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Key Takeaways
- Secretary Yellen engaged the top tax-writing committee about Biden’s budget.
- Senate tax “working groups.”
- Lawmakers hear stories that complying with the Beneficial Ownership Rule is hard, and nearly impossible.
- Update on stalled tax bill.
- Word on weed.
Treasury Secretary Janet Yellen testified before the House Ways and Means Committee about President Biden’s budget request and entertained some tough questions from lawmakers.
What Went Down:
- Secretary Yellen engaged the top tax-writing committee about Biden’s budget.
- Senate tax “working groups.”
- Lawmakers hear stories that complying with the Beneficial Ownership Rule is hard, and nearly impossible.
- Update on stalled tax bill.
- Word on weed.
Let’s Get To It:
Yellen Testifies
Treasury Secretary Janet Yellen testified this week before the tax-writing House Ways and Means Committee on the President’s Fiscal Year 2025 Budget Request. At times during the hearing, the legislative spats over tax policy turned into political fights. This post looks at the legislative debate that took place in the hearing.
In his opening remarks, House Ways and Means Chairman Jason Smith (R-Mo.) criticized the Biden Administration, which Yellen represents, for opposing the extension of the Tax Cuts and Jobs Act (TCJA) provisions that will expire at the end of 2025.
"Last week, President Biden called for the Trump tax cuts to expire, promising, 'If I’m re-elected, it’s going to stay expired.' So President Biden’s plan is for the average family of four making $75,000 to pay an extra $1,500 to the IRS each year,” Smith said.
The above-mentioned quote was apparently a misstatement by the President on X, formerly known as Twitter. Here is the April 23rd post:
Last week, the White House attempted to correct what Biden said. Yellen also tried to clarify the President’s position on the TCJA.
“No family earning under $400,000 [a year] will see their taxes go up on any set of proposals,” Yellen said.
This issue was repeatedly raised during the hearing. Some lawmakers tried to clarify the President’s remarks while others repeated it.
Another issue with the TCJA is the pass-thru deduction, which expires at the end of 2025. Yellen essentially repeated the mantra that taxpayers earning less than $400,000 a year will not see a tax increase.
“The President is committed to ensure that no families, including those with pass-thru businesses, making under $400,000 would see a tax increase,” Yellen said.
Committee Member Vern Buchanan (R-Fla.) stressed the $400,000 line could be a misnomer.
“$400,000 is nothing when trying to build a business small or large. They [small business owners] may make $600,000 but they don’t take-home $600,000. They take-home $100,000, $150,000 or $200,000,” Buchanan said, adding that if the pass-thru deduction expires then more businesses will become corporations and the double taxation will be burdensome for small businesses.
As has been reported before in the Recap: The debate about extending TCJA measures will be a huge undertaking in 2025 and possibly longer.
Other tax controversial topics discussed at the hearing included:
- R&D Tax Credit: Smith said that foreign companies are receiving these credits. Yellen said that negotiations with foreign countries are currently taking place and she hopes those talks will be successful. Her comments were related to how the credit will be handled if Pillar Two becomes U.S. law. Yellen said she hoped the credit would receive positive treatment under Pillar Two. She is in talks with other countries to carve-out an allowance for the credit.
- Green tax credits: Yellen said that Treasury is working with other agencies to ensure that the credits don’t go to foreign companies. Some lawmakers said that foreign companies are profiting from these tax credits.
- Pillar Two: Yellen stressed that if Pillar Two were to become law, which would create a minimum tax of 15% for larger multinational companies in jurisdictions where they are located, it would be a “positive, not negative” on the amount of revenue collected by the Federal government. Some lawmakers said that Pillar Two would be a drain on federal coffers. President Biden has proposed a 21% minimum tax. (Talks are also ongoing for Pillar One, Yellen said.)
- The “Billionaire” Tax: The Biden Administration has proposed a tax on individuals earning over $100 million. The tax would apply to unrealized capital gains. Yellen supported the proposal. Lawmakers disagreed on whether it’s a good idea.
- IRS Direct File: Yellen said the program was “very successful” this tax season. Over 140,000 used the program. The IRS goal was 100,000 users. Some lawmakers questioned if there is a conflict of interest for the IRS to prepare and review the tax forms. In other words, the IRS works from the Federal government that would benefit from robust tax collections. Despite the reservations stated at the hearing, Yellen suggested that the program will likely be expanded next year and would be available in more foreign languages.
Legislative outlook: This hearing was about the President’s budget proposals, and it is highly unlikely that these measures will become law in the current Congress because the chambers are politically divided.
Senate “Working Groups”
Senate Finance Ranking Member Mike Crapo (R-Idaho) is looking to possibly mimic House Ways and Means Committee Republicans and create working groups that will study provisions in the Tax Cuts and Jobs Act (TCJA), Tax Notes reports.
In these groups, Senate Finance Republicans will become better acquainted with TCJA provisions before they debate on how to modify them. It is not clear if Senate Finance Democrats will join these groups.
The individual tax provisions from the Tax Cuts and Jobs Act, which includes the pass-thru deduction, Opportunity Zones, as well as estate and gift measures, will expire at the end of 2025. There is expected to be a Herculean effort to extend at least part of these measures.
But before the debate over tax extensions can begin, lawmakers on the tax-writing Senate Finance Committee need a better understanding for what these tax provisions do, and more importantly, who benefits from them or who pays them.
Legislative outlook: As has been written in prior Recaps, the outcome of the 2024 elections will have an enormous impact on how these tax measures are debated, meaning the final conclusions from Crapo’s working group about the 2017 tax reform provision may only matter if Republicans take the majority in the Senate.
Eide Bailly’s reporting on the House Ways and Means Committee’s “Tax Teams” is here.
Beneficial Ownership Rule
The House Small Business Committee held a hearing this week titled “Under the Microscope: Examining FinCEN’s Implementation of the Corporate Transparency Act.”
Most of the witnesses who testified before the committee said that the new rules aimed at uncovering nefarious activity by businesses were extremely burdensome.
One witness pleaded with the committee to work with the Senate to override or amend the Beneficial Ownership Rule. This witness also said that the government has not done a good job educating business owners about Fin CEN and the Beneficial Ownership Rule.
Another witness said that his tax-prep firm was warned to not help clients navigate this new rule because his firm could incur penalties if they provide the wrong advice. This witness called on Congress to suspend implementation of the Beneficial Ownership Rule until it can be fixed.
“This isn’t’ going to work as it is currently structured,” the witness said.
It was repeatedly noted during the hearing that an overwhelming number of business owners are unaware that they must comply with Beneficial Ownership Rules
A third witness said that for business owners who know about the law they must wade through a roughly 100-page document to know how to comply with the rule or face criminal sanctions. The witness also noted that the Fin CEN data base, where companies input their confidential information, may not be secure from breach.
Legislative outlook: The hearing was not about a specific piece of legislation, although legislation has been introduced to repeal the Corporate Transparency Act, which included Beneficial Ownership Rules.
However, enactment of this bill was not the hearing’s primary goal. Instead, it was held to hear from witnesses on how the Beneficial Ownership Rules are negatively affecting businesses – especially small businesses.
The hearing came on the heels of a handful of states either declaring or challenging the constitutionality of the Beneficial Ownership Rules.
Tax Bill Update
Tax legislation that passed the House back in January is still not considered dead – yet.
Quick recap: The legislation includes R&D expensing for domestic costs, ups bonus depreciation to 100% and expands the business interest deduction and the Child Tax Credit, to name a few of its provisions. It is currently stalled in the Senate.
Some D.C. insiders have wondered if the bill could be attached to the FAA reauthorization bill. Adding the tax bill to the FAA bill would be germane (so no procedural hurdles) because the legislation already includes a tax section for fuel taxes. Others don’t think it will happen.
Legislative outlook: Adding the tax bill to the FAA reauthorization legislation is unlikely.
The issue with passing the tax bill is that Senate Finance Ranking Member Mike Crapo (R-Idaho) has numerous issues with the legislation. Until those issues are addressed, the tax bill will not pass the Senate. If it was attached to the FAA reauthorization bill, it would likely be a “poison pill” and cause the air-industry bill to fail. Not funding the FAA is not an option. So, the tax bill is not likely to be added to it.
The most likely moment for the tax bill to be considered dead will be after the elections.
The Word on Weed
It has been widely reported that the Drug Enforcement Administration is circulating a proposal that would reclassify marijuana. This is an act of the Biden Administration, and not Congress.
That being said, lawmakers will likely comment about this historic change in the classification of weed. But until there is action on tax legislation regarding marijuana, it will likely not be covered in the Capitol Hill Recap.
Still, if marijuana goes from a Schedule I drug to a Schedule III drug, as the DEA has suggested, legal dealers will be able to deduct from income their standard business expenses on their tax returns.
After news broke this week about the DEA’s action on marijuana, Senate Majority Leader Chuck Schumer (D-NY) introduced the “Cannabis Administration and Opportunity Act.” If enacted, the bill would remove marijuana from the Federal list of controlled substances, among other things. The legislation would also place an excise tax of at least 10% on the product. This levy increases to 25% over time.
The legislative text (provided by Tax Notes) is here.
Legislative outlook: Lawmakers are looking to attach this legislation to other bills. Senators tried to add it to the FAA reauthorization bill, but Republican opposition to the Cannabis Administration and Opportunity Act precluded it from being added. Currently, it is not clear what the fate is for this bill.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!