October 24, 2021
Americas Tax Policy: This Week in Tax Policy for October 22
This week (October 25-29)
Congress: The Senate and House are in session.
POTUS: The White House announced, "President Joseph R. Biden, Jr. and First Lady Jill Biden will travel to Rome, Italy for the G20 Leaders' Summit on October 30-31 … The President and Dr. Biden will also visit Vatican City and have an audience with His Holiness Pope Francis on October 29. They will discuss working together on efforts grounded in respect for fundamental human dignity, including ending the COVID-19 pandemic, tackling the climate crisis, and caring for the poor. From Rome, President Biden will travel to Glasgow, United Kingdom from November 1-2 to participate in the World Leader Summit at the start of the 26th Conference of the Parties to the UN Framework Convention on Climate Change (COP26)."
WCEY's DC Dynamics podcast focuses on US tax policy. Host Ray Beeman breaks down and examines current developments in Congress and puts them into political and policy context.
This Week (October 18-22)
Reconciliation outlook: Senator Kyrsten Sinema's (D-AZ) continued insistence that she won't support tax rate increases in a budget reconciliation bill is creating doubts that increases in the corporate, individual, and capital gains rates, which under the House Ways and Means Committee title of the budget reconciliation bill raise nearly $840 billion (over 10 years), can be included in their entirety. By contrast, Senator Joe Manchin (D-WV), the other Democratic moderate whose views are driving the reconciliation package, does support tax rate increases, though he has drawn the line at a corporate rate increase of 25%. Given Senator Sinema's views, the focus now is on international tax changes, tax gap proposals, and other potential non-tax rate changes like a 15% minimum tax based on book income, an excise tax on stock buybacks, and mark-to-market annual taxation of billionaires' assets. Multiple news outlets reported late October 21 that Senator Sinema has signed on to enough non-tax rate increase revenue measures to pay for the reconciliation bill, in each of the areas of corporate, international, high-income individual, and tax enforcement, without mentioning specifics, including about the cost of the bill. President Biden, who earlier suggested a bill of between $1.75 trillion and $1.9 trillion, said during a CNN Town Hall in Baltimore October 21 that he doesn't think the reconciliation bill will include an increase in the corporate tax rate because of Senator Sinema's opposition. "She says she will not raise a single penny in taxes on the corporate side and/or on wealthy people, period," the President said. The President said a reconciliation deal among Democrats is now "down to four or five issues." White House Press Secretary Jen Psaki said October 22 that President Biden's comments addressed raising the corporate rate, not the ability to raise revenue through a range of other tax fairness proposals, which she said include a 15% corporate minimum tax and closing "a loophole that allows some taxpayers, like hedge fund managers, to escape a Medicare tax imposed … on all high income."
House Ways & Means Chairman Richard Neal (D-MA) met with Senator Sinema October 21 and told her that, at this point in the process, asking for new proposals like mark-to-market taxation is difficult, Punchbowl reported. "It's the ninth inning," Neal said. "When are you gonna vet these issues? … I still think there's a long ways to go." Bloomberg reported that Chairman Neal discussed with Senator Sinema tax rate increase proposals and strengthening international rules to tax more of the profits U.S. companies earn abroad. On tax spending, "She's in on renewables. She's in on the issue of the child credit. She's in on family medical leave, and that's the way she ranked them," Neal said. "She said, 'I agree with you — this has gotta pass.'" Neal is not the only Congressional Democrat continuing to push for tax rate increases like those marked up and agreed to by Ways and Means, and some have suggested that once the business community sees the details of some of the alternatives, including the minimum tax on book income, they may prefer the corporate rate increase. Senator Mark Warner (D-VA), a Finance Committee member, was quoted in the New York Times as saying, "The irony is, with some of these alternatives that are coming out there, it may be the very business community that's rushing to the barricades, saying, 'Please, give us rates.'"
Focus on billionaires' tax: Two late-afternoon October 22 stories in the New York Times (NYT) and Washington Post focused on the prospect of a billionaires' tax being proposed in the reconciliation bill. The NYT reported that Senator Wyden's proposal "would raise hundreds of billions of dollars from just 600 to 700 people — America's billionaires," and is in line with wealth taxes more commonly associated with Senators like Elizabeth Warren (D-MA), who supports the plan. "Under the proposal, people with $1 billion in assets or $100 million in income for three consecutive years would be brought into an entirely new tax system. Initially, they would have to assess the current value of their tradable assets — like cash, stocks and bonds — and their value when they were purchased, then pay a one-time levy on them … " the story said. "Although Ms. Sinema has not explicitly embraced the billionaires' tax, Finance Committee aides said none of the 50 senators who caucus with the Democrats has expressed opposition." A Sinema spokesperson was quoted as saying, "She has told her colleagues and the president that simply raising tax rates will not in any way address the challenge of tax avoidance or improve economic competitiveness." The Post reported, "an unexpected compromise appears to be emerging over the billionaire tax proposal. Senate Finance Chair Ron Wyden (D-Ore.) is drafting the plan, but both senior Biden officials and other senior Democrats are cautiously optimistic Sinema and other centrist lawmakers support the effort … " The story said House Democrats in particular have balked at the proposal, including Chairman Neal, who said the Wyden plan could "become really complex" and noted the efficiency and easy implementation of rate increases. The Post noted that the proposal "would also set up a system for taxing assets that are not easily tradable, like real estate."
Timing: Senate Democratic leaders had been hoping to reach a high-level agreement by October 22, and activity picked up after Senator Manchin announced October 19 that he and Senator Bernie Sanders (I-VT) were working with Senate Majority Leader Chuck Schumer (D-NY) to reach a deal by week's end. Senator Sanders said Democrats were at a "fish or cut bait" moment on the reconciliation bill. A meeting between Chairman Neal, Chairman Wyden, House Speaker Nancy Pelosi (D-CA), Leader Schumer, and White House officials on revenue measures followed on Wednesday, October 20, the same day there seemed to be wide recognition that Senator Sinema would prevent some of the tax increases Democrats had been counting on from advancing. Senator Manchin subsequently told reporters October 21 that it is "pretty hard to make final decisions" in the absence of more legislative details, the Washington Post reported. Asked if it could take longer than Friday to broker a compromise, he eventually replied: "This is not going to happen any time soon." Still, President Biden said October 21, "I do think I'll get a deal." The pressure is on doing so by the end of next week as Democrats near a self-imposed October 31 deadline (with interplay between reconciliation and a House vote on the bipartisan infrastructure framework), the President heads to Europe, and the November 2 gubernatorial election in Virginia approaches. Speaker Pelosi met with President Biden again October 22 and House Majority Leader Steny Hoyer (D-MD) said on CNBC, "We'd like to get a framework by the end of — frankly today, but no later than the end of the weekend."
High-level deal: During a spate of meetings with groups of Democratic members on Tuesday, October 19, President Biden said reconciliation plans for free community college would be dropped, the expanded Child Tax Credit would be extended for only one additional year and means tested, homecare funding would be reduced from what was proposed, and paid leave benefits could be reduced to four weeks from 12, CNN reported. There has long been a tension between dropping some items altogether, as moderates advocated, and clipping their duration, the approach favored by progressives. The Washington Post reported that President Biden suggested to the group of progressives that he feels a deal of between $1.75 trillion and $1.9 trillion could be secured, and that the current vision for the plan "includes at least some expansion of Medicare to offer new benefits to seniors, the introduction of universal prekindergarten, and billions of dollars to address climate change." Ways & Means Chairman Neal pushed back against the proposed reduction in tax proposals like the Child Tax Credit at the insistence of senators. Politico reported: "'We didn't have a new tax plan every half hour,' he told reporters. His Child Tax Credit provisions as well as ones subsidizing child care expenses, clean energy and family leave 'ought to remain in the final package, as issued' by his committee."
Tax gap: Though not in the House bill, a modified version of the Administration's original IRS tax gap information reporting proposal that would require reporting of gross inflows and outflows from certain financial accounts with more than $10,000 in annual deposits or withdrawals was rolled out by Treasury in coordination with key Senate Democrats, including Finance Committee Chairman Wyden, October 19 and could be part of a final reconciliation deal. Chairman Neal, who said during the Ways & Means reconciliation markup that he was working with Treasury on the issue, stopped short of a full endorsement October 19, saying "the $10,000 figure is manageable" but that he wants to see more details, Bloomberg reported. A Treasury fact sheet said, "Under the current proposal, financial accounts with money flowing in and out that totals less than $10,000 annually are not subject to any additional reporting. Further, when computing this threshold, the new, tailored proposal carves out wage and salary earners and federal program beneficiaries, such that only those accruing other forms of income in opaque ways are a part of the reporting regime." Such a carve out, however, would require financial institutions to identify deposits of wages and exclude them from reporting, a task that may not be easily accomplished. The Administration has long been pushing for a tax gap proposal and the Administration and Wyden hope that better targeting the proposal will attract support from more Democrats. The Administration's budget proposed a reporting threshold of $600. However, many Democrats are uneasy with the proposal, major financial industry trade associations have opposed the proposal, and it is still a target of Republicans who say it poses privacy concerns. House Republican leader Kevin McCarthy (R-CA) tweeted October 19, "RT if you agree ? The IRS should not be surveilling your bank accounts."
DSTs: The Treasury Department October 21 announced that Austria, France, Italy, Spain and the United Kingdom have agreed that, as part of Pillar 1 of the OECD global tax agreement, they will withdraw all Unilateral Measures on all companies, including digital services taxes (DSTs). While the US wanted such taxes to be withdrawn as of October 8 (the date of the tax agreement), the other nations preferred withdrawal to be contingent on implementation of Pillar 1. Under a compromise, to the extent that taxes that accrue to the nations before Pillar 1 takes effect exceed the first-year tax due under Pillar 1, the excess will be creditable against the portion of the corporate income tax liability as computed under Pillar 1 in these countries. As USTR noted in a separate release, "In return, the United States will terminate the currently-suspended additional duties on goods of Austria, France, Italy, Spain, and the United Kingdom that had been adopted in the DST Section 301 investigations. USTR is proceeding with the formal steps required for terminating the Section 301 trade actions, and in coordination with Treasury, will monitor implementation of the agreement going forward."
Implementation of Pillar 1 appears to need Congressional support, potentially through Senate ratification of the multilateral convention that is still be drafted by the OECD. Several aspects of Pillar 1, including the creation of a new taxing right for countries, would override existing bilateral tax treaties that the United States has entered into. Some have questioned whether Senate ratification, requiring a two-thirds vote, is a realistic possibility. Another avenue may be a Congressional-Administrative Agreement, which would require passage by both the House and Senate and is similar to the process that has been used for numerous trade agreements over the last 30 years. But such a process has never been used in the tax treaty context.