This week (July 18-22)

Congress: The House and Senate will be in session. The Senate could take action on a slimmed-down USICA-COMPETES proposal. House business is expected to include a vote on legislation to ensure access to contraception.

On Wednesday, July 20, the Senate Finance Committee will hold a hearing, "The Role of Tax Incentives in Affordable Housing."

Last week (July 11-15)

Reconciliation: Senator Joe Manchin (D-WV) "told Democratic leaders on Thursday he would not support an economic package that contains new spending on climate change or includes new tax increases targeting wealthy Americans or corporations," the Washington Post reported July 14. That would leave Medicare prescription drug negotiation and the extension of expanded ACA health insurance premium tax credits as the centerpiece of any near-term reconciliation bill, and Manchin has expressed support for both proposals. However, Senator Manchin said on West Virginia radio July 15 that he simply told Senate Majority Leader Chuck Schumer (D-NY) he wouldn't agree to a broader reconciliation bill now — not before seeing the July inflation numbers (which are scheduled for release on August 10). He also suggested that he has taken proposals to change GILTI to align with the OECD-led global minimum tax off the table for fear of harming the competitiveness of US companies. Manchin has repeatedly said the September 30 expiration of reconciliation instructions is the deadline he is operating on, and he doesn't see the need for a deal before then. On the inflation uptick, he said, "Can't we wait to make sure we do nothing to add to that? … I can't make that decision on taxes of any type and also on the energy and climate — because it takes the taxes to pay for the investment in clean technology that I'm in favor of. I'm not going to do something and overreach that causes more problems."

The latest developments follow the July 13 release of the BLS CPI report showing consumer prices up 9% in June over a year ago and Manchin's comments that he was more cautious and concerned about additional spending than ever and would be more closely "scrubbing" proposals under discussion to determine their potential inflationary effects. He has been raising concerns about inflation for the better part of a year, and his vote is necessary for a reconciliation package to pass in the 50-50 split Senate. He said July 15 that he told Leader Schumer, who he has been negotiating with for months, "if you're on a political deadline and it has to be done in July, the one thing you know you can get done is" Medicare prescription drug negotiation, with some of the revenue applied to ACA subsidies and the remainder to deficit reduction. He suggested he was alarmed by the increase in year-over-year inflation from 8.6% in May to 9.1% in June, when the expectation was it would go down. Senator Manchin said he would want to see the next report drop to 8%, 7.5%, 7%, and that Congress could "come back the first of September and pass this legislation if it's a good piece of legislation." The July CPI figures will demonstrate to lawmakers if they are on track with the recent discussions or need to adjust, he said.

This leaves Democrats with the choice of acting on drug negotiation-ACA subsidies proposals now or waiting to see if inflation numbers draw Manchin back toward a broader bill before September 30. Punchbowl News observed this afternoon regarding that deadline, "[B]y then, millions of Obamacare enrollees will have already received notices that their premiums are going to increase dramatically, which would take place just weeks before the election. But if Democrats pass reconciliation now, they end up throwing away many of their priorities, such as climate and tax increases on the wealthy and corporations." The report quoted House Ways & Means Committee Chairman Richard Neal (D-MA) as saying, "So my position has been that if we can get a bigger deal with some certainty, we're willing to hold out. But if we are gonna go to the altar again and not have somebody say 'I do,' then we would have to take the immediate."

President Biden released a statement July 15 saying, in part: "if the Senate will not move to tackle the climate crisis and strengthen our domestic clean energy industry, I will take strong executive action to meet this moment … Health care is also critical … Democrats have come together … and are prepared to give Medicare the power to negotiate lower drug prices and to prevent an increase in health insurance premiums for millions of families with coverage under the Affordable Care Act. Families all over the nation will sleep easier if Congress takes this action. The Senate should move forward, pass it before the August recess, and get it to my desk so I can sign it."

Roll Call July 13 reported Manchin as saying on tax increases, "I'm looking at anything that can basically make the [tax] system fair … I'm not looking at penalizing anybody. I don't think we should be raising taxes. But the bottom line is there's loopholes that can be closed." He singled out for scrutiny 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. Leaders had been signaling that was a likely area of agreement among Democrats, though Republicans have been vocal in opposition on the issue, arguing its effects would be passed on to average Americans through higher prices and lower wages. In addition, there had been discussions of including the 15% corporate alternative minimum tax (CAMT), perhaps in modified form, and proposals to align GILTI with the OECD BEPS 2.0 minimum tax (through a 15% rate and country-by-country calculation). Manchin said July 15: "We said 'OK, a 15% minimum — they wanted to do 15% … overseas … Well, you know what? The rest of the countries aren't following suit, they're having a heck of a time. And I said, 'We're not going to go down that path overseas right now because the rest of the countries won't follow. And we will put all of our international companies in jeopardy, which will harm the American economy. We can't do that.' So, we took that off the table. I'm telling you things that we've been working on for months. I said, 'The 15% minimum in America makes sense.' But there's a lot of companies that don't pay quite 15% … I want to make sure that we are not harming our economy." Bloomberg Tax reported July 15, "On the international stage, Manchin's position puts US cooperation with a global tax overhaul in limbo. Democrats planned to use the major tax and spending package to bring the US into alignment on one of the two major parts of that agreement — a 15% global minimum tax."

House prerogative: There have also been rumblings that House 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 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. One work-around to the impasse, suggested by Senator McConnell, would be to pass only the $52 billion in CHIPS Act semiconductor funding. Leader Schumer on July 14 said he would move to bring to the floor next week a much narrower bill focused only on chips manufacturing and a few other agreed-upon items, but even that effort may fail. Schumer told senators to expect a floor vote as early as Tuesday (July 19) on moving to consider a stripped-down version of the China bill that would include the $52 billion in chips manufacturing incentives, a 25% tax credit for investments in semiconductor manufacturing (both for manufacturing equipment and construction of semiconductor facilities), money to speed the rollout of the 5G telecom network, and perhaps a few other provisions from the larger bills. But Senator John Cornyn (R-TX), a leading supporter of USICA and a key ally of McConnell, told reporters that many Republicans would oppose moving forward with even a slimmed-down bill until Democrats ran out of time to pass their separate economic package. It was not clear if, after news of Senator Manchin shutting down climate and tax increase proposals for now, the prospect of a vastly smaller, health-focused reconciliation bill might ease the friction between the parties on the separate China/chips negotiations.

ECOFIN/Hungary: Moving forward with the OECD BEPS 2.0 taxing rights-minimum tax effort is hampered by difficulty moving provisions through Congress — now left even further in question by the reconciliation developments — and the stalling of the minimum tax directive in the EU due to the objections of Hungary. Tax Notes reported that the Czech presidency of the EU Council will "strive" during the summer to make sure an agreement on the implementation of pillar 2 of the OECD global corporate tax deal can happen in October. "We would like to achieve a Council position at the October Economic and Financial Affairs (ECOFIN) meeting as far as pillar 2 is concerned," Zbynek Stanjura, minister of finance of the Czech Republic, told members of the European Parliament during a July 13 economic dialogue.

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. 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 that move, 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."

OECD consultation document, progress report: On July 11, the OECD Secretariat released a new consultation document on Pillar One Amount A. The document consolidates revised versions of all the Amount A consultation documents released thus far. Stakeholders are invited to send comments no later than Friday, August 19. The Public Consultation document continues to be a draft that does not represent consensus of the Inclusive Framework. Also, the OECD released a progress report prepared for the G20 finance ministers ahead of their meeting in Indonesia later this week. On Pillar One, the report formalizes prior statements by OECD officials of the aim to finalize the multilateral convention by mid-2023, effective 2024, confirming a one-year delay. On Pillar Two, the report notes work is largely complete with the Implementation Framework to be released later this year. The report highlights: "All G7 countries, the European Union, a number of G20 countries and many other economies have now scheduled plans to introduce the global minimum tax rules." The progress report 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.

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