November 14, 2021
Americas Tax Policy: This Week in Tax Policy for November 12
This week (November 15-19)
Congress: The Senate and House are back in session.
Infrastructure signing ceremony November 15: "On Monday, the President will host a bipartisan bill signing ceremony for his Bipartisan Infrastructure Deal, the Infrastructure Investment and Jobs Act. The President will be joined by Members of Congress who helped write this landmark economic growth bill and by a diverse group of leaders who fought for its passage across the country, ranging from Governors and Mayors of both parties to labor union and business leaders," according to a White House release .
Washington Council EY's "DC Dynamics" podcast series looks at what's coming up in US tax policy. Host Ray Beeman, leader of WCEY, draws on his experience as a former congressional staffer for the House Ways & Means Committee and the Joint Committee on Taxation to break down and examine current developments in Congress and put them into a political and policy context.
Last week (November 8-12)
Reconciliation outlook: The dust continued to settle following the November 5 House passage of the bipartisan infrastructure bill, sending it to the President for his signature, and House moderates' pledge to vote on the Build Back Better (BBB) Act (H.R. 5376) budget reconciliation bill sometime the week of November 15. The House and Senate were out of session this week for the Veteran's Day work period, a congressional delegation to the climate summit in Glasgow included Speaker Nancy Pelosi (D-CA), and she said there she still expects a House reconciliation vote the week of November 15. The pause in the action focused more attention on the lack of budget scores for the spending (and IRS funding) sections of the bill, whether it can be passed in the House next week, and the prospects for the bill in the Senate. House moderates withheld support for the BBB pending release of Congressional Budget Office (CBO) spending estimates (including revenue from increased IRS funding), which could take some time. Moderates have committed to voting for the BBB Act as expeditiously as they receive information from the CBO, but in no event later than the week of November 15, as long as estimates are consistent with the toplines for revenues and investments provided by the White House. What does that all mean? Well, the topline number provided by the White House is that the bill spends $1.75 trillion over 10 years, and that tax increases and additional revenues from spending on IRS enforcement will more than cover that cost. CBO announced November 9, "We anticipate releasing estimates for individual titles of the bill as we complete them, some of which will be released this week. Other estimates will take longer, particularly for provisions in some titles that interact with those in other titles." Top Progressive Pramila Jayapal (D-WA) suggested the uncertainty over CBO estimate releases shouldn't disrupt plans for a vote, tweeting November 9: "To clarify for everyone: the agreement we made w/our colleagues was NOT for CBO score. It was for some additional financial information from the CBO. Agreement also says that in no event would the vote take place later than the week of Nov. 15. We trust our colleagues' commitments." The agreement was necessary for progressives to vote for the infrastructure bill November 5, which they had been reluctant to support without assurances moderates would come through on reconciliation.
Estimates provided by the staff of the Joint Committee on Taxation show that two sets of tax cuts account for about $500 billion of the $1.75 trillion, relating to green energy and social safety net provisions. The question CBO must answer is whether the spending increases in the bill fill out the rest of the $1.75 trillion, or do they cost more, or less? The JCT estimates show the tax increases in the bill amount to nearly $1.5 trillion, leaving about $900 billion to cover the cost of the spending increases. And the White House says there is another $400 billion in revenue raised through increased spending on IRS enforcement, but the CBO needs to confirm that dollar amount as well, in addition to prescription drug provisions.
Inflation effects: Another twist in the outlook for the bill came with the November 10 Labor Department report of inflation rising 6.2% over the last 12 months. Senator Joe Manchin (D-WV), who has been raising inflation concerns for months in calling for a smaller bill, seemed to suggest the report justified those concerns. He said in a tweet: "By all accounts, the threat posed by record inflation to the American people is not 'transitory' and is instead getting worse. From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day." The effects of the inflation report aren't clear-cut. The Washington Post reported that a senior Administration official "disputed any notion that the president's economic agenda — either the recently passed bipartisan infrastructure deal or the pending Build Back Better legislation — would exacerbate the inflationary problems. Instead, the official argued Biden's agenda would help alleviate the problem because both pieces of legislation are focused on increasing economic capacity." Axios cited unnamed sources in reporting that Senator Manchin could call for a delay in the package for the remainder of the year as Congress faces the expiration of government funding December 3 and the need to address the debt limit sometime in December. Manchin wants detailed analyses of the spending and tax provisions under the reconciliation bill, also sought by House moderates. Majority Leader Chuck Schumer (D-NY) targeted the week of November 15 for Senate consideration, which Senator Manchin previously said was possible, though that was before the House holdup and inflation news.
If a House vote occurs the week of November 15, the Senate is near certain to change the bill for a variety of reasons, including potentially striking provisions that don't meet the arcane budget reconciliation rules that govern Senate consideration, and addressing concerns some Senators have over some provisions in the House bill. For example, the latest House bill from November 4 included an increase in the state & local deduction cap to $80,000 through 2030. The issue is among the most unsettled with the Senate, where members have their own ideas.
More generally, Senator Manchin has suggested major changes are possible, saying of the other chamber, "They're working off the House bill. That's not going to be the bill I work off of." He has expressed concerns about addressing paid leave in the reconciliation bill and on November 11 said he opposes a proposal in the House reconciliation bill that would give union-made U.S. electric vehicles an additional $4,500 tax incentive. Manchin's comments came at an automaker event to announce an investment in West Virginia manufacturing. "We shouldn't use everyone's tax dollars to pick winners and losers," he said.
EY Alerts: EY has prepared alerts on two major tax items in the pending budget reconciliation bill, the Build Back Better Act (H.R. 5376).
163(n): There have also been press stories about the reconciliation bill's contents. The Wall Street Journal November 9 reported on business community concerns over the proposed 163(n) limitation on the deductibility of interest expense for a domestic corporation that is part of an international financial reporting group. As the story noted, "The new limits would affect multinational companies that average at least $12 million a year over three years in net interest expense, meaning interest payments exceeding interest income." On October 30, more than three dozen large companies wrote congressional leaders asking them to drop the proposed limits, saying the proposal would be "debilitating to a broad range of industries and sectors," and adding, "This will result in reduced U.S. job creation and investment while encouraging offshore jobs creation." The WSJ story quoted a spokeswoman for Senate Finance Committee Chairman Ron Wyden (D-OR) as saying the proposal aims to close loopholes "that big corporations exploit to avoid taxes by strategically sticking debt in the United States, when they are already operating and earning income offshore … If they are actually investing and earning their income in the United States, this will not affect them."
CAMT: The American Benefits Council has issued a paper on retirement plan concerns with the proposed 15% corporate alternative minimum tax (CAMT) proposal based on book income. "The proposed corporate minimum tax rules were not designed to apply to defined benefit plans," the paper said. "The solution to this problem is straightforward. For purposes of the proposed corporate minimum tax — both the threshold test (as discussed below) and the tax itself — the treatment of defined benefit pension plans and other post-retirement benefit plans (such as retiree health plans) should follow the current income tax rules." Without such a change, the letter said, pension plan sponsors could be:
An EY Tax Alert on the CAMT is available here.
Tax gap: CBO is responsible for estimating the spending portions of the reconciliation plan, as well as the IRS enforcement funding initiative aimed at combating the tax gap. The latest Biden framework counted $400 billion in tax gap savings, though a top Ways & Means Democratic staffer said this week that the savings may be less than that; included as a footnote because revenue from such funding isn't scoreable under budget rules; and possibly make the difference between the bill being fully paid for or not. IRS Commissioner Charles Rettig made the case for the $80 billion funding boost in a November 11 Washington Post editorial. "The status quo is untenable: It's frustrating to taxpayers, it's frustrating to our employees and it's frustrating to me," he wrote. "Today, we have fewer than 15,000 people to handle more than 240 million calls received in the first half of this year alone. We have fewer auditors than at any time since World War II."
Infrastructure bill passed: The Infrastructure Investment and Jobs Act (H.R. 3684) has been passed by the House and is awaiting President Biden's signature on November 15. Tax provisions in the bill include:
The bill is available here.
A Senate summary is available here.