October 29, 2021
What to expect in Washington (October 29)
House Democrats released revised text of the Build Back Better Act (H.R. 5376) budget reconciliation bill with modifications to reflect some changes in the new framework released by President Biden earlier Thursday, which itself was largely a stripped-down version of the House bill from September with new revenue offsets reflecting Senator Kyrsten Sinema’s (D-AZ) opposition to tax rate increases. The President visited the Capitol to try to persuade House Democrats to back the reconciliation bill, and House Speaker Nancy Pelosi (D-CA) asked progressives to vote for the bipartisan infrastructure framework (BIF). That didn’t happen on Thursday – Congress instead extended the highway authorization until December 3, aligning it with the current expiration of government funding – but there appears to be growing consensus among Democrats to work to get both the reconciliation bill and BIF done in short order. Top progressive Rep. Pramila Jayapal (D-WA) said members would work to get both bills done next week. There are still undecided items, including possible modification of the SALT cap, some health issues, and paid leave.
Senate Majority Leader Chuck Schumer (D-NY) reportedly told Democratic members they have about a week to negotiate things back in or out of the reconciliation framework released yesterday. Senator Sinema released an optimistic statement about the framework and Senator Joe Manchin (D-WV) said its fate rested with the House, but now progressives and others are dissatisfied with omissions from the plan. Speaker Pelosi herself said she wanted paid leave provisions added back in; they have drawn objections from Senator Manchin. “I still would like to see paid leave for the babies, if we can’t get the rest. But that’s still a work in progress, shall we say.”
Tax items aren’t completely settled – “the revenue portion of the reconciliation package is still open,” Punchbowl News reported – and estimates from the Joint Committee on Taxation have not yet been provided. “This is not done,” Senate Finance Committee Chairman Ron Wyden (D-OR) said, Politico reported. Wyden, whose billionaires’ tax proposal was omitted, took issue with the surtax approach of 5% on income above $10 million and an additional 3% surtax on income above $25 million. (The Ways & Means bill included a 3% surcharge on income over $5 million). “Many billionaires pay little or no taxes because they don’t take a wage,” he said, adding that the Administration “acknowledged that there is more work to do.”
As the Wall Street Journal (WSJ) said, “[I]t still isn’t clear that the framework announced Thursday will be what gets through Congress. It needs to be turned into final legislative language, evaluated by nonpartisan congressional scorekeepers and accepted by all Senate Democrats and nearly all in the House.”
Tax – International tax changes remain in the package and the GILTI rate increase to 15% and country-by-country calculation are necessary to bring the US into compliance with the OECD-led global tax agreement. The revised bill reduces the Section 250 deduction for FDII to 24.8% and GILTI to 28.5%, yielding a 15% GILTI rate and a 15.8% FDII rate, with changes effective for tax years beginning after December 31, 2022. The new Biden framework calls for “imposing a penalty rate on any foreign corporations based in countries that do not” abide by the OECD agreement, and in the House bill the BEAT rate has been increased to 12.5% in 2023, 15% in 2024, and 18% in 2025 and later. Tax Notes reported, “A House Democratic staffer familiar with the framework confirmed that the stopping harmful inversions and ending low-tax developments (SHIELD) proposal is no longer being contemplated by the administration, and that changes to the BEAT are favored now instead.”
The revised bill retains the proposal to add Section 163(n) to limit the interest deduction of certain domestic corporations that are members in an international financial reporting group to an allowable percentage of 110% of the net interest expense but drops the Section 163(o) 5-year carryforward limitation for excess interest expense under Sections 163(j) and 163(n). The bill would limit the carryforward of excess foreign tax credit limitation with respect to the GILTI basket to five succeeding tax years for taxes paid or accrued in tax years beginning after December 31, 2022.
Other main revenue raisers reflect Senator Sinema’s aversion to tax rate increases, which prompted a flurry of late proposals. The 15% corporate minimum tax based on book income for companies that report over $1 billion in profits to shareholders reflects what was proposed by Senators Wyden and Elizabeth Warren (D-MA) on Tuesday. The revised bill retains the Ways & Means proposal to expand the Net Investment Income Tax (NIIT) to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income, which the White House had pointed to as a viable non-rate increase proposal.
The revised bill includes a 1% surcharge on corporate stock buybacks, down from the Wyden-Sherrod Brown (D-OH) bill’s 2%.
Addressing the Section 174 TCJA cliff, the amortization of research and experimental expenditures would begin for amounts paid or incurred in tax years beginning after December 31, 2025.
Energy tax credits begin with the Ways and Means Committee expansion/extension of renewable energy credits, including the Production Tax Credit and Investment Tax Credit, for five years before moving to the technology-neutral approach proposed by the Senate Finance Committee, Politico reported, citing tax committee staff. The expanded Child Tax Credit would be extended for one year, through 2022.
Additional IRS investment in enforcement is included, but new information-reporting requirements are not.
Some major tax increase provisions in the original Ways & Means bill left out of the revised version include:
The WSJ observed, “Essentially, Democrats took the broad collection of tax ideas they had been developing for years, ran them through several filters and moved forward with the mix of policies that survived those obstacles.”
Text and summary of the revised House bill are available here.
The President’s revised framework is available here.