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July 13, 2022

What to expect in Washington (July 13)

A comprehensive reconciliation deal between Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV) may not be as imminent as some anticipated, after Manchin said following a call with Schumer July 11 that Congress has until September 30 to complete a bill and he, personally, doesn't need a deal before then. Bloomberg also reported Manchin as reiterating previous comments that his top concern is for the bill to not contribute to inflation, and for it to close 'tax loopholes,' and lower energy prices. There has been speculation about tax elements of a deal coming together, and Democrats seem to have nailed down drug pricing and Net Investment Income Tax (NIIT) pieces. The Senate isn't business-as-usual this week, with Senator Schumer and others sidelined for COVID and other health issues.

Despite the absence of a deal, Senator Manchin said the working relationship with Schumer is strong. Politico reported July 12: "In an interview, Manchin said he and Schumer will need to talk again this week or next to keep negotiations going but summed up their relationship this way: 'We understand each other well enough.' 'We can agree to disagree, we can agree to try and find a moderate middle. He knows that I'm not in the base camp far to the left; that will never happen,' Manchin said Tuesday. 'He knows exactly where I'm at. Now whether they can get there or whatever, we'll see.'"

As Manchin alluded to, casting the bill as inflation-fighting will be politically necessary, as Republicans revive their criticism of Democratic-led spending and target the NIIT expansion to pass-through income for those above income thresholds. Second-ranking Republican Senator John Thune (R-SD) said on Fox News July 12: "They have been trying to cobble together a bill that could get even all 50 Democrats. The problem with a lot of these policies is, they are inflationary too. When you talk about the huge tax increases that accompany any of these ideas, that too is inflationary, in addition to creating conditions where workers get paid less … and they're talking about now, taxing small businesses, for example, pass-through businesses. That gets passed on in the form of higher prices. It gets passed on in the form of lower wages for workers."

Roll Call July 12 cited Senator Ben Cardin (D-MD) as saying Senator Schumer reiterated during the Tuesday Democratic Caucus meeting that his goal is to put a reconciliation bill on the floor before the August recess but didn't detail the Manchin talks that have been tightly under wraps.

What about the House? There are rumblings that Democrats aren't poised to simply accept a Manchin deal should one materialize, and some members are also citing inflation concerns. Axios reported July 12, "Rep. Josh Gottheimer (D-N.J.) is gauging support among House centrists for a counteroffer to the emerging Senate reconciliation package, with one big clause: No new taxes." The report said, "Gottheimer's counteroffer envisions $520 billion in new spending for climate energy and health insurance exchanges, and a total of $627 billion in new money from enhanced IRS enforcement and drug pricing reform."

Punchbowl similarly reported this morning Rep. Mikie Sherrill (D-NJ) as saying she's "not for any type of legislation that raises taxes" and has been in conversations with fellow Democrats about resisting any package including new taxes. "That's just … [my] position in general. But especially right now, as my constituents are facing inflation, cost of living [increases], … housing prices," Sherrill said, adding that she supports negotiating prescription drugs and IRS enforcement funding. She hosted a constituent roundtable last week focused on inflation and the resulting spending cutbacks for average Americans.

Further, Punchbowl said members including Gottheimer and Rep. Tom Suozzi (D-NY) still maintain they won't vote for a reconciliation bill without state and local tax (SALT) deduction cap relief.

Competitiveness — The USICA-COMPETES conference committee is "stuck," Senate Republican Leader Mitch McConnell (R-KY) said July 12. While suggestions that the House should just take up the Senate-passed bill could've been viewed as attempting to jam Republicans, McConnell cited that approach as a workaround for the impasse. Another would be to pass only the $52 billion in CHIPS Act semiconductor funding, as Senator John Cornyn (R-TX) has suggested. "Democrats, however, are not ready to give up on the conference process for the broader bipartisan competition bill or negotiations on the slimmed-down version of a reconciliation package," the Roll Call report said, citing Finance Committee Chairman Ron Wyden (D-OR) as among those holding out for a bipartisan bill. Likewise, House Majority Leader Steny Hoyer (D-MD) balked at the fallback suggestions, citing the need for the House perspective to be reflected in a bill and with "so much good stuff in there, we want to pass a broader bill than just a chips bill."

Global tax — The July 11 OECD progress report on Pillar One of the BEPS 2.0 project that formalized prior statements by OECD officials of the aim to finalize the multilateral convention by mid-2023, effective 2024, confirming a one-year delay, was welcomed by the Treasury Department. "Treasury welcomes the additional year agreed to at the O.E.C.D. to allow further time for negotiations among governments and consultations with stakeholders," a Treasury spokesman said in the New York Times. "Tremendous progress has been made, and additional time will ensure we all get this historic agreement right."

An EY Alert, "OECD releases Progress Report on Amount A of Pillar One of BEPS 2.0 project and invites public comment," is available here.

Tax-writing committee ranking members Senator Mike Crapo (R-ID) and Rep. Kevin Brady (R-TX), plus Senate Foreign Relations Committee Ranking Member Jim Risch (R-ID), July 11 challenged Treasury's announcement that it intends to withdraw from the U.S.-Hungary tax treaty, saying: "Treasury's latest tactic to force implementation of the OECD agreement is to withdraw from a longstanding bilateral tax treaty approved by Congress … The move stands in stark contrast to the Biden Administration's rhetoric about improving multilateral tax cooperation."

Housing — Today, 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." Witnesses include academics from Georgia Tech and Harvard, and representatives of housing policy groups.

On 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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For additional information concerning this Alert, please contact:
Washington Council Ernst & Young
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