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September 19, 2021

Americas Tax Policy: This Week in Tax Policy for September 17

This Week (September 20 - 24)

Congress: The House and Senate are in session and facing the expiration of government funding on September 30 and the need to address the debt limit, with a likely must-act date in October.

Deadlines: House Majority Leader Steny Hoyer (D-MD) announced that the House will take up a continuing resolution (CR) to extend government funding past September 30. Politico reported , "Text of that funding measure has not been released, but the patch is likely to keep government agencies open into December, setting up another critical funding deadline ahead of the holidays. Top lawmakers are leaning towards Dec. 10 for the end date but have also left open Dec. 3 as a possibility. While they prepare the bill for floor action, majority party leaders are deciding whether to pair the must-pass funding package to avoid a shutdown with a measure to tackle the approaching debt cliff … " Rep. Hoyer's statement said the House will "take action" on the debt limit but didn't specify whether it would be in the context of the CR.

SFC nominations hearing: The Senate Finance Committee will hold a hearing on Wednesday, September 22 (10 a.m.) to Consider the Nominations of Christi A. Grimm, of Colorado, to be Inspector General, Department of Health and Human Services and Neil Harvey MacBride, of Virginia, to be General Counsel for the Department of the Treasury.

 Last Week (September 13 - 17)

Reconciliation outlook: The House Ways & Means Committee approved its Build Back Better Act tax increase package September 15 after a lengthy two-day markup during which Democrats defeated several Republican amendments on international tax issues and adopted none. The Ways & Means bill is to be combined by the Budget Committee with reconciliation pieces from other committees next week but plans for floor consideration haven't been announced. The portion of the reconciliation package reported by Ways & Means is just part of a larger bill that includes the products of numerous committees considering other spending priorities relating to health care, climate, caregiving, and education. Discussions among Democratic leaders in the House and Senate are expected over the coming weeks to determine what moderate members in each chamber can support, and it is unclear how long that will take. It is anticipated that the size of the House bill will have to be scaled back, potentially requiring less tax revenue, but what will be cut has yet to be decided. It's possible that significant changes could be made to what the committees are sending to the Budget Committee, but those will not likely come until the bill is considered by the Rules Committee, prior to being brought to the House floor. Because the bill will only have Democratic support, House Democratic leaders only have a few votes to spare to achieve passage of a bill. In the Senate, all 50 Democrats plus VP Harris will be necessary to pass such a bill. President Biden held a call with House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer (D-NY) September 16 after meeting with key moderate Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) a day earlier, as Democrats also face decisions on government funding and the debt limit. President Biden September 16 delivered a speech continuing to make the case for increasing taxes on high-income individuals and companies, some of which he said don't pay any taxes. "I'm not out to punish anyone … All I'm asking is you pay your fair share," he said. Senator Manchin has publicly discussed supporting a bill of no more than $1.5 trillion, a corporate tax rate no higher than 25%, and a capital gains rate of 28%. A September 15 story in the Washington Post suggested that while Senator Sinema hasn't said much publicly, she "and her staff have been closely involved in the talks, putting detailed questions to several key lawmakers and committee aides to understand the justification for proposed spending and tax increases." There is a self-imposed House deadline of September 27 for a vote on the separate infrastructure bill, by which time progressives want action on the reconciliation bill as a condition of their infrastructure vote. It is possible Speaker Pelosi holds onto the House reconciliation legislation until a deal can be worked out with the Senate, following which changes to the current package would be made at the Rules Committee. House Budget Chairman John Yarmuth (D-KY) said in the Post that the House would likely vote on a measure first: "I think that it looks right now like we'll probably proceed to do our own bill and see if we can get 218 votes in the House to pass it, rather than wait for the Senate to act." Bloomberg reported Senator Ben Cardin (D-MD) as saying the Senate would likely take whatever passes the House, amend it, and send it back, but he doesn't see it happening this month. "It's going to take some time," Cardin said, adding that "as you put out one area, another crops up."

Tax increase proposals: Released September 13, the more than $2 trillion Ways & Means Committee tax increase proposals can be broadly viewed as falling three categories:

  • Corporate/international: top corporate rate of 26.5%, interest deductibility limited for domestic corporations that are part of an international financial reporting group, GILTI rate of 16.5625% after 2021 with a country-by-country calculation and 5% QBAI threshold (except for US possessions), BEAT rate of 12.5% after 2023 and 15% after 2025, and FDII rate of 20.7% after 2021
  • High-income individuals: top individual rate of 39.6%, top capital gains rate of 25% (effective 9/14/21), net investment income tax (NIIT) expanded to business income of high income individuals ($500,000 joint), 3% surtax on individuals with AGI over $5 million, limitation on excess business losses of noncorporate taxpayers made permanent, the TCJA-doubled estate tax exemption expires after 2021 rather than after 2025, 5-year holding period for carried interest, and an expansion of wash sale and constructive sale rules
  • Retirement/executive compensation: a "mega-IRA" provision to prohibit new contributions to a Roth or traditional IRA if the total value of an individual's IRA and defined contribution accounts exceeds $10 million, new minimum distribution requirements on those whose retirement accounts exceed $10 million and income exceeds $400,000, and accelerating the American Rescue Plan Act 162(m) expansion to cover the CEO, CFO and next eight highest paid employees to after 2021 rather than after 2026

Not included were changes to stepped-up basis, broad repeal of oil & gas tax incentives, and the SALT deduction cap, which could come later, as well as a number of proposals recently unveiled by Senate Finance Committee Chairman Wyden (D-OR) to dramatically change partnership tax rules, and impose an excise tax on stock buybacks. "There were enough that raised questions about it," Ways & Means Chairman Richard Neal (D-MA) said of stepped up basis changes, adding it probably couldn't win the 218 votes to pass the House. A September 18 Wall Street Journal (WSJ) article entitled "Democrats Seek Backup Plan on Taxing Capital Gains" focused on the prospect of carryover basis being pursued in the Senate, "to eliminate the stepped-up basis — but not to tax capital gains at death. That would mean that heirs still only pay taxes when they sell an appreciated asset like a stock, but they would have to pay taxes on the full amount of the gain made since the original owner acquired it." Senator Mark Warner (D-VA) was quoted as saying, "I've been more intrigued with the carry-over basis concept because it does seem there's actually a realization event you capture, but I think it's just one of a litany of ideas that we are going to have to work through."

Markup highlights: During the second day of the Ways & Means markup there was significant debate over international tax changes, and Republican amendments sought to block GILTI tax increases and the reduction in the FDII deduction. During debate on an amendment to block the increase in the corporate rate, Chairman Neal said — similar to the President's subsequent comments — the tax increases under the bill are "not to distribute wealth, not to punish success, not to curb innovation, as much as it is simply to broaden opportunity." He also cited the global minimum tax rate of at least 15% negotiated between Treasury Secretary Yellen and other nations and said the Committee's approach to that issue is "entirely reasonable." Neal said Democrats want US companies to compete globally, but also to broaden opportunity. Ranking Member Brady said, "Let's not compound our economic surrender by moving forward on GILTI when the rest of the world, frankly, is cheering us sabotaging our economic competitiveness." Chairman Neal said the bill's GILTI rate was carefully crafted to reflect the global consensus. Rep. David Schweikert (R-AZ) said he fears we are about to "break something" and lose jobs and investment with GILTI changes under the bill. Rep. Mike Thompson (D-CA) said Congress needs to increase GILTI to at least 15% in order to show leadership on the global stage. Rep. Stephanie Murphy (D-FL) was the only Democrat to oppose the package, and said she remained "optimistic that the comprehensive reconciliation package will be appropriately targeted and fiscally responsible — paid for by tax provisions that promote fairness but do not hurt working families." During the previous day's markup, there was a Sense of Congress amendment, which was defeated, addressing the prospect of changing the bill at the Rules Committee, saying that issues like stepped-up basis and the SALT deduction cap shouldn't be addressed after the Ways & Means Committee reports the bill. Other amendments addressed making the SALT deduction cap permanent for millionaires, withholding Superfund provisions if energy prices are high, and requiring that tax provisions not take effect until the unemployment rate is at its pre-pandemic level.

International: As an EY ITTS Alert linked here notes, international provisions potentially affected by the Ways & Means proposal include the foreign tax credit, the GILTI regime, BEAT, and the interest expense limitation under Section 163, among others. In a major change, the proposal would compute a taxpayer's FTC limitation on a country-by-country basis based on taxable units (the CbC FTC Limitation), thus preventing excess FTCs from high-tax jurisdictions from being credited against income from low-tax jurisdictions. The current 20% haircut under Section 960(d) for foreign income taxes deemed paid on GILTI inclusions (GILTI FTC) would decrease to 5%, and the expense allocation rules would be modified so as not to apply to GILTI. The proposal would add new Section 163(n), which would limit the interest deductibility of certain domestic corporations that are part of a multinational group that prepares consolidated financial statements, according to the domestic corporation's allocable share of the group's net interest expense. This new limitation would apply in conjunction with current Section 163(j) so that interest deductions could not exceed whichever limitation is more restrictive.

A September 14 New York Times (NYT) story, "Democrats Push to Join Tax Haven Crackdown," said, "House Democrats, as part of their plan to raise as much as $2.9 trillion to finance President Biden's social safety net package, proposed raising the tax rate on companies' overseas earnings to 16.6 percent from 10.5 percent and calculating the tax on a country-by-country basis. The plan would meet the primary commitments of the global agreement that is being negotiated through the Organization for Economic Cooperation and Development. 'This is more than just tweaks,' said Craig A. Hillier, an international tax expert at Ernst & Young. 'These are material moves being proposed on how foreign income is taxed.'" As the story pointed out, "Treasury officials are continuing to work with their international counterparts to put the finishing touches on the global tax agreement so that leaders of the Group of 20 nations can sign off on the pact when they meet for a summit in Rome at the end of October. But many questions must still be resolved in the next six weeks."

Senate: Committee chairmen provided an overview of their priorities for a Senate reconciliation bill to the Democratic Caucus on September 14, but it is unclear when and how a Senate tax package could emerge given the leadership-driven nature of the negotiations. Senator Schumer suggested there were committees that didn't agree with their House counterparts without naming them. Chairman Neal previously acknowledged differing views with Finance Chairman Wyden, who has released standalone proposals on issues like a 2% excise tax on stock buybacks, partnership tax reforms, mark to market treatment for capital gains, changes to the tax treatment of derivatives, and replacing multiple energy tax incentives under current law with a streamlined system focused on clean electricity and transportation and energy efficiency. Ways & Means proposes extensions of current energy provisions, plus some new credits. Opposite the Senate moderates who want a bill much more modest than the President's proposals and the House bill are progressives who say the House bill doesn't go far enough by not including stepped-up basis or a major wealth tax. The Ways & Means bill does include a high-income surcharge but largely works within the current system, and even progressive House members warn that the optics of a wealth tax could hurt the party in the midterm elections. "Progressive senators, led by Elizabeth Warren, Democrat of Massachusetts, and Bernie Sanders, independent of Vermont, pushed back hard on the decision by senior Democrats on the House Ways and Means Committee to focus a $2.1 trillion package of tax increases on income taxes, not levies on the vast fortunes of tycoons," said a September 14 NYT story. It cited Senator Warren as saying, "The wealth tax is not something that a bunch of politicians sit around and think, 'Great idea.' It's something that the American people say we need for basic fairness."

Green energy: Highlights of the Ways & Means green energy and infrastructure subtitles include:

  • Extension through 2033 (with 2-year phasedown) of the Section 45(d) production tax credit (PTC) for electricity from renewable resources including solar with an increased credit for facilities that meet domestic requirements;
  • Extension through 2033 (with 2-year phasedown) of the Section 48 energy investment tax credit (ITC) with the addition of newly eligible technologies like energy storage and dynamic glass;
  • Extension through 2031 of several current clean energy tax incentives plus new credits for transmission property, zero emissions facilities, zero emissions nuclear power production, sustainable aviation fuel, and clean hydrogen, plus a revival of the Section 48C qualified advanced energy property credit;
  • A refundable EV credit of $7,500 for vehicles placed in service before 2027, with additional amounts available if a facility operates under a union-negotiated collective bargaining agreement and uses at least 50% domestic content, retail price caps for different types of vehicles, and a phaseout based on AGI, plus separate credits for used and commercial EVs; and
  • Similar to Build America Bonds, issuers of qualified infrastructure bonds would receive a tax credit equal to an applicable percentage of the interest, providing direct financing support for infrastructure investments made by state and local governments, with the applicable percentage of the credit for interest paid with respect to qualified bonds determined in the year the bond is issued as follows: 2022 through 2024 = 35%, 2025 = 32%, 2026 = 30%, 2027 and thereafter = 28%.

The Energy & Commerce-approved portion of the reconciliation bill would invest $150 billion in a Clean Electricity Performance Program (CEPP), which would issue grants as incentives for utilities to reach the Biden administration's goal of operating on 80% clean electricity by 2030. Senator Manchin and other Democrats oppose the provision. The September 17 WSJ reported, "As talks continue on the clean electricity effort, Senate Democrats have reviewed with fresh interest an alternative for cutting emissions: a carbon tax, according to a Senate Democratic aide. Senate Democrats and staff are discussing a carbon tax that would charge between $10 and $20 per ton of carbon emissions, a lower price than that of some other public proposals, and exempt gasoline, according to the aide." It could raise more than $500 billion either toward covering the cost of the $3.5 trillion bill or as rebates for consumers.

Trade: This week China formally requested to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the successor 11-nation trade bloc to the Trans-Pacific Partnership (TPP). The TPP was originally conceived a trade agreement designed, in part, to restrain China's economic influence in the region. China's formal application follows months of consultations between China and CPTPP member nations. The move renewed calls by some trade and geopolitical analysts as well as lawmakers for the U.S. to reconsider its decision to abandon the TPP, which occurred in early 2017. The White House indicated September 16 that it was reviewing its options vis-à-vis the CPTPP but it did not appear set to change course and seek to join the trade bloc any time soon.


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