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Lawmakers have a full plate and tax legislation is getting very little attention from them.
What Went Down:
- What an impeachment inquiry could mean for passing tax legislation.
- Passing The Big Three has gotten harder.
- Tax Committees talk taxes.
- If former President Donald Trump wins the White House, Congress could vet a new tax reform bill.
Let’s Get To It:
Impeachment tangle:
Quick version: House impeachment proceedings will likely take time away from passing legislation. This includes a bill providing R&D expensing, expanding the 163(j)-interest deduction, and upping Bonus Deprecation to 100%.
Longer version:
House Speaker Kevin McCarthy (R-Calif) this week initiated an impeachment inquiry into President Biden. The House votes to impeach a president; the Senate votes to remove him or her from office.
The tax-writing House Ways and Means Committee will play in role in this current impeachment inquiry because the panel has the authority to access tax documents – but they are not allowed to share that information with non-committee members. The lack of authority to make tax information public could be problematic if an impeachment inquiry becomes a public trial.
The House is unlikely to impeach the president. Here's the math:
- House Democrats total 212 and all are highly expected to oppose impeachment.
- There are 14 House Republicans who represent districts that Joe Biden won in 2020 and are unlikely to support impeachment.
- There are 222 House Republicans, minus the 14 GOPers from Biden districts, leaves 208 possible votes to prosecute President Biden.
- Impeaching him would require 218 votes. The math makes impeachment a long shot.
- Allowing this process to run its course will take time away from passing legislation, like for taxes or funding the federal government.
Besides the House Ways and Means Committee, the House Oversight and Judiciary Committees are also tasked with pursing the impeachment inquiry. Impeachment hearings are expected to dominate lawmakers’ time and committees’ schedules.
The impeachment proceedings are expected to make funding the federal government harder to accomplish. House Democrats were expected to help McCarthy pass a Continuing Resolution that would fund the federal government into November or December. Now, Democrats will be under political pressure to oppose any spending initiative proposed by McCarthy because of the impeachment inquiry he unleashed on his chamber.
Meanwhile, the Republican House Freedom Caucus, which does not disclose its membership but is approximated to have around 45 members, is not expected to support funding unless spending levels are cut. The group’s leaders have publicly stated that their Caucus will not support a Continuing Resolution. This group has also put the kibosh on using other spending vehicles to fund the federal government.
If everyone stays true to their word (which is a big ‘if’), McCarthy will not have the votes to extend funding and a partial shutdown of the federal government will ensue at midnight on September 30th.
If the federal government partially shuts down, lawmakers will be focused on re-opening it and legislation will not pass Congress. This includes a tax bill that would include R&D expensing, expanding the 163(j)-interest deduction, and upping Bonus Deprecation to 100%.
Speaker McCarthy would also like to adjourn the House in early December so he can be home for Christmas. If he gets his wish, it’s unlikely there will be time to pass tax legislation before the end of the year. Some lawmakers want a vote on tax legislation in October or November, but it is unclear if this will happen.
Legislative Outlook: Passing tax legislation that includes R&D expensing, expanding the 163(j)-interest deduction, and upping Bonus Deprecation to 100% has always been a long shot. If a partial shutdown occurs, passage becomes a longer shot.
Important to note: There is a saying on Capitol Hill that every bill is DOA until it passes. The tax bill is definitely in the DOA category. If it will rise from the dead remains to be seen, but past pieces of legislation with worse prospects for passage have become law. Stay tuned.
As if things weren’t already bad:
Putting impeachment aside, passing business-oriented tax legislation became harder to accomplish this week.
For over a year, lawmakers have struggled to pass legislation that would include R&D expensing, expand the 163(j)-interest deduction, and up Bonus Deprecation to 100% (known as “The Big Three” among staffers).
The main hurdle to passing this bill was garnering sufficient support to add an expanded Child Tax Credit to the legislation. This hurdle has never been cleared. And now, pro-Child-Tax-Credit lawmakers have more reason to stand their ground and oppose passing business-related tax breaks if family relief is also not included in the tax package.
The Census Bureau this week released its report on poverty. The document shows the poverty rate for children living in homes with insufficient financial resources more than doubled from 2021 to 2022, from 5.2 percent to 12.4 percent.
In 2021, the Child Tax Credit was supercharged ($3,600 per child under age 6, $3,000 per child ages 6 to 17, and fully refundable). That ended in 2022. Certain lawmakers argue that the Child Tax Credit lifted children out of poverty-stricken homes – and its expiration returned them there.
These lawmakers have urged re-enactment the 2021 Child Tax Credit and the Census Bureau report adds volume to their call.
“Today’s reports confirm that child poverty is a choice, and by not extending our expanded Child Tax Credit,” said House Ways and Means Committee Ranking Member Richard Neal (D-Mass.).
Senate Finance Chairman Ron Wyden (D-Ore.) echoed a similar sentiment:
'In 2021, Democrats were able to cut child poverty in half, and tragically, because a proven tool in the fight against poverty was left to expire, five million kids went back to living in poverty in 2022,' Wyden said, adding, 'any end of year tax package must include expansions to the child tax credit.'
Lawmakers in both political parties would like to extend the Child Tax Credit, but their support is for different provisions. Some want the legislation to include a work requirement. Others oppose its inclusion. The scatter shot in support means a majority of lawmakers do not support just one proposal. Instead, a minority of lawmakers support different proposals.
The prohibitive cost of the 2021 provision plays a key role in it garnering lackluster support. Re-enacting the measure would cost more than $1 trillion over a ten-year period, according to the Joint Committee on Taxation, which determines the cost of tax legislation for Congress.
The cost for enacting The Big Three is nowhere near this amount, and lawmakers backing the business tax breaks want cost parity between them and family tax measures.
This means the benefits from the 2021 Child Tax Credit would have to be severely reduced. But a lesser measure would likely lose support from certain lawmakers who think the Census report shows that the 2021 Child Tax Credit was instrumental in lifting children out of poverty (a point that is hard to argue against).
Also, don’t forget that a handful of House Republican House members have stalled passage of the current tax bill because it does not include relief from the SALT cap.
Legislative Outlook: Passing The Big Three is still tied to a bipartisan, bicameral agreement for passing an expanded Child Tax Credit and addressing the SALT cap. Some lawmakers hope to have a vote on the Big Three in October or November. We’ll see if that hope materializes.
Tax Talk Beyond the Big Three:
The Senate Finance Committee this week held a “markup” on the "U.S.-Taiwan Expedited Double Tax Relief Act."
A “markup” is basically a congressional hearing where lawmakers debate and amend legislation.
This week, Senators sought to end the double taxation on income related to Taiwan.
The Joint Committee on Taxation provides specifics:
Under the proposal, income from U.S. sources earned or received by qualified residents of Taiwan is entitled to certain benefits. These benefits include reduced tax rates for income otherwise subject to the 30-percent gross-basis tax; with respect to income effectively connected with a U.S. trade or business, taxation of only that income effectively connected with a U.S. permanent establishment; and preferential treatment of wages and related income earned by such qualified residents. The new rules are analogous to provisions typical in bilateral treaties to which the United States is a party and are based on relevant language found in the Model Treaty. The proposal requires general anti-abuse standards similar to those in section 894(c) to deny benefits when payments are made through hybrid entities. The proposed rules are applicable only if reciprocal provisions apply to U.S. persons with respect to income sourced in Taiwan.
The legislation is supported by both Senate Finance Committee leaders, as well as the leaders in the House Ways and Means Committee. In short, this bill has bipartisan, bicameral support.
Legislative Outlook: A bill with bipartisan, bicameral support should pass Congress – unless a poison pill is added to it. One possible add could be trade legislation working its way through the Senate. It could be added to this tax bill, and it is unclear if the trade bill has the same level of support as the tax bill.
In other news:
The House Ways and Means Committee this week held a “Members Day” hearing where lawmakers pitched their legislative priorities to the panel. The pitches included tax and non-tax legislation.
Hanging over the hearing was the fact that the individual tax cuts included in the 2017 tax reform bill will expire at the end of 2025. Lawmakers expect there to be political pressure to extend them.
“We will have to address that, moving forward,” said House Ways and Means Member Adrian Smith (R-Neb.).
Smith also noted that the length of extension will be a huge factor. A ten-year extension is projected to cost trillions of dollars. Lawmakers might favor short-term extensions to keep costs down.
Meanwhile:
House Budget Committee Chairman Jodey Arrington (R-Texas) this week announced he will markup a budget that will extend the 2017 tax reform provisions that are scheduled to expire in 2025. The Committee has yet to announce a date for this event.
Budgets do not become law, and the Senate will not agree with Arrington’s proposal. There is no chance that his call to extend the tax reform provisions will become law in the current Congress.
Legislative Outlook: Lawmakers are starting to say that action on tax modifications, beyond the Taiwan deal, are most likely to happen in 2025.
TCJA 2.0:
Former President Donald Trump reportedly seeks to propose tax cuts beyond what was enacted in 2017 for individuals and companies as he campaigns for president, the Washington Post reported this week:
Trump and his advisers have discussed deeper cuts to both individual and corporate tax rates that would build on his controversial 2017 tax law… The cuts could be paid for, at least in theory, with a new 10 percent tariff on all imports to the United States that Trump has called for, which could raise hundreds of billions in revenue. The sharp new tax cuts would help offset higher consumer costs caused by the tariffs.
Using tariffs as a “payfor” is odd because it drives consumer prices higher, which the article notes. These means that any tax relief received by taxpayers would be reduced by the fact that they are paying more for certain purchases.
Trump’s campaign includes the “Trump Reciprocal Trade Act.”
"[I]f any foreign country imposes a tariff on American-made goods that is higher than the tariff imposed by the U.S., President Trump will have the authority to impose a reciprocal tariff on that country’s goods,' according to the press release on the proposal.
The non-partisan Committee for a Responsible Federal Budget (CRFB) did the math and thinks the proposal would raise a lot of revenue for the government:
[W]e estimate tariff revenue collection of $350 to $450 billion per year. In other words, annual customs revenue would more than quadruple between 2025 and 2035 under the proposal.
It also mentions that tariff increases take their toll consumers and the economy:
By increasing the price of consumer and capital goods, they effectively lower the purchasing power of U.S. consumers and businesses. They also exacerbate businesses’ uncertainty about future trade barriers, leading them to pause or cancel investments or make expensive changes to their supply chains. Additionally, U.S. tariffs may provoke retaliatory tariffs by trading partners, lowering American exports.
The Smoot–Hawley Tariff Act was enacted in 1930 and raised tariffs on imported goods. It also made the Great Depression worse, according to scholars and economists.
If Trump wins the White House in 2024, Congress could debate his Reciprocal Trade Act in 2025 – the same year that the individual tax breaks in the 2017 tax reform bill expire.
Legislative Outlook: 2025 could be a heck of a year for taxes.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!