July 24, 2022
Americas Tax Policy: This Week in Tax Policy for July 22
This week (July 25-29)
Congress: The House and Senate will be in session. Upon reconvening at 3 p.m. on Monday, July 25, the Senate will vote at 5:30 p.m. on the motion to invoke cloture on the motion to concur in the House amendment, to the Senate amendment, to H.R. 4346, the legislative vehicle for the CHIPS Act, with further amendment (Senate Amendment 5135). Final passage of the bill could come Tuesday or Wednesday.
The Senate Finance Committee has set a Hearing to Consider the Nomination of Douglas J. McKalip to be Chief Agricultural Negotiator, Office of the United States Trade Representative, with the Rank of Ambassador for July 28 (10:15 a.m.).
Last week (July 18-22)
Reconciliation: Following 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, the focus is now on:
Health only: The Senate has been occupied with the slimmed-down, semiconductor chips-focused competitiveness bill and hasn't begun to take up the anticipated pared-back reconciliation bill that lowers the cost of prescription drugs under Medicare and extends expanded ACA subsidies. The expectation is that Congress will act before members leave for the August recess (July 29 for the House, August 5 for the Senate). Punchbowl reported July 22, "The legislation is still being vetted by the Senate parliamentarian, and there's not even draft text available yet. Once it's out and ready for floor action, it will take at least four or five days to get through the Senate. We expect this to be the last thing the Senate does before leaving town for the recess." The House, of course, could be brought back to vote beyond July 29.
Climate: There continue to be rumblings about a follow-on climate-based bill using a fresh set of reconciliation instructions, though it is widely recognized that processing an FY2023 budget that could pave the way for tax increases and that would likely require members to take votes on tax and other controversial issues during the open-ended vote-a-rama would be politically challenging for Democrats. Bloomberg reported that if a health-focused reconciliation bill is processed, that would likely preclude another reconciliation bill that addresses taxes under the FY2022 budget, and an FY2023 budget would likely need to be processed to provide another set of reconciliation instructions. Keeping hope alive for a climate package, Senate Finance Committee Chairman Ron Wyden (D-OR) released a statement July 18 saying, in part: "Conversations on clean energy must continue to preserve our options to move forward. Nearly all of the clean energy credits have already expired, and it will be difficult to extend them at the end of the year. Even if we reach an agreement with Republicans on an extension, it will likely be for only a handful of years, far short of the permanent reform we could achieve in our package. Without long-term certainty, investment in clean domestic energy will fall far short of what is necessary … " Axios reported July 19: "Democratic leaders still plan to move quickly on legislation that lowers the cost of prescription drugs and provides subsidies for the Affordable Care Act — and get it to Biden in early August before Congress leaves for recess. But if June's 9.1% inflation rate cools off enough to keep Manchin interested, they could take a final shot at the climate provisions he forced them to abandon this month. 'We're open to it, whatever the vehicle may be,' Senate Majority Whip Dick Durbin (D-Ill.) said. 'There is a second possibility.'" Senator Manchin said July 15 he wouldn't agree to a broader reconciliation bill addressing energy and tax issues now — not before seeing the July inflation numbers, which are scheduled for release on August 10. He said he would want to see the July CPI figures drop to 7-8% year-over-year, and they will demonstrate to lawmakers if they are on track with the recent discussions or need to adjust.
As the broader reconciliation talks faltered, President Biden said he would look to executive action on climate change, and he has been under pressure from some Democrats to declare a national climate emergency, which the New York Times said, "would give him the ability to halt new federal oil drilling and ramp up wind, solar and other clean energy projects." Returning from delivering a climate speech outlining more modest steps July 20, President Biden said he has not declared such a national climate emergency "because I'm running into traps on the totality of the authority I have. I will make that decision soon." Asked whether doing so would allow him to do more on the issue, he said, "Well, I think I can do more, unless the Congress acts. In the meantime, I can do more, because not enough is being done now. And so, there's still discussions going on about whether or not there will be some action on my climate plan. And that's — I'm told that's in play. And we'll see." The President refused to comment on any potential deal with Senator Manchin, and it's unclear if he was referring to the potential for a follow-on reconciliation bill, after Congress addresses the drug negotiation-premium tax credits package.
House prerogative: House Speaker Nancy Pelosi (D-CA) is prepping her members to accept whatever the Senate can pass on reconciliation and USICA-COMPETES, even if bills fall short of previous aspirations. She said in a July 18 Dear Colleague letter, "we are constantly striving to bring a COMPETES bill to the Floor as well as address the new developments on the Reconciliation bill. In both cases, we must accept the good and continue our negotiations for more … The health provisions of a potential Reconciliation package are essential, as we must act to reduce the cost of prescription drugs. It is of the highest priority for House Democrats that we continue our fight to save the planet For The Children, as this is an issue of health, jobs, security and values."
Year-end tax bill: Politico Morning Tax July 18 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."
Global tax: Senator Manchin's comments about taking 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 brought more uncertainty to advancing the global tax agreement. A July 18 New York Times story on the potential inaction on international tax changes said, "Failure to get agreement at home creates a mess both for the Biden administration and for multinational corporations. Many other countries are likely to press ahead to ratify the deal, but some may now be emboldened to hold out, fracturing the coalition and potentially opening the door for some countries to continue marketing themselves as corporate tax havens." The story also said some countries opting to act "poses risks for U.S. companies, including the chance that their tax bills could go up, given an enforcement mechanism that the Treasury Department helped create to nudge reluctant countries into the agreement. If the United States doesn't adopt a 15% minimum tax, American companies with subsidiaries in participating countries could wind up paying penalty taxes to those foreign governments." The story quoted Barbara Angus, the global tax policy leader at Ernst & Young, as saying a failure by the United States to comply with the deal would have "significant implications" for American companies. "'For this framework to work as it's intended, there really does need to be consistency and coordination,' said Ms. Angus, who is also a former chief tax counsel on the House Ways and Means Committee," the NYT reported. Kimberly Clausing, who recently stepped down as Treasury's deputy assistant secretary for tax analysis, tweeted July 19, "the agreement is smart. It has an enforcement mechanism (the UTPR) that will encourage countries to adopt. If some countries have the courage to lead, others will have strong incentives to follow." NPR reported of Treasury Secretary Janet Yellen July 19: "It could potentially take years for the U.S. to pass the initiative, Yellen acknowledged in a Tuesday interview with Morning Edition. But she says it's too important not to revisit — and believes that as other countries adopt a minimum corporate tax, they will incentivize Congress to pursue legislation that will bring the U.S. into compliance too."
Meanwhile, the UK July 20 released draft Pillar Two legislation for an IIR (effective for accounting periods commencing on or after December 31, 2023). And Bloomberg Tax reported a senior official saying July 21 that the OECD will hold an in-person public consultation on new Pillar One international tax rules. "We will do a public consultation in person on Pillar One, in September — the exact date we will advise you on soon," Achim Pross, head of the International Cooperation and Tax Administration Division of the OECD's Center for Tax Policy and Administration, said.
An EY Alert, "UK Government releases documents for consultation prior to Finance Bill 2022/23," is available here.
Competitiveness: The Senate on Tuesday night voted, 64-34, to proceed to a narrower version of the semiconductor/China competition bill, after a bicameral conference committee on the broader House- and Senate-passed bills became bogged down. The chamber is heading toward final passage next week of the stripped-down competitiveness bill, the Chips Act for America, anchored by more than $52 billion in grants and incentives for companies building semiconductor fabrication plants in the US, and a multi-year 25% investment tax credit for semiconductor plants (estimated to cost $24 billion), and including "science and commerce" provisions drawn from the Senate-passed USICA bill. Senator Todd Young (R-IN) floated the prospect of including a tax provision that would have (for one year, retroactively) restored expensing of research and development costs (as opposed to 5-year amortization), but the R&D provision was not included in the substitute amendment.
Housing: The July 20 Senate Finance hearing, "The Role of Tax Incentives in Affordable Housing," primarily focused on the many housing-related bills put forward by Committee members, including:
It's unclear how any such proposals could move in Congress soon given that LIHTC and other housing proposals in the House-passed BBBA were not included in the latest round of reconciliation negotiations which, as mentioned, have stalled. Unlike the House Ways & Means Committee housing hearing held July 13 as the latest 9.1% year-over-year inflation increase was announced, the Finance hearing wasn't focused on past and future causes of inflation, though Ranking Member Mike Crapo (R-ID) addressed the issue in an opener: "Foremost in the current economy is the need to reduce inflation. Unfortunately, it has been allowed to run rampant, and necessary Federal Reserve actions will raise the cost of housing. Builders are also feeling inflation's effect through more expensive building materials."
The OECD July 21 released a report, "Housing Taxation in OECD Countries," which provides an assessment of the wide range of taxes governments levy on residential property.
Education: Ways and Means Committee Member Greg Murphy, M.D. (R-NC) and others July 20 introduced the Protecting Endowments from Our Adversaries Act (H.R. 8447) to impose an excise tax on certain investments of private colleges and universities. The bill is intended to pressure large university endowments to purge their investment portfolios of entities deemed a threat to US national security.