What a Democratic Congress Means for Federal Tax Policy in 2027

Early results from the US midterm elections are in, and Democrats have retaken control of the US House of Representatives and US Senate. This change in power will shift which federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. issues are discussed in Washington over the next two years, as well as the proposals that may receive votes in Congress. New tax cuts are on the table, as are tax increases.

Several parts of the Democratic agenda for the 120th Congress, which begins January 3, 2027, would require major changes in tax policy. Democrats want to restore larger tax credits for the purchase of health insurance, as well as a larger child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income rather than the taxpayer’s tax bill directly. (CTC) and earned income tax credit (EITC). They also want to raise taxes on high-income individuals and businesses to pay for these credits and other new spending.

Democrats will have limited maneuvering room in 2027 given Republican control of the White House, but proposals made in 2027 will shape the direction of policy in the future. Democrats have aggressive proposals to raise significant sums of tax revenue, but they must confront trade-offs. Our current spending commitments and associated debt limit the ambitions of new spending programs or tax cuts, and the proposed tax increases will dampen long-term US economic growth. 

Debate Between Conventional and Novel Tax Increases Will Ramp Up  

Democrats in Congress will place a high priority on proposals to raise tax revenue from corporations and very high earners. While their ambitions to raise taxes will be limited by President Trump’s veto, these proposals will serve as messaging and discussion vehicles over the next two years on the direction of the tax code.One top priority will center on proposals to raise the corporate rate from 21 percent. Questions may include how high to raise the rate, whether the rate should be graduated, and what corporate base changes should accompany a rate hike. International tax rules for corporations may also be revisited, including changing tax rules for foreign earnings, calculating liability on a country-by-country basis, and raising guardrails on profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens..

The tax treatment of data center and AI investment will be top of mind for some congressional Democrats. In 2026, we’ve seen several proposals to disallow data center bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. conditionally or in its entirety, enact a new tax on bits, and impose a new excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on data center electricity use.

Additionally, Democrats in both chambers of Congress have proposed income surtaxes on millionaires, including Sen. Chris Van Hollen’s (D-MD) proposed surtax on taxpayers earning over $1 million at a top rate of 12 percent.

Capital gains taxes will also be an area of focus, following the path of proposals to raise capital gains tax rates, end the step-up in basisThe step-up in basis provision adjusts the value, or “cost basis,” of an inherited asset (stocks, bonds, real estate, etc.) when it is passed on, after death. This eliminates the capital gains tax owed by the recipient, reducing the heir’s tax liability. The cost basis receives a “step-up” to its fair market value, or the price at which the good would be sold or purchased in a fair marke at death for inherited assets, and tax unrealized capital gains annually for very-high-net-worth individuals. Some would go further by levying a wealth tax on billionaire assets each year.

These proposals will spark continued debate among Democrats about whether tax revenue should be raised by adjusting the levers on the existing tax code or by enacting novel and untested tax ideas that have administrative, legal, and economic risks. Either way, most of the proposed tax increases would come with steep economic trade-offs as they discourage saving and investment.

Tax Cuts May Focus on Health Care, Children, and Housing at a Substantial Revenue Cost

At the top of Democrats’ list for tax cuts may be restoring expanded premium tax credits (PTCs) that expired at the end of 2025. PTCs subsidize the purchase of health insurance on Affordable Care Act exchanges. Democrats enacted temporary and large expansions of these subsidies from 2021 through 2025.

Table 1. Premium Tax Credits (PTCs) Under Current Law vs. 2021-2025 Expansion

Note: Many beneficiaries who are under 100% of the FPL are eligible for Medicaid and are not eligible for PTCs. In 2025, only two percent of ACA enrollees had income below 100% of the FPL. Share of enrollment totals do not add to 100% because 4% of enrollees had "other" or unknown income.
Source: 26 USC 36B, Internal Revenue Code, https://uscode.house.gov/us/usc/119-136/t26/s36B/; Bernadette Fernandez, "Enhanced Premium Tax Credit and 2026 Exchange Premiums: Frequently Asked Questions," Congressional Research Service, Dec. 10, 2025, https://www.congress.gov/crs-product/R48290.

House Democratic Leader Hakeem Jeffries (D-NY)—the likely next speaker of the House—has made restoring more generous PTCs a priority. He will encounter difficulties with Republicans in Washington, but next year’s debt limit debate may serve as one opportunity for Democratic leverage. The Congressional Budget Office (CBO) previously estimated that extending the PTC expansion would cost $350 billion over a decade.

The New York Times reported in October 2026 that Jeffries is also prioritizing expansions of the CTC and EITC. Democrats enacted one-year expansions to these credits in 2021 and then tried but failed to extend the expansions in 2022. The CTC expansion could increase the size of the per-child credit from $2,200 in 2026 to $3,000 or more in 2027. The EITC expansion could focus on expanding the credit for childless adult workers.

Table 2. Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) Under Current Law vs. 2021 Expansion

Source: Garrett Watson and Alex Durante, "2026 Tax BracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.," Tax Foundation, Jan. 1, 2026, https://taxfoundation.org/data/all/federal/2026-tax-brackets/; 26 USC 24, Internal Revenue Code, https://uscode.house.gov/us/usc/119-136/t26/s24/; 26 USC 32, Internal Revenue Code, https://uscode.house.gov/us/usc/119-136/t26/s32/; Margot L. Crandall-Hollick, "The Child Tax Credit: Temporary Expansion for 2021 Under the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2)," May 12, 2021, https://www.congress.gov/crs-product/IN11613; Margot L. Crandall-Hollick, "The ‘Childless’ EITC: Temporary Expansion for 2021 Under the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2)," Congressional Research Service, May 3, 2021, https://www.congress.gov/crs-product/IN11610.

Restoring the 2021 childless EITC could cost between $60 billion and $120 billion over the next decade, depending on the parameters Democrats choose, while restoring the 2021 CTC could cost more than $500 billion.

Housing tax policy could also be on Democrats’ agenda in 2027, including expansions to the low-income housing tax credit (LIHTC). Republicans expanded the LIHTC in the 2025 One Big Beautiful Bill Act (OBBBA). It’s unclear what additional changes Democrats would seek to the LIHTC. We recently estimated that repealing the LIHTC and the new markets tax credit would raise $202.7 billion over 10 years.legislation

Members of Congress and President Trump will also face at least one critical tax deadline in the 120th Congress: the expiration of several tax cuts enacted in the OBBBA on December 31, 2028. On that day, the tips, overtime, auto loan interest, and enhanced senior deduction will expire. The provision that lets manufacturers immediately deduct the full cost of new factory buildings will also expire.

It’s unclear how Democrats would approach the expiring provisions of OBBBA. Some Democratic lawmakers support extending and expanding the tips and overtime deductions. We previously estimated that extending the tips, overtime, auto loan interest, and enhanced senior deductions beyond 2028 would cost $577.3 billion over 10 years.

Tariffs and the Long-Term Budgetary Outlook Create New Challenges

Some Democratic policymakers have opposed the Trump administration’s imposition of hundreds of billions of dollars in tariffs, and have pledged to vote to roll them back. The issue doesn’t split neatly along party lines, though.

Many Democrats oppose the way President Trump imposed tariffs—unilaterally, on wide swaths of goods, and on economic adversaries and allies alike, with rapid, chaotic changes. However, some support tariffs on specific goods, such as aluminum and steel. Even if Democrats muster the votes to roll back some or all of Trump’s tariffs, it’s unlikely Congress could assemble a veto-proof majority on the issue in the next two years.

The broader US budgetary outlook may also have direct implications for federal tax policy. Federal debt is more than $32 trillion and recently surpassed 100 percent of gross domestic product (GDP). CBO projects large budget deficits in perpetuity, and in the most recent fiscal year, the government spent $2 trillion more than it took in.

Government borrowing costs are rising. The benchmark 10-year Treasury yield has been hovering around five percent in recent weeks. Consumer borrowing costs have risen in tandem, on everything from mortgages to auto loans. Lawmakers may feel pressure from households, businesses, and investors to reduce the gap between spending and revenue in the years ahead.

Even if lawmakers don’t improve the fiscal trajectory in the coming years, a much larger issue looms. The Social Security Trustees currently project the Social Security trust fund will be fully depleted in 2032. Absent congressional action, Social Security would no longer be able to pay out benefits in full. The crop of US senators elected this fall will face this issue in their current six-year term.

In our recent publication, Options for Reforming America’s Tax Code 3.0: A Policymaker’s Guide to Tax Reform Trade-Offs, we outlined a few ways lawmakers could bring additional revenue into the trust fund. Any bipartisan and enduring package for Social Security reform will require a blend of benefit reductions and additional revenue.

Big Picture

The shifting balance of power in Washington should produce a busy session for the 120th Congress starting in January. Even if gridlock means Congress passes few bills next year, the proposals each party makes on tax and trade policy will offer important signals for an even more consequential few years ahead.

From the 2028 presidential election to the expiration of OBBBA tax cuts on December 31, 2028, to persistent budgetary issues in Washington, there is no shortage of ways in which federal tax policy might once again take center stage. Democrats have many tax cuts and tax increases they may try to enact in the new Congress. They will need to balance these priorities with the veto pen of a Republican president and several challenging national trends, including rising budget deficits and an uncertain economic outlook.

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