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July 11, 2022

What to expect in Washington (July 11)

Congress is returning from a two-week recess for a crucial stretch of pre-August recess legislating that is traditionally viewed as essentially a last chance to move controversial items before the midterm elections. The House is scheduled to be in session for the next three weeks (through July 29) and the Senate is currently scheduled to be in DC through August 5. Senate Democrats are accelerating their efforts to pass a budget reconciliation bill prior to the August recess, having sent Medicare prescription drug negotiation language to the parliamentarian and making clear they are united in supporting the House-passed Build Back Better Act (BBBA) proposal to expand the 3.8% Net Investment Income Tax (NIIT) to pass-through income for individuals with more than $400,000 in taxable income, joint filers with more than $500,000, and trusts and estates. The proposal's roughly $200 billion in revenue is intended to forestall Medicare insolvency, projected for 2028, until 2031.

The drug and NIIT agreements are the most tangible signs of progress in the months-long talks between Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV). An AP story said the parameters of an eventual package could include about $500 billion in spending and tax credits and $1 trillion in revenue and other savings. "Energy and environment programs, corporate taxes, IRS budget increases to strengthen tax enforcement and a renewal of soon-to-expire federal subsidies for people buying health insurance under President Barack Obama's health care law are also under discussion … "

Still, caution is being urged in assuming there is a glidepath to enactment for the climate-health-tax measure that has been stalled since the more massive House-passed BBBA ran aground over personal and policy conflicts between party leaders and Senator Manchin in December. "Senator Manchin still has serious unresolved concerns, and there is a lot of work to be done before it's conceivable that a deal can be reached he can sign onto," a Manchin spokeswoman said in a July 7 New York Times report that noted any changes to the tax code must also win the support of Senator Kyrsten Sinema (D-AZ).

Sinema's office has been pointing back to previous statements that the Senator supports House-passed BBBA tax proposals and enough in tax changes to support a narrowed package, with a goal to "ensure corporations pay taxes, while not increasing costs on small businesses or everyday Americans." A July 2 Insider story said, "one Senate Democratic aide familiar with the negotiations told Insider the surtax has been knocked out of consideration," but the view is it will not be difficult to reach $1 trillion in revenue from other available proposals. (The House-passed BBBA surtax would have imposed a surcharge of 5% on income over $10 million, plus an additional 3% over $25 million.)

Other tax increases remain in flux. A Washington Post story on Senate Finance Committee Chairman Ron Wyden's (D-OR) investigation into pharmaceutical industry taxes said of the House-passed BBBA's proposals to align GILTI with the OECD BEPS 2.0 minimum tax, "Manchin privately has expressed resistance to the Biden administration's approach." The Wall Street Journal (WSJ) said the BBBA's proposal to "impose that 15% minimum in each country where a company operates" could be changed pursuant to the Schumer-Manchin talks. That aligns with earlier Bloomberg reporting that the country-by-country requirement could be struck, which was included in a story that said the 15% corporate alternative minimum tax (CAMT) could be modified to "exclude a business's deductions for the investments they make when calculating the tax."

The WSJ reported July 10, "Some of the tax changes, including the fate of the U.S. piece of the global corporate minimum tax agreement and the $10,000 cap on the state and local tax deduction, remain in flux. A proposed surtax on people with incomes above $10 million seems less likely to be included."

Politico reported July 7, "Democrats have not finalized which tax increases on corporations and the wealthy will be used and international taxation policy remains in flux … " The Washington Post reported, "On climate, for example, Democrats are still wrangling with Manchin over a tax credit for electric vehicles. The West Virginia lawmaker has voiced concern that the tax incentive could be a handout for wealthy Americans who purchase expensive electric cars. While the issue is unresolved, a potential compromise could involve 'means testing,' in which the tax credit would be restricted to consumers who earn below certain income thresholds. Another unresolved issue concerns a suite of tax credits for producers of clean energy from sources such as wind and solar power. Manchin has indicated that he will not support a spending bill that includes what's known as direct pay … "

Global tax — Moving forward with the OECD BEPS 2.0 taxing rights-minimum tax deal is hampered by difficulty moving provisions through Congress and stalling of the minimum tax directive in the EU due to the objection of Hungary. The U.S. Treasury indicated July 8 it would withdraw from its treaty with Hungary, saying that country's lowering of the corporate tax rate to 9% makes the benefits of the treaty too one-sided.

Meanwhile, the OECD Secretary-General Tax Report released this morning includes a new Progress Report on Pillar One, "presenting a comprehensive draft of the technical model rules to implement a new taxing right that will allow market jurisdictions to tax profits from some of the largest multinational enterprises." OECD said the report will be subject to public consultation through mid-August, with the aim to finalize a new Multilateral Convention by mid-2023, for entry into force in 2024, which is a later timeline than nations had previously targeted. Stakeholder feedback on the Amount A Progress Report is sought by August 19.

Competitiveness — Democrats' efforts to revive and pass the reconciliation bill is part of a dual track of priority legislation with the USICA-COMPETES competitiveness bill, and the two efforts are intertwined more than ever after Senate Republican Leader Mitch McConnell's (R-KY) June 30 tweet that "there will be no bipartisan USICA as long as Democrats are pursuing a partisan reconciliation bill." That was viewed by some as an indication Democrats may be close to a reconciliation deal — bolstered by subsequent decisions being made about that plan — and touched off all sorts of speculation about the political calculus of doing one bill over the other and whether Senator McConnell could afford to oppose both.

Axios reported July 7, "The potential countermove [to McConnell's threat] is to bring the Senate-passed China bill to the House floor for an up-or-down vote," though there are concerns that an insufficient number of Democrats would support the bill devoid of the House add-ons.

Politico reported July 8 Schumer has "requested an all-Senators classified briefing from the administration on the global innovation and technology race" and the competitiveness legislation, scheduled for July 13, seen as heightening "the national security case for USICA." The July 10 WSJ report said that "efforts are under way to put together a similar briefing for the House." Further, "Some Democrats are pushing for House leadership to simply take the bill the Senate passed last year and put it up for a vote, a Democratic lawmaker said, worried that future delays would prevent the bill from passing at all."

Congress — The Senate is back in today with a 5:30 p.m. vote on a DoD nomination. Federal Reserve oversight and ATF nominations votes are also set for this week. There are medical-related attendance issues, including with Senate Majority Leader Schumer and Senator Pat Leahy (D-VT).

On Tuesday, July 12 (10:00 a.m.), the Senate Finance Committee holds a hearing to consider the nominations of Jay Curtis Shambaugh to be an Under Secretary of the Treasury and Rebecca Lee Haffajee to be an Assistant Secretary of Health and Human Services.

The House this week will take up abortion and gun violence legislation, in addition to the National Defense Authorization Act (NDAA), according to guidance from Majority Leader Steny Hoyer (D-MD). More than 1,000 amendments have been filed to the NDAA. The House will begin work to advance appropriation bills to fund the government for Fiscal Year 2023 during the week of July 18, then consider a package of bills aimed at helping to address droughts and wildfires in the West the following week.

On Wednesday, July 13 (10:00 a.m.), the House Ways & Means Committee will hold a hearing, "Nowhere to Live: Profits, Disinvestment, and the American Housing Crisis."

Friday, July 15 (12:00 p.m.), is the EY Webcast, "Tax in the time of COVID-19: Update on legislative, economic, regulatory and IRS developments." Register.


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Washington Council Ernst & Young
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