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This week (February 14 - 18)

Congress: The House is out of session. The Senate will convene on Monday, February 14 at 3 p.m. and at 5:30 p.m. vote on the motion to invoke cloture on the motion to proceed to H.R. 3076, a bill to provide stability to and enhance the services of the United States Postal Service. The Senate is also expected to vote on the House-passed continuing resolution to extend government funding through March 11. Looking forward, top appropriators February 9 signaled a deal on topline spending numbers for an omnibus appropriations bill to fund the government through the remainder of FY2022 but haven't announced details, and finalizing an omnibus is expected to take weeks.

Ways & Means: The House Ways & Means Select Revenue Measures Subcommittee will hold a hearing on "Examining the Economic Impact of Federal Infrastructure Investment" on Tuesday, February 15 (2:00 p.m.).

Finance Committee: On Thursday, February 17 (10:00 a.m.), the Senate Finance Committee holds a hearing , "Spotlighting IRS Customer Service Challenges."

Last week (February 7 - 11)

Inflation: The outlook for a potentially retooled climate/social spending bill that could emerge in the wake of the House-passed Build Back Better Act's (BBBA) demise is becoming even less clear as inflation concerns intensify and the midterm elections near. It now seemingly depends not only on what Senator Joe Manchin (D-WV) wants to support, but whether Democratic senators up for re-election this year in tough races are able to address inflation concerns affecting the nation as a whole and highlighted by Republicans as a vulnerability. The February 10 report of 12-month inflation rising to 7.5% raised concerns from Senators Manchin and Kyrsten Sinema (D-AZ), as well as Democrats up for re-election this fall in close races. Senator Manchin released a statement saying, "For months, I have been ringing the alarm bell about inflation. Once again, we are witnessing that the threat of inflation is real. … As inflation and our $30 trillion in national debt continue a historic climb, only in Washington, DC do people seem to think that spending trillions more of taxpayers' money will cure our problems, let alone inflation … " Senator Sinema said, "Arizonans should be able to keep more of their hard-earned money in their pockets. That is why I work every day to ensure any government spending is targeted and thoughtful — because a lean, efficient government helps avoid price hikes." Punchbowl News reported February 11 that Republicans are "convinced Democrats don't have a real plan to address" inflation, which is an important dynamic for the midterms. "It's the biggest issue in the country, and I think their biggest liability going into the fall," Senate GOP leader Mitch McConnell (R-KY) said.

What can be done: On February 9, Senators including Mark Kelly (D-AZ), Maggie Hassan (D-NH), Catherine Cortez Masto (D-NV), and Raphael Warnock (D-GA) introduced a bill (S. 3609) to provide a federal gas tax holiday through the end of the year, which they said would provide "much-needed economic relief to families." The senators in that group are viewed as facing some of the most competitive Senate midterm re-election races. CNN reported that some members, including Senator Kelly, are challenging the White House to do more to address the issue, as President Biden has maintained that inflation will taper off. "The Senate's most vulnerable Democrats are all calling on the Biden administration to do more to address the pain consumers are feeling … and taking steps themselves to show they are in tune with voters' concerns, whether it's on the price of gasoline or groceries," the story said. Senator Hassan was quoted as saying, "We need to push harder to see what we can do to resolve the supply chain issues." The House and Senate are expected to begin reconciling differences between the USICA and COMPETES Act semiconductor/competitiveness/supply chain bills. The House bill includes a health-related tax provision that raised some speculation about whether other tax provisions could be added down the line. Senators Warnock and Cortez Masto have also called for reducing the cost of prescription drugs to address rising consumer costs.

'Financial house' in order and tax increases: Senator Manchin has called for "fixing the tax code" and said doing so was the reason he voted to facilitate budget reconciliation for the BBBA, and the call for the nation's financial realignment seems to be getting louder amid inflation and debt concerns. A February 9 Politico report more directly suggested he wants whatever bill that can be resurrected amid the House-passed BBBA's demise to foremost be a tax bill, rather than a spending bill paid for with tax increases. "Rather than start with spending priorities and then evaluating how to pay for them, Manchin wants to start with tax reform as the goal of any party-line effort. He's also insisting that social programs go through typical committee consideration, which allows Republicans more input. And he doesn't just want it fully paid for; he wants it to significantly cut the deficit and put debt on a 'downward trajectory.' 'That's really what reconciliation is for: to get your financial house back in order. And that's the thing that can be done and should be done,' Manchin said." The story said, "Most Democrats concede they could not revive a tax and spending bill before April, and the final deadline is Sept. 30, when Democrats' existing powers to push the defunct bill without the threat of a Senate filibuster expire." Senator Sheldon Whitehouse (D-RI) said the August recess could be a de facto deadline, and Senator Jon Tester (D-MT) was quoted as saying there's a small chance a resurrected BBBA doesn't get done at all. (Senator Tester this week also made news for saying on a CNN podcast, "I honestly don't think the Democratic Party can be a majority party unless we start appealing to Middle America a lot more. I'm talking about the area between the two mountain ranges, the Appalachians and the Rocky Mountains.") During a West Virginia radio interview February 10, Senator Manchin listed inflation increases for specific items, including over 7% for food prices, and said there are a lot of "good, well-intentioned ideas" in the BBBA that ultimately need to be addressed, but, "We are not in a financial position to do it." On February 11, Bloomberg reported that the White House is considering reworking the economic plan to emphasize deficit reduction in a bid to secure support from Senator Manchin.

Tax rates: Also during the radio interview, Senator Manchin repeated that changes of the magnitude proposed in the BBBA need to be considered at the committee level — where Republicans may not support them, but will nonetheless participate in the debate — and called for a "tax bill that puts us on a path to financial solvency." While the House-passed BBBA eschewed tax rate increases due to opposition from Senator Sinema, Manchin continued to call for them in the February 10 interview. "We were all opposed to the 2017 tax cuts the way they finally came out … So, if we agree on that, can't we put [a bill] together that truly gets our economy back on track?" Asked whether he supports a tax increase, Manchin said, "I basically want corporations to pay 25% … you don't need a punishing, you need basically a competitive [system]. And all the people at the top end of the food chain should be paying too — they should be paying and they're not now in so many areas. You got corporations not paying, that should be a minimum of a 15% corporate tax — minimum of a 15% corporate tax that you pay in America." He also said he supports a capital gains rate increase to 28% and elimination of carried interest and unspecified "loopholes."

Year-end tax changes: There are also increasing signs of pressure on Congress to act on year-end 2021 tax changes, many of which were addressed in the now-stalled BBBA. These include energy tax extenders and the TCJA IRC Section 174 requirement that R&D expenses be amortized over five years rather than expensed. Law360 February 8 reported of another TCJA cliff that wasn't in the BBBA, "Several senior Republicans said they would insist on moving a renewal of the 2017 Tax Cuts and Jobs Act's (115 P.L. 97) formula for capping deductible business interest expenses at the sum of 30% of earnings before interest, taxes, depreciation and amortization, or EBITDA, with any extensions of temporary tax breaks, or extenders." The story said, "A renewal of the more generous business interest deduction cap and extensions of other expired tax breaks could move as part of a fiscal 2022 omnibus spending bill or in other legislation." The story cited Senator Roy Blunt (R-MO) as saying, "There will be an extenders package. My hope is that that would be part of it … The sooner we get the extenders done, the more you drive this year's behavior." In the House, Reps. Adrian Smith (R-NE) and Kevin Brady (R-TX) said Republicans would insist that the renewal of the EBITDA-based business interest deduction cap be included in any extenders package, Law360 said. Sen. Blunt and Rep. Smith are the Republican sponsors of House and Senate legislation that would preserve the EBITDA limitation.

Child Tax Credit: Another 2021 year-end tax change very much on the radar of congressional Democrats is expiration of the expanded CTC, which increased the credit amount and provided monthly payments to some taxpayers. Senators Michael Bennet (D-CO), Cory Booker (D-NJ), Sherrod Brown (D-OH) and Warnock, and Reps. Rosa DeLauro (D-CT) and Suzan DelBene (D-WA) held a news conference February 8 calling for the extension of the expanded CTC and Earned Income Tax Credit. The CTC, especially, was a focus of BBBA negotiations. Senator Manchin has suggested inclusion of a one-year extension masked the cost of the policy over the long term and called for income limits and work requirements. Senator Warnock said, according to Punchbowl News, "What are the work requirements for the tax cuts given to the richest of the rich in 2017? Where are those work requirements? Where's the means testing for extending this? This is a tax cut. It's just for ordinary people. And the moral question is why is the tax cut good for those who need it the least, but not the right thing for those who need it the most?" Senator Bennet said in the CNN report on inflation concerns, "I think it's a reason why we should be making permanent the child tax credit because it would really help people that are struggling with inflation right now."

Politico reported, "Sen. Mitt Romney on Tuesday raised the possibility of lawmakers cutting a bipartisan deal to expand the Child Tax Credit if Democrats' bid to revive their own plan fails. Romney — who's long backed a monthly payment program similar to the one Democrats are trying to resuscitate — said he's been discussing the possibility of a deal with Democrats, including Sen. Joe Manchin (D-W.Va.)." Senator Romney said in Roll Call, "Now that Build Back Better is in limbo or worse, there's a growing series of discussions going on among members of the Senate at least, but also members of the House to say, 'OK, let's go back and look once again at family security and children and think about a way that we might pass something on a bipartisan basis.'" The report cited Romney as saying while many Democrats view the child tax credit as an anti-poverty program, he and GOP colleagues also view it as a way to make sure people who want to can have children and keep the U.S. population from shrinking. During a White House event with Treasury Secretary Yellen February 8, VP Harris said, "we fought to expand the Child Tax Credit and the Earned Income Tax Credit as part of the American Rescue Plan" and "the President and I will keep fighting to extend these measures for years to come."

ERTC: Senators Hassan, Tim Scott (R-SC), Mark Warner (D-VA), Shelly Moore Capito (R-WV) and Ben Cardin (D-MD) February 10 introduced the Employee Retention Tax Credit Reinstatement Act (S. 3625). The House bill (H.R. 6161) was introduced in December. The ERTC was terminated as of September 30 under the infrastructure bill enacted in November; the bills would reinstate it through the end of 2021. A February 7 Roll Call report on potential renewal of the ERTC cited Senator Cardin as saying, "It's on the table depending on how we proceed on COVID relief, and it's also on the table in terms of tax issues. So it's being talked about, but there's been no decisions made on that." The story said Senate Finance Committee Chairman Ron Wyden (D-OR) is particularly interested in the ERTC.

Congress: House Ways & Means Committee member Jason Smith (R-MO) announced he is running for re-election — there is a high-profile race to replace Senator Blunt, which Smith is forgoing — and will vie for the top GOP spot on Ways & Means. The Ways & Means race also currently includes Reps. Vern Buchanan (R-FL) and Adrian Smith (R-NE).

Global tax: On February 4, the Secretariat of the Organisation for Economic Co-operation and Development (OECD) released a public consultation document with draft rules on nexus and revenue sourcing in connection with Pillar One of the OECD/G20 project on Addressing the Tax Challenges Arising from the Digitalisation of the Economy (the so-called BEPS 2.0 project). Comments on the public consultation document may be submitted by February 18 and all written comments received will be made publicly available. An EY Tax Alert with further details is available here.

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