Politicians spent their Memorial Day holiday piecing together a debt ceiling package and are soon expected to turn their attention to a tax bill.
What Went Down:
- President Joe Biden and House Speaker Kevin McCarthy (R-Calif) reached an agreement on debt ceiling legislation that will likely pass Congress.
- House Ways and Means Chairman Jason Smith (R-Mo.) said after Congress approves a debt ceiling bill his committee would act on an economic plan that would include tax measures.
- Europe or Bust is a bust.
Let’s Get To It:
Debt Ceiling Deal:
President Joe Biden and House Speaker Kevin McCarthy (R-Calif.) agreed on legislation that suspends the debt ceiling until January of 2025.
The House passed the legislation on May 31st. The Senate is expected to approve it later this week (leaders in both parties support it, meaning it’ll get the votes).
Biden is expected to sign the bill into law before June 5th, the date the federal government is expected to run out of money if the legislation is not signed into law.
Why suspend the Debt Ceiling instead of raising it?
Suspension is more appealing, politically. If lawmakers were to vote for legislation that raised the Debt Ceiling, they would have to explain to constituents why they supported legislation that adds more red ink to federal government coffers. A vote to suspend the Debt Ceiling doesn’t specifically add more debt. But it does allow federal officials to issue more bonds. One could call this a distinction without a difference. Welcome to Washington.
The Debt Ceiling bill does not include tax provisions. But it does claw back some of the $80 billion in the Inflation Reduction Act that goes to the IRS. The tax agency was to receive the $80 billion over the next ten years. The Debt Ceiling bill reduces this amount by roughly $1.4 billion, according to the legislation.
It has been reported that Washington leaders made a “side deal” that would cut an additional $20 billion from IRS funding.
The side deal is basically about appropriation bills. When (or if) they are drafted, $10 billion will be cut from IRS funding for 2024 and 2025, for a total of $20 billion in spending cuts.
The $20 billion will fund other federal agencies, which Democrats like. Republicans also like the side deal because it defunds the IRS. Consider this a win-win, except for the IRS – assuming that future appropriation bills actually cut funding from the tax agency.
A White House official pushed back on the idea that the IRS would be hamstrung by the spending cuts, saying that the tax agency still has access to any unspent funding over the next ten years.
Quote from the unnamed White House official on a call with reporters:
[T]he IRS will continue to be able to spend that, you know, remaining 60, and spend that over the course of the next several years… [I]t's not as if you're taking 2024 or 2025 money from the IRS… [W]e don't think it'll fundamentally change what the IRS does over the course of the next few years… We think the IRS will continue to be able to effectuate its plans in the near term, and then there may be a need to come back to Congress and ask for additional funding.
The IRS getting more money will rely on who’s in charge of Washington when the agency makes its ask.
There is also a pesky rule that one Congress cannot force another Congress to obey certain rules. We are in the 118th Congress. In 2025, we'll be in the 119th Congress, and the 118th Congress can't force it to do anything.
Legislative Outlook: The Debt Ceiling bill is expected to pass Congress and Biden is expected to sign it into law.
Tax Bill:
House Ways and Means Chairman Jason Smith (R-Mo.) is expected to release legislation in the not-too-distant future that will fix several high-profile tax SNAFUs.
The bill is expected to allow for R&D expensing, expand the 163(j)-interest deduction, and return Bonus Depreciation to 100%. These provisions are now called the “Big Three” by congressional staffers.
The legislation is also expected to extend the Child Tax Credit that was included in the 2017 tax reform bill. It might also extend the 199A pass-thru deduction beyond its current 2025 expiration date, as well as extend other tax provisions in the 2017 bill. Regular “tax extenders” could also be included in the legislation.
Smith is expected to release the bill in mid-June.
It is not clear if the bill will go through “regular order.” If it does, it will be subject to committee hearings and could be amended.
Legislative Outlook: The legislation is expected to pass the House, where Republicans are the majority party. The bill can pass with only Republican support.
Passage in the Senate is unclear.
Senate Democratic support will be needed for this bill to pass the Upper Chamber. Many Senate Democrats, who support the Big Three, will withhold their support unless the bill expands the Child Tax Credit.
Some Republicans hope that extending the 2017 Child Tax Credit will prompt their liberal counterparts to support the bill. A handful of Democrats say that the 2017 provision does not go far enough. They prefer the more robust Child Tax Credit provision that was in the American Rescue Plan.
Differences between Child Tax Credits:
- The American Rescue Plan upped the credit to $3,000 per child ($3,600 per child under age 6), made it refundable for most taxpayers, and removed an earnings floor. The credit expired in 2022. If this provision was extended for ten years, it would cost well over $1 trillion, according to the Joint Committee on Taxation.
- The Child Tax Credit in the 2017 tax reform bill expires in 2025. It increased the credit to $2,000, with $1400 being refundable for certain income levels. It also requires that child receiving the credit have a Social Security number. The credit would cost roughly $550 billion over the next ten years, according to the Joint Committee on Taxation.
From a political perspective, if Chairman Smith adds the Child Tax Credit from the 2017 tax reform bill to his Economic Plan, Democrats might be hard pressed to oppose it, especially in the Senate.
Many Senate Democrats have spoken publicly about the need to expand the Child Tax Credit, which is what the measure in the 2017 tax reform bill does. If Senate Democrats vote ‘no’ on the Economic Plan, they will have to explain to their constituents why they opposed expanding the Child Tax Credit, which they said they support.
Sometimes, in politics, being forced to explain your position weakens your standing with voters.
To dodge the explanation route, Democrats might support expanding the 2017 Child Tax Credit, and, therefore, the entire tax bill.
If enough Senate Democrat support the bill, it will likely pass Congress. At that point, it will be up to President Biden on whether he signs it into law. If Senate Democrats support the bill, Biden will likely enact it.
Time is Not on Their side:
- Congress will basically have to pass this bill by the end of July,
- Lawmakers in both chambers are expected to recess for the entire month of August,
- When they return in September, they will be hard pressed to fund the federal government beyond September 30th or face a partial shutdown of the federal government
- Come October, year-end bills will be discussed and it’s unclear if the tax bill will be part of that discussion.
Europe or Bust, Busted:
The previously reported trip to Europe for House Ways and Means Republicans is off because of the Debt Ceiling debate/vote. It is unclear if it will be rescheduled.
As was reported last week, the trip was to allow Republican tax-writers to vent their frustrations about the undertaxed profits rule in the OECD’s global tax deal. That frustration still exists and probably needs to be vented.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!