a mounting national debt severely limit the scope for expansive new spending programs or unfinanced tax cuts. Economists note that the specific tax increases proposed by Democrats could also dampen long-term US economic growth by increasing the tax burden on saving and investment.
Debate Between Conventional and Novel Tax Increases Will Ramp Up
Congressional Democrats are placing a premium on proposals aimed at extracting greater tax revenue from corporations and very high-income individuals. While their legislative ambitions will run into the formidable barrier of a presidential veto, these debates will serve as the primary battleground for defining the future trajectory of the federal tax code. One of the central focal points will center on proposals to raise the corporate income tax rate, which currently sits at a flat 21 percent. Lawmakers will debate how high the rate should be pushed, whether a graduated corporate rate structure should be implemented, and what structural changes to the corporate tax base should accompany any rate increase. Additionally, international tax rules are expected to be heavily scrutinized, including potential revisions to the taxation of foreign corporate earnings, the calculation of tax liability on a country-by-country basis, and tighter guardrails designed to prevent multinational corporations from shifting profits to low-tax jurisdictions and tax havens.
The evolving tax treatment of data centers and artificial intelligence investments is also expected to capture the attention of congressional lawmakers. Throughout 2026, a series of legislative proposals emerged seeking to alter how the explosive growth of AI and digital infrastructure is taxed. These proposals have ranged from conditionally disallowing bonus depreciation for data center investments to enacting novel levies such as a tax on digital data bits or a specialized excise tax targeting the immense electricity consumption required to power modern data centers.
At the individual level, Democrats across both chambers have championed various income surtaxes targeting millionaires. Among these is a notable proposal by Senator Chris Van Hollen of Maryland, which would institute a top-tier surtax of 12 percent on individual taxpayers with annual earnings exceeding $1 million. Capital gains taxation is also slated for intense focus, echoing legislative efforts to raise capital gains tax rates, eliminate the step-up in basis provision that currently eliminates capital gains tax liability on inherited assets at death, and tax unrealized capital gains annually for ultra-high-net-worth individuals. Some progressive lawmakers are pushing even further by advocating for an annual wealth tax levied directly on the total assets of billionaires.
These ambitious proposals will spark continuous internal debate among Democrats regarding the most effective path forward. Lawmakers will grapple with whether to pursue revenue through traditional adjustments to existing tax code levers or by experimenting with novel, untested tax mechanisms that carry significant administrative, legal, and economic risks. Regardless of the approach, most proposed tax increases carry steep economic trade-offs, primarily by discouraging domestic saving and capital investment.
Tax Cuts May Focus on Health Care, Children, and Housing at a Substantial Revenue Cost
At the very top of the Democratic legislative wishlist for tax relief is the restoration of enhanced premium tax credits that previously subsidized health insurance purchases on Affordable Care Act exchanges before expiring at the end of 2025. Democrats had enacted massive temporary expansions of these subsidies beginning in 2021, providing substantial financial assistance to millions of enrollees across various income brackets.
House Democratic Leader Hakeem Jeffries of New York, widely anticipated to serve as the next Speaker of the House, has made the restoration of these generous premium tax credits a primary legislative objective. Although he will encounter fierce resistance from congressional Republicans, upcoming legislative vehicles, such as the critical debt limit debates slated for the new term, could provide Democrats with strategic leverage. The Congressional Budget Office has previously estimated that extending the expanded premium tax credits would carry a staggering federal cost of approximately $350 billion over a decade.
In addition to health care, leadership is prioritizing expansions of both the child tax credit and the earned income tax credit. Democrats previously secured temporary, one-year expansions of these credits under the American Rescue Plan Act of 2021, though subsequent legislative efforts to extend them fell short. Under potential renewal proposals, the per-child tax credit could be increased from its current baseline of $2,200 to $3,000 or more. Meanwhile, earned income tax credit expansions would likely focus on broadening eligibility and increasing benefit levels for childless adult workers. Restoring the 2021 childless earned income tax credit expansion could cost between $60 billion and $120 billion over the next ten years, while reviving the expanded child tax credit could easily exceed $500 billion in lost federal revenue.
Housing tax policy is also expected to feature prominently on the Democratic agenda, with potential pushes to expand the low-income housing tax credit. Although Republicans implemented certain expansions to the credit as part of the One Big Beautiful Bill Act passed in 2025, Democrats may pursue further targeted modifications to address ongoing housing affordability and inventory shortages. Some lawmakers have previously supported legislation aimed at extending full expensing rules to multifamily residential housing construction, a move designed to lower the after-tax costs of developing new housing stock.
Beyond their own priorities, members of Congress and President Trump will confront a major looming fiscal cliff: the expiration of several prominent tax cuts enacted under the One Big Beautiful Bill Act, which are scheduled to sunset on December 31, 2028. On that date, temporary deductions for tip income, overtime pay, auto loan interest, and enhanced senior deductions will officially expire. The specialized provision allowing manufacturers to immediately deduct the full cost of constructing new factory buildings will also lapse. It remains to be seen how Democrats will approach these expiring provisions, though certain lawmakers have expressed support for extending deductions related to tips and overtime. Analysts estimate that extending these specific deductions alongside auto loan and senior deductions beyond 2028 would cost roughly $577 billion over a decade.
Tariffs and the Long-Term Budgetary Outlook Create New Challenges
Beyond domestic tax provisions, trade policy will remain a contentious battleground. Several Democratic policymakers have strongly opposed the Trump administration’s implementation of sweeping tariffs encompassing hundreds of billions of dollars in imported goods, pledging to vote to roll them back. However, trade policy does not divide cleanly along partisan lines.
Many Democrats object primarily to the unilateral manner in which the administration imposed tariffs across wide swaths of goods, affecting economic adversaries and traditional allies alike through rapid and unpredictable adjustments. At the same time, certain regional Democrats have voiced support for targeted tariffs on specific industrial inputs, such as steel and aluminum. Even if a unified Democratic caucus manages to muster the votes to roll back portions of the administration’s tariff regime, assembling a veto-proof majority in Congress over the next two years remains an exceptionally high hurdle.
Compounding these legislative debates is the broader and increasingly fragile US budgetary outlook. Federal debt has officially surpassed $32 trillion, climbing to more than 100 percent of the nation’s gross economic output. The Congressional Budget Office continues to project historically large budget deficits extending indefinitely into the future, driven by a fiscal year in which the federal government spent roughly $2 trillion more than it collected in revenue.
Government borrowing costs have trended steadily upward, with the benchmark 10-year Treasury yield hovering around five percent in recent weeks. Consumer borrowing costs have risen in tandem across virtually all credit markets, impacting everything from residential mortgages to commercial and auto loans. Consequently, lawmakers are likely to face mounting pressure from households, businesses, and financial markets to address the widening gap between federal spending and tax revenues.
Looming even larger on the fiscal horizon is the impending insolvency of federal entitlement programs. The Social Security Trustees currently project that the program’s trust funds will be fully depleted by 2032, at which point Social Security will lack the necessary funds to pay out promised benefits in full without direct congressional intervention. The newly elected class of senators taking office this fall will be forced to confront this structural crisis head-on during their current six-year terms. Economists emphasize that any bipartisan, enduring legislative package designed to rescue Social Security will ultimately require a politically difficult combination of benefit adjustments and significant new revenue sources.
As the 120th Congress prepares to convene, the shifting balance of power in Washington guarantees an intensely active legislative session. Even if persistent divided-government gridlock limits the number of major bills signed into law, the tax and trade proposals championed by each party will provide vital signals regarding the direction of economic policy ahead of the 2028 presidential election and the impending expiration of major tax cuts. Democrats will attempt to advance a broad array of tax cuts and revenue-raising measures, but they must navigate the constitutional check of a presidential veto and the harsh realities of mounting national debt and an uncertain economic landscape.
