July 18, 2021
Americas Tax Policy: This Week in Tax Policy News for July 16
This week (July 19-23)
Congress: The House and Senate are in session. Senate action is expected in relation to a bipartisan infrastructure bill and a FY2022 budget resolution. No tax-related hearings are scheduled in Finance and Ways & Means.
Last week (July 12-16)
The big picture: Senate efforts to enact President Biden's agenda remain on two tracks. Majority Leader Chuck Schumer (D-NY) has said the Senate will take a procedural vote on Wednesday, July 21, in relation to the as-yet-unreleased bipartisan infrastructure bill that, with routine transportation spending, is expected to near $1 trillion in investment over five years, including about $575 billion in new spending. Discussions over pay-fors to cover the new spending continued July 15 without resolution, before Senators left Washington for the weekend, and the $40 billion investment in IRS enforcement funding to narrow the tax gap is said to be on the ropes and likely to be removed or scaled back. The bipartisan infrastructure plan was first announced June 24, but bill text has not been released. Senator Schumer also set Wednesday as the day by which the entire Senate Democratic caucus must agree to move forward on the FY2022 Budget Resolution, for which Budget Committee Democrats and Schumer have announced plans to allow for a $3.5 trillion health, climate, and caregiving bill fully paid for, without announcing other details. Congressional passage of the budget resolution would set the stage for development of the actual details of the $3.5 trillion package by committees of jurisdiction in the fall. Senator Schumer is trying to pass the infrastructure bill and budget resolution in the three weeks remaining before the scheduled start of the August recess. No official summary or resolution text has been released.
Infrastructure: The bipartisan Senate group is reportedly working over the weekend to produce legislative language on Monday, though even when text is agreed to, it will take days to get a CBO score. A Washington Post report, "Schumer sets new infrastructure deal deadline as IRS provision faces strong blowback," said the tax gap investment "seemed in particular political peril Thursday amid sustained GOP opposition. Its potential absence from the final package left lawmakers scrambling to find other ways to cover the costs of their long-sought infrastructure investments, because some senators from both sides have maintained that they are not willing to support an agreement that adds to the deficit." The report said regarding the tax gap component, "lawmakers crafting the deal said they hoped to put strong safeguards in place to prevent abuse. Those safeguards still seemed insufficient by Thursday, prompting Senate aides … to say it will probably be removed from the final legislative package." Axios reported, "Sens. Jon Tester (D-Mont.) and Mark Warner (D-Va.) confirmed the group is now discussing potential alternatives to the IRS provision." However, "Sources familiar with the meeting say it may not be dropped in its entirety but peeled back."
Reconciliation bill: Senate Budget Committee Democrats and Majority Leader Schumer said July 13 the forthcoming FY2022 budget resolution will provide for a $3.5 trillion health care, climate, and caregiving bill, which could pass under the reconciliation process with the votes of all 50 Democratic senators (plus the VP) sometime after Congress returns in September from the August recess. "The budget resolution with instructions will be $3.5 trillion," Sen. Schumer said. "Every major program that President Biden has asked us for is funded in a robust way." Senator Mark Warner (D-VA) said during a news conference that the $3.5 trillion plan will be "fully paid for." Senator Joe Manchin (D-WV), a key moderate whose tolerance for spending and tax increases will shape the Democrat-only reconciliation bill, said it must. "We need to pay for it," Manchin said in Politico. "I'd like to pay for all of it. I don't think we need more debt." Senators Manchin and Warner have signaled they may agree to a corporate tax rate increase only to 25% and capital gains rate only to 28%, and Warner is seen possibly blocking the Administration's plan to end stepped-up basis. In addition to tax increases, Democrats are looking at other offsets for the package, including allowing Medicare to negotiate the price of prescription drugs, macroeconomic effects (dynamic scoring), and proposed polluter import fees.
It still remains unclear how much revenue will need to be raised by the House and Senate tax committees. Senate Finance Committee Chairman Ron Wyden (D-OR) and other Committee members have released some tax increase proposals consistent with those of included in the Biden administration's FY 2022 budget, including an international tax framework. However, the House Ways & Means Committee mostly has not tipped its hand as to how it might meet a revenue target, and Chairman Richard Neal (D-MA) has said he will remain guarded until there is a better sense of what can pass Congress. A separate NYT story cited Chairman Wyden as saying, referring to Section 199A, "that he was preparing to overhaul a deduction for companies not organized as corporations, like many small businesses and law firms. Such a change would cut small businesses' taxes but raise additional revenues from wealthy business owners."
Climate: Informal summaries of what a Democrat-only reconciliation bill would provide for have referenced polluter import fees as a pay-for, without any additional detail. A NYT story drew comparisons to a newly announced EU carbon border tax and said while the US proposal has not been detailed, "in theory, a carbon border tax would require companies that want to sell steel, iron and other goods to the United States to pay a price for every ton of carbon dioxide that is emitted during their manufacturing processes. If countries can't or won't do that, the United States could impose its own price." It said such a proposal could draw a WTO challenge. "Some lawmakers believe a border carbon tax could soften Republicans and others who oppose climate change policies," the report said. A separate story said polluter import fees "could violate Mr. Biden's pledge not to raise taxes on Americans earning less than $400,000 a year, if the tax is imposed on products such as electronics from China." Senator Wyden said, "We've not heard that argument."
Global tax: Following support for a global tax agreement from most countries in the Inclusive Framework on BEPS and the G20 finance ministers, there is increased attention on the holdouts, details, and process. Congressional action on Pillar One with regard to new taxing rights will likely require ratification of a multilateral treaty by a two-thirds vote in the Senate. Any deal would also likely require changes to the US effectively connected income rules. Asked about the two-thirds Senate hurdle during a news conference last weekend, Secretary Yellen said, "The details of Pillar One remain to be negotiated. I would say that Pillar Two is further along than Pillar One. Pillar Two, we're hoping to have incorporated in the coming budget resolution and reconciliation bill the changes that are necessary to put it into effect, but Pillar One will be on a slightly slower track. We will work with Congress. Maybe it will be ready in the Spring of 2022 and we will try to determine at that point what's necessary for implementation." Secretary Yellen said this week:
An editorial in the July 16 Wall Street Journal, "Congress Goes AWOL on Global Taxation," described the BEPS 2.0 process as a threat to Congress's constitutional power. "Despite their flaws, current global rules broadly try to hand taxing authority to the jurisdiction where a company's investors and managers have taken risks, engaged in product development or research and the like," it said. The emerging global tax agreement would "allow sclerotic European countries to tax successful U.S. firms solely by dint of housing consumers rather than encouraging investment and risk-taking — while blunting the benefit of any incentives Congress wants to provide," the editorial said. Further, "By binding the U.S. to the OECD's complex system for calculating a minimum tax, Ms. Yellen is limiting the ability of a future Congress to change tax rates and the exemptions, deductions and other rules of the U.S. code."