June 7, 2022
Secretary Yellen faces questions from Senate Finance Committee
During a June 7 Senate Finance Committee hearing on the FY2023 Budget, Treasury Secretary Janet Yellen and Democratic Committee members were united in calling for fighting inflation with clean energy proposals and prescription drug reforms to lower consumer costs. The Secretary also faced questions regarding the OECD BEPS 2.0 project on new taxing rights and a global minimum tax (Pillar One and Pillar Two, respectively), after a delegation of congressional tax staff traveled to Europe for meetings on the project, and she confirmed ratification of a multilateral agreement to implement Pillar One will require congressional approval, but the form that takes has yet to be determined.
In an opening statement, Chairman Ron Wyden (D-OR) raised concerns about inflation and enumerated steps Democrats have taken, and are prepared to take, to tackle prescription drug prices, energy costs, and the cost of renting or owning a home. As the President has recently, Chairman Wyden invoked the tax and entitlement proposals of Senator Rick Scott (R-FL) and said, "You can bet that Republicans will want to hand a fresh round of tax handouts to corporations as well."
In his statement, Ranking Member Mike Crapo (R-ID) asserted that Democratic spending decisions have contributed to inflation and took Democrats to task for continuing to pursue the tax increases and spending proposals from the House-passed Build Back Better Act. He specifically cited the corporate minimum tax on book income, saying it would hit manufacturers hard and undercut investments in innovation and emerging technologies. Senator Crapo also raised concerns with the OECD-led international tax agreement, saying both pillars cede sweeping new rights to other countries, and noted the agreement cannot be fully implemented without congressional action. "In many cases, the terms can only be properly carried out with a multilateral treaty, requiring a two-thirds vote by the Senate," he said. He sharply criticized the Administration for not consulting with Congress as it has been negotiating aspects of Pillar One and Pillar Two, and for not providing Congress with any type of impact analysis on the US economy or on US-based companies.
In her testimony, Secretary Yellen said the nation is facing unexpected levels of inflation and, to dampen such pressures, an appropriate budgetary stance is necessary, including on clean energy and prescription drugs, to help lower costs. Secretary Yellen further said that "it is no secret" that she is focused on advancing the global agreement on international tax reform, including a global minimum tax, and she is hopeful that "Congress will also implement this global minimum tax as part of its legislative agenda."
Regarding the global tax agreement, Secretary Yellen said she is willing to work with Congress to make sure that companies making investments associated with business tax credits do not find the value of those credits diminished due to aspects of the global minimum tax regime.
The Secretary also said she would be willing to work with Congress regarding concerns about the January 2022 foreign tax credit (FTC) regulations but doesn't think the effective date of the regulations will be delayed, as companies have requested.
Below is a paraphrased summary of select exchanges between members and the Secretary.
Chairman Wyden: Action on energy and prescription drug prices is necessary, with some funded by requiring the wealthy to pay their fair share. How would such policies lower costs for families?
Sec. Yellen: Proposals should address drug prices and energy costs, to cut utility bills, and revenue raising proposals could pay for some such policies and provide for deficit reduction.
Ranking Member Crapo: Democrats are trying to negotiate a plan to raise taxes. Would that be prudent given prospects for stagflation?
Sec. Yellen: There is a lot that Congress can do to ease cost burdens Americans are facing. The Administration has worked to reduce energy costs and would like to see further investment on renewable energy and other priorities, and it is appropriate to pay for that by asking corporations and the wealthy to pay their fair share.
Sen. Debbie Stabenow (D-MI): What does Congress need to do to bring prices down?
Sec. Yellen: President Biden has indicated bringing down inflation is a top priority. Congress can do a lot to mitigate costs households face: affordable housing, prescription drug prices, high health care costs, and high energy costs through making investments in renewables.
Sen. Maria Cantwell (D-WA): Regarding the semiconductor chip shortage, we are trying for a competition and innovation bill to increase US investment and supply. How critical is it to get this done this work period?
Sec. Yellen: Investments in semiconductors are necessary as a national security and economic issue and USICA should be passed. The pandemic resulted in such a demand for chips globally, and that has affected the automotive industry. There have been subsidies by other countries for semiconductor production and we need to develop that capacity.
Sen. Patrick Toomey (R-PA): There is danger with the Administration's attempt to reverse rate cuts that were part of the TCJA, following which we had a great economy. Corporate inversions stopped in the wake of the TCJA, by design, and the TCJA shifted the tax burden to higher-income people. Federal tax revenue surged and this year we could reach a record high over last year, which itself was a record. We haven't seen how the OECD-led deal gets implemented and I am concerned about the impact on US competitiveness.
Further, since Pillar One requires modification of existing tax treaties, it seems likely that must be brought before Congress.
Sec. Yellen: Data relating to Pillar Two is available and was included in the House-passed BBBA and scored by JCT. On Pillar One, it could "go either way depending on details" that have not yet been decided. Pillar One will have a small impact. We will gain revenue from our ability to tax foreign corporations in the US and lose some from reallocation of taxing authority, and it could be positive or negative depending on details not yet worked out.
"The Ratification requires Congress's approval, I think there's no doubt about it, but the form that that needs to take is still to be determined."
Sen. James Lankford (R-OK): Under the global tax agreement, other countries will have leverage over US companies and the deal seems structured to incentivize companies to move IP and R&D internationally.
Sec. Yellen: We are the only nation that imposes a minimum tax, and this deal will force other nations to impose a minimum tax on their companies.
Sen. Ben Cardin (D-MD): I was in Cambridge, MD looking at challenges for affordable housing and there are several provisions in the Budget — historic tax credits, NMTC, LIHTC, and the Neighborhood Homes Investment Act dealing with the appraisal gap.
Sec. Yellen: We are supportive of the Neighborhood Homes Investment Act and affordable housing is a serious challenge that the Administration wants to confront.
Sen. Cardin: On retirement security, we are looking to provide more flexibility and certainty. We need the Administration's push to get to the finish line because there are a lot of stakeholders. Will the Administration help?
Sec. Yellen: We look forward to working with you on it.
Sen. Rob Portman (R-OH): On the issue of FTCs, I am concerned about the regulations. Countries around the world provide FTCs and many US workers support global sales. My concern is the interest to avoid double taxation is compromised and the new regulations point us in the wrong direction. I appreciate you want to make changes to the cost recovery and royalty withholding portion of the rules, but not creditability with regard to withholding taxes on services.
It has been suggested that a one-year delay could be appropriate.
Sec. Yellen: We will look at any concrete suggestions. We understand there are concerns about the regulations. Philosophically, we think these regulations are very important to protect critical interests of the US and the fundamental principle is we should allow a credit for foreign taxes only where the foreign taxing jurisdiction has the primary right to tax the income. We are seeing DSTs and these are taxes that shouldn't be entitled to the foreign tax credit. If we grant creditability, it only encourages such taxes.
If there are changes to the regulations, they could be applied retroactively.
Renewable energy tax credits
Sen. Maggie Hassan (D-NH): Do you support renewable energy tax credits?
Sec. Yellen: Clean energy tax credits can help low- and middle-income families cut costs and address climate change.
Statements and testimony are available here.
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