November 6, 2022
Americas Tax Policy: This Week in Tax Policy for November 4
This week (November 7-11)
The House and Senate are out of session until after the midterm elections on November 8. The Senate will return November 14.
Last week (October 31-November 4)
The big picture: The outcome of the midterm elections on November 8 will influence what can be attached to must-pass legislation in the lame-duck session to extend government funding beyond its December 16 expiration, including whether there will be a tax package and what it will look like; and set the policy direction for Congress on tax and many other issues for the next two years. Tax committee leaders have made comments in the press suggesting they expect there to be a year-end tax package, though members could opt to push some business into next year depending on the outcome of the elections, Republicans have already been reviving spending concerns, and there may be a partisan stalemate over a Child Tax Credit (CTC) expansion. Some Senate Finance Committee Democrats have said a tax deal that addresses business items can't advance without something on the CTC, and, while some Republicans have expressed an openness to some expansion of the credit, top Ways and Means members have recently been very critical of the 2021 expansion and the cost of extending it. With Congress also aiming to pass the National Defense Authorization Act, possibly with energy permitting reform attached, and the Senate aiming to clear judicial nominations, the agenda for the lame-duck session was packed even before the news of Democrats potentially addressing the debt limit under the budget reconciliation process to prevent the issue from becoming a political flashpoint in 2023.
Elections: In reporting on one voter poll this week, the November 2 Wall Street Journal said, "Voters are giving Republicans a late boost in support just ahead of the midterm elections, as pessimism about the economy and the direction of the country jump to their highest levels of the year, a new [WSJ] poll finds." The poll showed Republicans leading the generic ballot over Democrats, 46% to 44%, when voters are asked which party they would support in their congressional district if the election were held today. In the poll, 27% said President Biden's policies have had a positive impact on the economy and 54% said they have had a negative impact, and the President was shown to have a 43% approval rating. A November 3 Washington Post story on Democratic concerns over election losses, even in places President Biden carried safely in 2020, cited a Democratic strategist as saying a "general malaise" has contributed to an "angry electorate" that has wanted to vote out those in charge in the last several elections, and may again this year. On the flipside, a November 3 Axios article said every election carries surprises and reasons for Democratic optimism include the fact that the Senate remains "very much in play" and "polling is never perfect."
Child Tax Credit: The one-year extension of the expanded credit in the House-passed Build Back Better Act from a year ago was estimated to cost $185 billion over 10 years. The issue was not addressed in the Inflation Reduction Act and, while some members like Senator Mitt Romney (R-UT) have offered compromise proposals on the CTC, Republicans have long been viewed as unlikely to support an expansion of the magnitude in effect for 2021. There may be a less expensive approach, but it remains unclear if a deal can be struck. Top members of the Ways and Means Committee, Ranking Member Kevin Brady (R-TX) and Rep. Jason Smith (R-MO) — who is vying for the chairmanship if Republicans win control of the House for 2023 along with Reps. Vern Buchanan (R-FL) and Adrian Smith (R-NE) — this week delivered some pointed criticism of the 2021 expansion. Brady and Jason Smith highlighted Joint Committee on Taxation staff estimates that "a permanent extension of the Democrats' 2021 Child Tax Credit policy would cost taxpayers $1.4 trillion over the next decade, reduce economic growth, business investment, and labor force participation while resulting in higher inflation." In a separate letter to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, the lawmakers requested all documentation on the Administration's rollout of Democrats' expanded CTC, saying, "The American Rescue Plan Act (ARPA) made numerous ill-advised changes to the Child Tax Credit (CTC). One such change included changing the distribution to an Advance CTC paid monthly. In May 2021 the Biden Administration rolled out in haste an online portal created by the Internal Revenue Service (IRS) and financed by American taxpayers to assist taxpayers in accessing their Advance CTC payments."
Debt limit: The Bipartisan Policy Center says the date when the federal government won't be able to pay its bills likely isn't until the third quarter of 2023. News stories have raised the prospect that a potential Republican majority in one or both chambers could make 2023 look something like the 2011–2013 period, when Republicans controlled the House under a Democratic President (Obama) and conservative members sought to extract concessions in exchange for their support of government funding and debt limit bills, leaving Congress lurching between fiscal deadlines. Then, on October 6, Huffington Post reported House Ways and Means Committee Chairman Richard Neal (D-MA) as saying he'd consider dealing with the debt ceiling in the post-election lame duck session instead of 2023. There has been additional reporting since then. A November 3 Washington Post story said, "Some Republicans say they are willing to dangle the possibility of defaulting on the federal debt next year to gain leverage to force the change over a Democratic president's objections." The report cited Rep. Jason Smith as saying in a statement "that Americans want Congress to use the debt ceiling and every other opportunity to tackle rising prices, secure the border and 'repeal the 87,000 new IRS agents Democrats are hiring to target American families.'" The New York Times reported November 3, "Top Republicans have suggested in recent weeks that they would use any vote to avert a potentially calamitous default on the U.S. government's debt to force President Biden to accept deep cuts to federal spending that he has said he will not support, potentially including reductions to Social Security and Medicare." The story said that, fearing a repeat of the 2011–2013 environment with fiscal deadlines, "a growing number of Democrats have urged party leaders to use a lame-duck session after the election to raise the debt limit substantially should Republicans win a majority, taking the issue off the table before the G.O.P. assumes control." Senate Finance Committee Chairman Ron Wyden (D-OR) was cited in the story as saying, "This is going to be a lame duck that's not going to be for the fainthearted," and that conversations have already begun about how to stave off the threat of cuts to safety net programs or the economic catastrophe of the United States defaulting on its debt. The story said Chairman Wyden, "like other Democratic officials, did not rule out the possibility of his party trying to unilaterally raise the debt limit during a lame-duck session, by using fast-track reconciliation rules that would prevent a Republican filibuster. 'I'm not going to take anything off the table,' Mr. Wyden said, adding, 'I think you'll find growing amount of concern, particularly about gutting Social Security and Medicare, since this is not as if they haven't told you what they're going to do.'"
House Republican leader Kevin McCarthy (R-CA), the leading candidate for Speaker should Republicans win control of the House, was cited in Punchbowl News October 18 as saying, "You can't just continue down the path to keep spending and adding to the debt. And if people want to make a debt ceiling [for a longer period of time], just like anything else, there comes a point in time where, okay, we'll provide you more money, but you got to change your current behavior. We're not just going to keep lifting your credit card limit, right?"
IRS enforcement funding: As Rep. Jason Smith's statement suggests, Republicans continue to oppose the $80 billion IRS enforcement funding increase in the Inflation Reduction Act and are drawing attention to the issue ahead of the elections. House Republican leader McCarthy said if they win control of the chamber, the first order of business in the next Congress will be legislation to undo the funding. Finance Committee members Senators John Thune (R-SD) and Chuck Grassley (R-IA), the former chairman who is in an unusually tight re-election race, November 1 announced that they intend to introduce legislation to give Congress input into how the funding "could be spent, hold the IRS more accountable, and provide more transparency for the American people." In an op-ed in the November 1 Wall Street Journal, Thune said the new IRS funding would be frozen until the agency presents a plan to Congress for how it would be used, which can be rejected through a resolution of disapproval. IRS would also need to comply with a consistent and strict reporting process.
IRA regulations: Beyond Congress, there remains a focus on Inflation Reduction Act regulations. During an Urban-Brookings Tax Policy Center event October 31, Assistant Treasury Secretary for Tax Policy Lily Batchelder declined to provide a timeline for regulations on the corporate alternative minimum tax (CAMT) and other IRA provisions. "We're just literally working night and day and through weekends to develop guidance," she said, adding that Treasury is studying financial accounting as it contemplates CAMT regulations. Batchelder additionally said, "Treasury has experience with clean energy incentives, [but the Inflation Reduction Act] requires a huge amount of innovative work in a very short period of time."
Energy: During an October 31 news conference drawing attention to oil company profits, President Biden said companies should be increasing production and refining capacity to lower prices for consumers, and, if they don't, he will work with Congress to look at these options for a higher tax on excess profits and other restrictions. Democrats have explored so-called "windfall profits" taxes on oil companies at various points over the years, and such a tax was in effect in the 1980s, according to the Congressional Research Service. In this Congress, on March 10, Senator Sheldon Whitehouse (D-RI) introduced the Big Oil Windfall Profits Tax (S. 3802) under which large oil companies that produce or import at least 300,000 barrels of oil per day (or did so in 2019) would owe a per-barrel tax equal to 50% of the difference between the current price of a barrel of oil and the pre-pandemic average price per barrel between 2015 and 2019. The quarterly tax would apply to both domestically produced and imported barrels of oil.
IRS leadership: On October 28, it was announced that Doug O'Donnell, the IRS Deputy Commissioner for Services and Enforcement, has been selected to serve as acting IRS Commissioner beginning when the term of current Commissioner Rettig ends on November 12. An October 31 Bloomberg Tax story cited former IRS leaders as saying it is important for a Senate-confirmed commissioner to be in place to direct how the $80 billion IRA enforcement funding increase is spent.
Guidance plan: On November 4, Treasury and the IRS released the 2022–2023 Priority Guidance Plan. The 2022–2023 Priority Guidance Plan contains 205 guidance projects that are priorities for allocating Treasury Department and Service resources during the 12-month period from July 1, 2022 through June 30, 2023.
Global tax: Reps. Brady and Kevin Hern (R-OK) wrote to Treasury Secretary Janet Yellen requesting the retention of all documents and communications related to the OECD BEPS 2.0 Pillar One Agreement. In a letter that was released on October 31, the Republican committee members wrote: "The lack of a sufficient response and information from the Administration to date is disappointing and unacceptable." According to the lawmakers, Congress must know what companies "will be affected, what jurisdictions will be losing tax rights, and what jurisdiction will be gaining taxing rights under the current proposals" so it can evaluate the impact of the proposal on the US fisc. The letter requested a response by November 10. Treaties: In a November 3 letter to Secretary Yellen, Rep. Brady, Senate Finance Committee Ranking Member Mike Crapo (R-ID), and Senate Foreign Relations Committee Ranking Member Jim Risch (R-ID) expressed concern about Treasury terminating the US-Hungary tax treaty.