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The narrative that Democrats should push Republicans for a deal to increase Child Tax Credit (CTC) benefits — following the lapse of the expanded credit with monthly payments at the end of 2021 — in exchange for addressing the TCJA Section 174 cliff, requiring 5-year R&D amortization rather than expensing, continues to gain attention, further muddling the prospects for and potential shape of a year-end tax package.

A September 15 Washington Post opinion column by Catherine Rampell demanded that, "before Democrats even think about giving away another tax break to corporations, they should demand more dollars for poor kids," arguing that the 174 change was of Republicans' own making in the TCJA and that census data shows child poverty rates fell nearly in half in 2021, when the expanded credit was in effect, compared with a year earlier. The column suggested that for revenue raisers like the TCJA Section 174 change, the effective date was delayed and "the presumption at the time was that these provisions might never materialize because future Congresses would step in and reverse them first."

The column recognizes that Democrats support R&D and probably "doing cleanup for Republicans this year" but should demand a revived CTC expansion. It noted that some Republicans support enhancing the CTC, but probably not to the level in effect for 2021, and a compromise is possible. "Democrats should use the leverage they now have with Republicans to deliver for the most vulnerable Americans — unless Democrats wish to demonstrate that they, too, care more about corporations than they do about kids," the column said.

Recall that a motion to instruct conferees to the America COMPETES/USICA competitiveness conference by Senator Maggie Hassan (D-NH) calling for preserving R&D expensing was agreed to 90-5 May 4. Elements of that conference were enacted in August as the CHIPS and Science Act, but Section 174 was not addressed.

Congress — Both the House and Senate have gone out for the week without making much measurable progress toward a continuing resolution (CR) to extend government funding beyond September 30 and into December, which is the only must-pass item of the pre-election session. There is continued discussion of potential CR add-ons, particularly an energy permitting reform measure that was promised to Senator Joe Manchin (D-WV) in the run-up to the Inflation Reduction Act. Senator Manchin's proposal hasn't been unveiled, and negotiations with progressive Democrats and perhaps some Republicans — Senator Shelley Moore Capito (R-WV) has her own proposal — are possible.

There is also talk of adding an FDA User Fee package to the CR. A same-sex marriage codification proposal at one time discussed for inclusion is now being eyed for a vote after the midterm elections. Additionally, a "high-profile antitrust bill intended to curb the power of tech giants … appears to have enough support to pass Congress but likely won't be voted on before Election Day," Time magazine reported.

The House will next meet on Monday, September 19. The Senate will convene at 3:00 p.m. on Monday and, at 5:30pm, will vote on a procedural motion related to the Florence Pan DC Circuit judicial nomination.

Elections — The midterm elections and what is at stake, with the potential for Republicans to gain control of one or both chambers of Congress next year, continue to be a focus of attention and speculation. While Speaker Nancy Pelosi (D-CA) and others have suggested Democrats could retain control of the House, Republicans would only need to flip five seats to win control (presuming they retain the vacant Indiana seat). The Cook Political Report rates 33 Democratic seats as toss-up or lean to or likely Republican, compared to only a one-third of that number (11) in Republican seats rated toss-up or lean to/likely Democratic.

A story in this morning's Wall Street Journal on the Senate elections said: "Democrats' top pickup opportunities are in Pennsylvania and Wisconsin, both states Mr. Biden won in 2020. The party also sees opportunities to expand its offensive map to include North Carolina, Ohio and Florida — states that voted for Mr. Trump two years ago. For Republicans, Democratic-held seats in Nevada and Georgia are the main targets, followed by New Hampshire. In that state, nonpartisan political observers view the primary win by Don Bolduc, a retired Army general, over a more establishment candidate, Chuck Morse, as hurting the GOP's odds of unseating Democratic Sen. Maggie Hassan in November." The story cited Republicans as saying the elections are a referendum on Democrats' handling of the economy, crime, and immigration, while Democrats "are trying to go on offense on abortion," and said control of the Senate could again come down to a Georgia runoff.

The New York Times reported this morning, "Democrats remain unexpectedly competitive in the battle for Congress as the sprint to November's midterm election begins, a New York Times/Siena College poll has found. The surprising Democratic strength has been bolstered by falling gas prices and President Biden's success at breaking through legislative gridlock in Washington to pass his agenda. That shift in political momentum has helped boost, in just two months, the president's approval rating by nine percentage points and doubled the share of Americans who believe the country is on the right track."

Crypto, Climate Disclosure Rules — At a Senate Banking Committee hearing Thursday, Securities and Exchange Commission Chairman Gary Gensler fielded a slew of questions about the SEC's fast-paced rulemaking around climate risk disclosures for public companies, and Gensler's belief that the SEC has jurisdiction over most digital tokens. Ranking Member Pat Toomey (R-PA) said the climate disclosure rule "isn't about an informed investment decision. It's about equipping climate activists with data to run political pressure campaigns against companies, often to the detriment of shareholders. The endgame is to discourage capital investment in oil, natural gas and other traditional energy industries." Toomey said the SEC "ultimately will have to answer to the courts, which should make it nervous. The Supreme Court has repeatedly held that 'Congress … does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions — it does not, one might say, hide elephants in mouseholes.'"

Toomey said the Court applied this principle earlier this year in West Virginia v. EPA. Gensler told Toomey that most public comments have been supportive of investors' using climate disclosures, and that the rule follows the SEC's historical practice of how disclosures are made. He added that the proposal only requires companies to disclose climate risk if it is material to their business or if they have already decided to disclose the information.

Elsewhere Thursday, the SEC's Investor Advisory Committee supported the agency's plans for large company disclosures on Scope 3 "indirect" greenhouse gas emissions from supply chains and other indirect sources: "We recognize the concerns that some have raised about the implementation costs of these proposed rules, but believe that registrants have rapidly increasing access to a growing community of both experts and tools that will allow this to be done very cost effectively," Bloomberg reported. A vote on the recommendation is set for September 21.

The Senate hearing was also preoccupied with cryptocurrency questions. Senator Toomey disputed Gensler's assertion that "the vast majority" of crypto tokens are securities and said Congress should legislate to clarify the regulatory landscape. Gensler told him that the Supreme Court has addressed the definition of a security, providing a familiar, multi-factor test that most tokens meet. "There are many factors … It's not one spectrum of centralization versus decentralization," he said. Toomey also questioned Gensler's idea that "many crypto intermediaries … are transacting in securities and have to register with the SEC in some capacity," arguing that crypto transactions typically can be settled "in real-time, on-chain and without intermediaries." But Toomey said that given the "novel" nature of digital assets, "Congress ought to step in to provide clarity. In particular, we need to revisit the definition of 'security' as part of a larger effort to tailor a regulatory framework that is calibrated to the unique risks and activities of the crypto market."

Gensler also addressed the Public Company Accounting Oversight Board (PCAOB)'s recent agreement with Chinese authorities to allow auditors to begin inspections of Chinese firms listed on US exchanges. Gensler said PCAOB inspectors are expected to depart for Hong Kong on September 16 and start work next week. The process would take eight to 10 weeks, "so we'll probably know somewhere around Thanksgiving or early December," he said.

Today, September 16 at 12:00 p.m. ET is the EY Webcast, "Tax in the time of COVID-19: Update on legislative, economic, regulatory and IRS developments." Register.

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