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This week (January 24-28)

Congress: The House and Senate are both out the week of January 24, then back with a February 18 deadline for government funding. There is expected to be a strong effort to advance the BBBA during February, ahead of President Biden's State of the Union address on March 1.

Given the congressional recess, This Week in Tax Policy won't be published this week, though Tax Alerts will be issued as events warrant.

This Week (January 17-21)

BBBA update: A January 18 Reuters report that the Biden administration "is preparing an alternative to its $1.75 trillion spending bill" that will focus on climate measures and omit some social spending proposals jumpstarted a new round of speculation about the future of the Build Back Better Act (BBBA). The White House didn't seem to dispute that things were happening but took exception to the idea that an approach had been decided. Press Secretary Jen Psaki said during a news conference, "I would just make very clear there is no specific proposal we are putting forward. We are just engaged in a range of conversations with members of Congress about what to do next." Negotiations are intended to be kept mostly private after the back-and-forth played out between the White House and Senator Joe Manchin (D-WV) in late 2021 in public view and culminated with a stalemate on some policy issues and a souring of negotiations after the White House named and blamed Senator Manchin. The Wall Street Journal reported White House chief of staff Ron Klain as saying, "One lesson we learned in the first year is, I think, the less we talk about our negotiations with specific senators and congressmen, the better we are, so I'm going to say our talks with Sen. Manchin will proceed directly and privately." Senator Manchin is emphasizing that Democrats are back to the drawing board, saying January 19, "we just started on a clean slate" on the BBBA in response to whether he still supports the bill's $500 billion in clean energy provisions, Roll Call reported. A January 20 CNN report cited him as saying "we will just be starting from scratch" on the bill. A modified version of the BBBA anchored by climate/energy provisions is a focus as Democrats seek to revive negotiations, though Manchin said he hasn't resumed talks with the White House.

A focus on energy issues seems to be the direction the Administration is headed as an initial step. President Biden said of the BBBA during a January 19 press conference, "We're going to have to probably break it up … I think it's clear that we would be able to get support for the $500 billion-plus dollars for energy and the environmental issues," and noted that Manchin also supports universal pre-K. The President also said, "There is strong support for, I think, a number of the ways in which to pay for this proposal" — without detailing which tax proposals in the House-passed BBBA could stay or go. He further said, "I think we can break the package up, get as much as we can now, and come back and fight for the rest later." In comments reported by CNN, Senator Manchin suggested he wants tax changes, saying of lawmakers, "Get your financial house in order. Get a tax code that works and take care of the pharmaceuticals … gouging the people with high prices. We can fix that. We can do a lot of good things."

There is a question as to how much the bill could be pared back as a modified version of the current budget reconciliation bill that passed the House, or whether there really will be an effort to move the proposals in pieces. A report in the Washington Post said, "House Democrats running for reelection in competitive districts, facing increasingly long odds of surviving a potential Republican wave" are calling for a new strategy, including breaking up the BBBA and holding votes on politically popular provisions like curbing prescription drug costs and extending the child tax credit. However, some Democratic leaders like Majority Leader Steny Hoyer (D-MD) have maintained that the BBBA shouldn't be abandoned and still has a chance of passing, the report said. Similarly, House Speaker Nancy Pelosi (D-CA) said January 20 the "chunks" of the bill President Biden wants to act on, "I would hope would be a major bill going forward. It may be more limited, but it is still significant." Also, those who say, "'Let's divide it up' … don't understand the process," she said, alluding to the fact that without Republican support reconciliation is required and the number of reconciliation bills is limited per budget cycle. The Speaker went on to enumerate the priorities under the bill, including climate and healthcare provisions, and, as other Democrats have suggested, said they may "have to rename it."

President Biden's suggestion that they would "come back and fight for the rest later" mirrors Senator Manchin's comment from October that Democrats could move a consensus bill then "come back with it later and they can run on the rest of it later … just not everything at one time." Democratic leaders at the time continued to pursue an all-in-one bill that clipped the duration of certain provisions to fit within cost constraints, though that approach was eventually rejected by Manchin as disingenuous. The President's comments raised questions about whether a second reconciliation bill will be pursued. Roll Call reported that the BBBA in two parts "would likely necessitate a new time-consuming budget reconciliation process, including first adopting a new budget resolution and yet another 'vote-a-rama.' Democrats haven't ruled that out, but they still need to get the original bill done before living to fight again another day. 'I think that's gonna be the challenge. I think it requires different reconciliation bills,'" Sen. Jon Tester (D-MT) said.

Climate/Energy: Some Democrats want the BBBA to remain a broad package, and others see the urgency in acting on pieces of it. Senator Edward Markey (D-MA), EPW Subcommittee on Clean Air, Climate, and Nuclear Safety chair, said January 19, "The climate and clean energy provisions in [BBB] have been largely worked through and financed, so let's start there and add any of the other important provisions … " A January 19 New York Times story suggested that while some Republicans refer to the climate provisions as a far-left agenda, "many of the clean-energy tax credits in Build Back Better have been backed by Republican lawmakers in the past and even written by them. The tax credits, some of which have been law since the 1970s, have typically been extended for just a few years at time. The pending legislation would keep them in place for a decade, lending more certainty to markets, which is designed to spur more investment." The Washington Post reported, "With climate change, in particular, [Senate Finance Committee Chairman Wyden], Manchin and other top Democrats have maintained for weeks there is now more alignment than dissent over rethinking the tax code so that it incentivizes cleaner energy. Democrats last year scaled back their more aggressive proposals — responding to concerns aired by Manchin, who represents a coal-heavy state — to punish the worst polluters."

Global tax: The current state of negotiations over a modified version of the House-passed BBBA means that the fate of proposals to change the GILTI regime so that it will be judged by the OECD as being a compliant global minimum tax, or Income Inclusion Rule, is also in question. With the European Commission moving forward on a directive that embodies the final Pillar Two models rules released by the OECD in late December, and the UK having launched a public consultation on its own legislation to implement the global minimum tax, the world is clearly watching whether some version of the BBBA with GILTI changes will be enacted. An OECD commentary related to Pillar Two model rules is forthcoming, perhaps in February. A Tax Notes article cited an Italian official as confirming that timetable and saying once the commentary is completed, the Inclusive Framework will start developing a multilateral instrument for the coordinated implementation of the subject-to-tax rule, a treaty-based rule that allows source jurisdictions to impose withholding tax on certain related party payments that are subject to tax below a minimum rate. The article cited a European Commission official as noting that the United States is having difficulty enacting GILTI regime reforms because of the political wrangling relating to the fate of the BBBA, not the reforms themselves, and that the European Commission expects the United States to adopt GILTI regime reforms in time for the EU Council to grant equivalence. Politico reported January 18 that three EU member states — Estonia, Hungary, and Poland — questioned the timetable of the French Presidency for the EU to adopt the direction in the coming months so that member states can draft and implement the global minimum tax by January 2023. Some also noted that Pillar One and Pillar Two are supposed to move forward simultaneously. They "also demanded the initiative be contingent on the rollout of a global levy" under Pillar One out of concern that "U.S. President Joe Biden will fail to find the Congressional support he needs to implement the same rules, leaving Europe at an economic disadvantage." Treasury Secretary Yellen mentioned international provisions in saying of the BBBA January 19, "While we don't know the final form this will take, it will revolutionize how we care for children in this country, invest in climate change, and overhaul the international tax system to ensure corporations pay their fair share." Meanwhile, Secretary Yellen took heat from Republicans on the House Ways & Means Committee, who argued that the Administration's efforts to forge a global tax agreement lacked broader and necessary, in their view, bipartisan consultations with Democrats and Republicans on the tax-writing committees. In a January 20 letter to Yellen, Rep. Kevin Hern (R-OK) and the other Ways & Means Republicans expressed concern about the effort to commit the US to global tax policies without true bipartisan consultations with Congress, saying, "It is extremely troubling that the Administration has made promises to the world without sufficient bipartisan, bicameral consultation. For example, we understand that the Administration has encouraged its foreign negotiating partners not to treat the United States' Global Intangible Low Tax Income (GILTI) as a qualifying minimum tax under the OECD's Pillar 2, risking adverse consequences for U.S. headquartered firms." The strongly worded letter went on to characterize the Administration's strategy as a "fool's errand."

Ways & Means: Ways & Means Committee Republicans shuffled some subcommittee assignments following Rep. Devin Nunes' (R-CA) exit from Congress and selection of Rep. Greg Murphy (R-NC) to replace him on the Committee. Notably, Rep. Mike Kelly (R-PA) has become the top Republican on the Select Revenue Measures Subcommittee, Rep. Vern Buchanan (R-FL) is now the top Republican on the Health Subcommittee, and Rep. Adrian Smith (R-NE) is the top Republican on the Trade Subcommittee.

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