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This Week (October 18-22)

Congress: The Senate and House are in session in Washington. The Senate plans to consider voting rights legislation.

Last Week (October 11-15)

Reconciliation outlook: Congress was mostly out of session this week and negotiations over how to shrink the $3.5 trillion-plus House reconciliation bill to win the support of moderates and still appease progressives continued but seemed to be moving slowly, with a Democratic self-imposed deadline of October 31 (when the highway authorization expires) on reconciliation and infrastructure, and hard deadlines following in December on government funding, the debt limit, and expiring tax provisions. Press Secretary Jen Psaki October 14 denied the White House is growing impatient with the talks but did say "we don't feel that the time is unending, and we feel it's time to move forward with negotiations." The dynamics haven't really changed, however, as factions within the Democratic party have differing opinions over:

1. whether a House vote on the Senate-passed infrastructure bill should wait on a reconciliation bill, as progressives insist
2. the size of the reconciliation bill, with Senator Joe Manchin (D-WV) at $1.5 trillion, House progressives at $2.5 trillion, and Senator Bernie Sanders (I-VT) still at $3.5 trillion
3. how the cost should be cut, with options of narrowing the scope of the bill or retaining the broad scope of policies but reducing the duration or benefits of provisions
4. what gets cut from a bill addressing health care, paid leave, energy, low-income tax credits, etc.

And one totally unanswered question is whether the more than $2.1 trillion in revenue raisers drafted by the House Ways and Means Committee can shrink if the overall size of the bill is cut dramatically. Counter to progressives' insistence that the reconciliation bill be in hand before the infrastructure bill can be approved in the House (which will require their votes), Senator Kyrsten Sinema (D-AZ) told House moderates this week she won't vote for a reconciliation bill before Congress approves the $1 trillion (including routine spending) infrastructure bill, Reuters reported. CNN reported that on a call with a small group of fellow Democrats this week, neither Senator Sinema nor Senator Joe Manchin (D-WV) endorsed the $1.9 trillion-$2.2 trillion price tag that President Biden has floated as a topline number. "Sinema said both she and Manchin told Biden they 'cannot guarantee' they would get behind even $2.1 trillion, as she reiterated that the infrastructure bill should pass first to make progress on the larger plan," the report said. It said Senator Manchin raised concerns over the proposed expansion of Medicare; opposed new paid family and medical leave provisions; raised concerns over tuition-free community college; called for new benefits to be means-tested to limit the eligibility to those with lower incomes; and rejected calls by Democrats to include aggressive climate measures.

What gets cut: There are differences of opinion among Democrats about how to fit their priorities into a smaller package — by reducing the scope of provisions or including the same roster of proposals but with shorter duration and limited benefits. House Speaker Nancy Pelosi (D-CA) told members in an October 11 letter, "Overwhelmingly, the guidance I am receiving from Members is to do fewer things well so that we can still have a transformative impact on families in the workplace and responsibly address the climate crisis: a Build Back Better agenda for jobs and the planet For The Children!" However, in a news conference October 12, the Speaker said reducing the cost of the package could involve "cutting back on years," said she hoped they wouldn't have to drop parts of the plan, and wouldn't speculate on what those parts would be if they did. She later said both approaches are a possibility. "We have some important decisions to make in the next few days so that we can proceed," the Speaker said. Some moderates favor narrowing the scope of the package, including Senators Manchin and Sinema. (Senator Manchin previously called for a $1.5 trillion package now and suggested other Democrats could follow up with another package later.) National Journal October 15 reported Rep. Stephanie Murphy (D-FL), who opposed the Ways & Means bill in Committee and is a leader of the Blue Dog coalition of fiscally conservative Democrats, as saying "it's important to do a few things really well" rather than funding everything for a shorter period of time, similar to comments from fellow Ways & Means member Rep. Suzan DelBene (D-WA), who is also the chairwoman of the moderate New Democrat Coalition.

Progressives, however, continue to push for a broad bill with a shorter duration of proposals. Rep. Pramila Jayapal (D-WA), who previously called for a minimum investment of $2.5 trillion, tweeted October 12: "There is simply NO scenario where we finally make long-overdue investments in working people — in popular things like childcare, health care, paid leave, education, housing, climate action — and then look back years later and say we did too much or went too big. Let's deliver." Asked on CBS how progressive priorities will be paid for in a slimmed down bill: "We do believe that you can significantly cut down on the price tag by funding some of these programs for a shorter period of time," Jayapal said. In an October 13 letter to Speaker Pelosi, progressives formalized their call to maintain a broad scope for reconciliation and clip the duration of proposals, saying, "If given a choice between legislating narrowly or broadly, we strongly encourage you to choose the latter, and make robust investments over a shorter window."

Child tax credit: There has been a focus on the expanded Child Tax Credit (CTC), which expires at the end of 2021 and would be extended under the Ways & Means bill at a cost of $556 billion over 10 years. The Wall Street Journal reported on means testing to limit eligibility for some programs to low-income Americans, as Senator Manchin has advocated. Senator Mark Warner (D-VA) indicated a narrower Child Tax Credit is under consideration because some Senators are receiving checks now, evidence of overreach in the current program. The story said, "On the other side are both progressive and centrist Democrats who want to make programs like subsidized child care, free preschool and two years of free community college available to Americans up and down the income ladder" and "Mrs. Pelosi hasn't indicated where she stands on income eligibility." An October 14 New York Times analysis said, "As they work to shrink the price tag of Mr. Biden's bill to ensure its passage, Democrats are in essence making a bet that even if some benefits must be made available only temporarily, they will become very hard to rescind. History shows that Democrats are probably correct. Federal benefits are rarely taken away once given … " The analysis noted that Democrats want to use the reconciliation measure to extend the expanded Child Tax Credit enacted under the American Rescue Plan Act earlier this year. "The tax credit has led to millions of families receiving thousands of dollars in monthly payments deposited directly into their back accounts, and it is considered a chief factor in significantly reducing child poverty. Democrats propose to keep it for several more years in the new legislation, effectively daring Republicans to end it," the Times said.

Tax implications: Identifying a topline spending number likely precedes determining which tax increases will ultimately be tapped to help pay for the measure. The Ways & Means bill proposed about $2.1 trillion in tax increases and Democrats are expecting to count revenue from drug pricing negotiation and dynamic scoring. Some issues from the Ways & Means bill continue to raise concerns, including the proposed new Section 163(n) limitation on interest deductibility for domestic corporations that are members of an international financial reporting group. Politico reported, "the Global Business Alliance, the Information Technology Industry Council, the Institute of International Bankers and the National Foreign Trade Council have written a letter to top Democrats asking them to pull back from a proposed new limitation on business interest. 'This additional limitation would significantly increase the cost of capital for employers interested in growing and maintaining their operations in the United States,' the groups wrote … "

Timing: Democratic leaders have set the expiration of the highway authorization on October 31 as a self-imposed deadline for a reconciliation agreement and a House vote on the bipartisan infrastructure framework (BIF), which is linked to the broader measure at the insistence of progressives. In light of wide-ranging disputes among Democrats, there is a widely-held view that talks could extend into December and be put up against other deadlines and the congressional recess for the holidays. Deadlines facing Congress:

• October 31, expiration of highway authorization, leadership target for House vote on infrastructure
• December 3, expiration of government funding
• Sometime in December (likely), new must-act date on the debt limit
• December 31, expiration of expanded Child Tax Credit, Section 163(j) interest expense and Section 174 R&D expense TCJA cliffs, expiration of some tax extenders.

The President signed the short-term debt limit increase October 14. Regarding how long the $480 billion debt limit increase will allow Treasury to meet the nation's financial obligations, Oxford Economics researcher Nancy Vanden Houten tweeted October 12: "$480 bn will be exhausted quickly >Treasury will need to use special measures after that; they'll likely be used up by early December >Only cash and incoming receipts to pay bills after that." The tweet suggested that, without further action on the debt limit, the nation will be at risk of default just before Christmas, with default likely by New Year's Eve.

Politics: Putting the reconciliation bill tensions in political context, the New York Times October 11 cited former Obama administration official Jason Furman as saying "The problem now is this may be the last train leaving the station for a long time … five, 10, 20 years before there's another shot at a lot of these issues," and John Podesta as viewing the package as "a chance to avoid those losses by giving Democratic incumbents a batch of popular programs to run on, and also giving the president policy victories that could define his legacy."

Global tax: On October 13, the G20 Finance Ministers endorsed the BEPS 2.0 agreement that was announced the previous week by the Inclusive Framework, as expected. Also on October 13, the OECD presented the international tax update to G20 Finance Ministers and Central Bank Governors, which included details of the BEPS 2.0 agreement and discussion of carbon taxes. The October 8 Inclusive Framework Statement builds on the statement released in July 2021, providing further specificity on several key parameters. In particular, the amount of residual profit to be re-allocated to market jurisdictions under Pillar One has now been set at 25% (as compared to 20-30% as provided in July) and the rate for the minimum tax under Pillar Two has now been agreed at 15% (as compared to "at least 15%" as provided in July). In addition, other thresholds, rates and administrative mechanisms are covered. An EY Alert on the October 8 agreement is linked below. An implementation timeline included in the G20 announcement is as follows:

After Treasury Secretary Janet Yellen said she is "confident that what we need to do to come into compliance with the minimum tax will be included in a reconciliation package," Politico cited a Treasury official as suggesting that would consist of increasing the current GILTI rate to 15% and applying it on a country-by-country basis. It is the minimum tax part of the deal under Pillar 2 that requires changing GILTI, as Democrats plan to do in the reconciliation bill; reallocating a portion of large MNEs' profits to market jurisdictions under Pillar 1 will likely require ratification of a multilateral tax treaty by the Senate, with a two-thirds vote threshold.

DSTs: Politico reported that the U.S. has reached an agreement with France, Italy and other European countries over withdrawing unilateral digital services taxes, according to Bruno Le Maire, the French finance minister. Countries with a DST "came to an agreement with the U.S. administration on the way we will withdraw our national taxation once the international solution on digital taxation will be implemented and will enter into force," he said. The Wall Street Journal said: "The deal isn't likely to yield an immediate withdrawal of those taxes because it is still linked to the broader global tax agreement being completed and implemented over the next few years. But having a path forward could ease tensions between the U.S. and France, Italy, the U.K., Austria and Spain. 'That's good news,' Mr. Le Maire told reporters. 'We came to an agreement during these two days in Washington about the way in which we will withdraw' those taxes."

IRS: The IRS this week announced in Notice 2021-59 its intention to defer by one additional year the applicability date of final regulations under Section 987 and certain related final regulations. The affected regulations will be amended to apply to tax years beginning after December 7, 2022.

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