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July 18, 2022

What to expect in Washington (July 18)

The fallout from Senator Joe Manchin's (D-WV) announcement last week that he wouldn't support new spending on climate change or tax increases as part of a budget reconciliation bill, at least before seeing the next round of inflation figures, continued over the weekend. Press stories focused on climate policy aspirations being dashed and questioning the future of the OECD-led global tax agreement after Manchin specifically said he took changes to bring GILTI in line with the Pillar Two 15% minimum tax off the table during the negotiations, to preserve the competitiveness of US companies.

The breakdown followed Senator Manchin's comments after the July 13 release of the BLS CPI report showing consumer prices up 9% in June over a year ago that he was more cautious and concerned about additional spending and capped an unraveling of Democratic tax aspirations predating the 2020 elections. President Biden's large package of rate increases and other tax changes in the FY2022 budget was whittled down and rate-based changes were omitted in the House-passed BBBA (at the urging of Senator Kyrsten Sinema (D-AZ)), then recently a smaller set of tax provisions was being eyed with optimism until the middle of last week, when the CPI numbers upended the talks. The President on Friday encouraged Congress to act quickly on the Medicare drug negotiation-ACA premium tax credit package that Manchin said he would accept, and Democratic leaders appear poised to do that.

On the global tax deal, Senator Manchin said Friday, "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." Treasury Secretary Janet Yellen was quoted in the Sunday Washington Post as saying, "There's huge global momentum to move forward. Other countries are moving forward … It will create a momentum for us to join in, too." She highlighted that the global tax agreement gives countries taxing rights on multinational firms' profits booked in jurisdictions where taxes are below the new minimum of 15 percent, meaning the U.S. will have an incentive to increase its tax rate or lose out on government tax revenue.

An earlier Post story said, "In the days before the discussions collapsed, Senate Democratic Leader Charles E. Schumer (D-N.Y.) haggled privately with Manchin, as the two had done for months. At one point, party officials even offered to drop a key proposal setting a minimum tax on corporations in exchange for climate spending … "

The Wall Street Journal reported on Saturday, "Now the administration must try to urge other countries to go first and hope that momentum, pressure and the potential for lost revenue can compel a future Congress to act." A Treasury Department spokesman said the U.S. remains committed to the global minimum tax and will look at every avenue possible to get it done. "Backers of the global tax deal might now have to hope that the Biden administration has more success in persuading foreign governments than it did in swaying Congress," the report said, citing US advocacy for approval of the EU minimum tax directive.

Reuters reported Secretary Yellen as saying of the changes to align the US with the 15% global minimum tax, "We are very committed to moving ahead with this. This is a truly important global initiative … I can tell you that we will continue to look for every possible opportunity that we have to move this forward."

On July 15, Treasury issued a statement on withdrawing from the Hungary tax treaty and when it will be effective.

Politico Morning Tax today said the apparent demise of a tax package in a reconciliation bill raises more questions about the shape of a post-election year-end tax package. "Key tax writers in both parties have been wanting to do a second retirement-security measure this year, on the heels of 2019 legislation, though there has been concern on the left that some of the leading proposals would be too generous to the rich. And if it's late in the year, chances are you're talking about tax extenders," the report said.

Regarding the TCJA cliffs that took hold this year on IRC Section 174 — requiring five-year R&D amortization rather than expensing — and on the IRC Section 163(j) interest deduction calculation, plus the phasedown of bonus depreciation after this year, the report said, "Republicans will have lots of incentive to clean up some issues from the Tax Cuts and Jobs Act. Still, there are also plenty of Democrats who are big fans of allowing companies to quickly write off their expenses, and some of them have been looking for any avenue they can find to eliminate the new restrictions on deducting research costs. But that's not going to be an issue that unites all Democrats — some won't be huge fans of it to begin with, and others who might be sympathetic to quicker expensing have already said they don't like the idea of passing something like that after falling short on extending the monthly child allowances that they enacted last year."

Congress — The Senate could take action this week on a slimmed-down USICA-COMPETES proposal. Senator John Cornyn (R-TX), who previously said Republicans would block action while a broad reconciliation bill was still a possibility, tweeted over the weekend that Manchin's rejection of climate policies and tax increases "will green light proceeding this week to shore up the dangerous vulnerability of US supply chain for advanced semiconductors."

The House will kick off the appropriations process — with the "Transportation, Housing and Urban Development, Agriculture, Rural Development, Energy and Water Development, Financial Services and General Government, Interior, Environment, Military Construction, and Veterans Affairs Appropriations Act, 2023" — and is also expected to 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."


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