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November 20, 2022

Americas Tax Policy: This Week in Tax Policy for November 18

This week (November 21-25)

Congress: The House and Senate are out for the Thanksgiving holiday.

Please note — This Week in Tax Policy won't be published this week while Congress is away.

Last week (November 14-18)

The big picture: The specific outlook for tax issues in Congress in the lame-duck session and in 2023 has been slow to come into focus following the November 8 elections for several reasons:

  • control of the House and Senate for the next Congress remained unknown for days;
  • contentious leadership elections that included challenges to current Republican leaders;
  • some Republicans questioning their policy direction after a "Red Wave" failed to materialize; and
  • a long list of potential issues for the lame duck that must be prioritized and negotiated.

Republicans November 17 officially secured control of the House for the next Congress, ushering in an era of divided government. Democratic Senate control, either at 51-49 or 50-50, depending on the outcome of the December 6 Georgia runoff election, will act as a counter to the GOP House. The budget reconciliation process that would allow fiscal policy-related legislation to pass the Senate with only a simple majority rather than 60 votes won't be available to Republicans in a divided Congress and Majority Leader Chuck Schumer (D-NY) can control what House-passed bills are (or are not) brought to the Senate floor. Leader Schumer's ability to set the Senate floor schedule should assist in protecting his members from tough votes ahead of the 2024 elections. The 2024 elections will feature 23 senators who are Democrats or Independents who caucus with Democrats up for reelection, compared to 10 Republicans. The Georgia runoff election won't determine control of the Senate, but a 51-49 Senate majority would give Democrats majorities on committees and subpoena power to chairmen, neither of which are available under the current 50-50 power-sharing agreement between Democrats and Republicans.

An article in the November 17 Wall Street Journal (WSJ) said that a divided government dims prospects for major legislation and puts "President Biden on defense as the new Congress investigates his administration." The article said, "Republican leaders say their plans include boosting border security … encouraging more pay for police and reversing Democrats' plans to expand the Internal Revenue Service. They will also use their oversight authority to investigate the Biden administration and the president's family." However, "given how the midterm picture appeared entering this year, keeping the Senate and narrowly losing the House are both huge accomplishments and an extraordinary stroke of political luck for Democrats," the New York Times said in a story that suggested the GOP House majority could provide a useful foil for President Biden to draw political distinctions ahead of the 2024 elections.

Leadership: House Republicans elected Kevin McCarthy (R-CA) as their nominee for Speaker with 188 votes — over a Freedom Caucus member who received 31 votes — though his nomination must also be backed by a majority of the entire House in a public vote on January 3, once the new Congress is seated. The Freedom Caucus opposition likely demonstrated that Rep. McCarthy will have to negotiate to win members' support and the requisite 218 votes, which may require some political concessions to the group. Rep. Steve Scalise (R-LA) was elected Majority Leader and current National Republican Congressional Campaign Chair Tom Emmer (R-MN) was elected whip.

Senate Republican Leader Mitch McConnell (R-KY) also faced a challenge to his leadership from Senator Rick Scott (R-FL) and others, for reasons reportedly including the perception that he did not provide an agenda for Republican candidates to run on. Senator McConnell was defiant over his role in the elections. "Every one of our candidates knew what they were for, expressed it quite clearly," he said following the Senate GOP lunch on Tuesday. "We underperformed among independents and moderates because their impression of many of the people in our party in leadership roles is that they're involved in chaos, negativity, excessive attacks, and it frightened independent and moderate Republican voters. And we saw that, which is why you all recall I never predicted a red wave." Senator Scott has proposed middle-class tax increases and said structural change to entitlements should accompany the next debt limit increase.

Speaker Nancy Pelosi (D-CA) announced November 17 she would not seek re-election as the top Democrat in the House but will remain in Congress. Majority Leader Steny Hoyer (D-MD) will also step down from his leadership post. Rep. Hakeem Jeffries (D-NY), chairman of the House Democratic Caucus, has announced that he will seek the top Democratic spot. "Jeffries is expected to be joined by Reps. Katherine M. Clark (D-Mass.) and Pete Aguilar (D-Calif.), who will seek the No. 2 and No. 3 positions," the Washington Post reported. "Rep. James E. Clyburn (D-S.C.) will leave his post as House majority whip but become an assistant leader, a position that will now be fourth in the leadership structure."

Politico Morning Tax reported that House Ways and Means Committee Chairman Richard Neal (D-MA) has announced his intention to remain as top Democrat on the panel.

Lame-duck session: The outlook for the lame-duck session of Congress remained largely unclear after a first week back in session marked by uncertainty over House control, House and Senate Republican leadership elections, and the announcements regarding Democratic leadership changes. A must-pass priority of the lame-duck session, which will resume after next week's break for Thanksgiving, is extending government funding beyond December 16. An omnibus appropriations measure through the duration of the fiscal year is still viewed as more likely than another continuing resolution through an earlier date in 2023, for reasons that include the retirements of top Senate appropriators Pat Leahy (D-VT) and Richard Shelby (R-AL), who have been in Congress for 48 years and 36 years respectively. It remains to be seen what can be appended to the omnibus, including health items and a potential tax package that is complicated by difficult negotiations over whether to include a Child Tax Credit enhancement, which Democrats insist upon as a condition of supporting business tax items in the package.

A November 15 Wall Street Journal story described the lame-duck tax landscape, saying that while members are hopeful some tax measures with bipartisan support can get through Congress, "short deadlines and postelection uncertainty could impede those efforts," as could time spent on leadership elections, the National Defense Authorization Act (NDAA), and potentially the debt limit. The story noted that there is bipartisan support for addressing the TCJA IRC Section 174 amortization requirement, but Democrats are insistent that a Child Tax Credit expansion be part of any tax package, which could also address the IRC Section 163(j) interest deductibility calculation, expensing, and the nonitemizer charitable deduction that was in effect for 2021.

Politico reported that Senate Finance Committee Chairman Ron Wyden (D-OR) said November 15 that tax extenders are also "obviously" a priority for the lame-duck session but, "There's going to be a clear debate about tax choices, and this whole issue of the Child Tax Credit is front and center in that discussion." He said he wants both the CTC expansion and addressing the IRC Section 174 R&D requirement — which have been portrayed as central elements of a bipartisan deal — to be included. Republicans generally say the 2021 CTC expansion was too expensive, at $185 billion for one year, and caused implementation problems. Less expensive options are likely available. Law360 reported House Ways and Means Committee Ranking Member Kevin Brady (R-TX) as saying November 13 the cost of the provision would outweigh the benefits for Republicans, and he would want any expansion to "be connected to work." Still, he said he told Chairman Neal that Republicans are "going to be open about trying to find a kind of balanced package."

Chairman Wyden expressed greater optimism about including a retirement savings package in a year-end bill. Some of the issues likely to be addressed include increasing catch-up contribution amounts and increasing the age at which minimum distributions are required.

The debt limit issue — which likely doesn't need to be addressed until the second half of 2023 but could be used then as a bargaining chip by Republicans seeking spending cuts or policy changes — seems less likely to be addressed the lame-duck session. Senator Joe Manchin (D-WV) said November 15 that any debt limit legislation should be bipartisan and not processed through reconciliation, and other members were cited as questioning whether there would be enough time to utilize budget reconciliation for the effort, which would require first passing a new budget resolution and then the reconciliation bill itself.

Tax in 2023: Prior to the election, some House Republicans said their tax priorities for the next Congress included legislation to roll back the Inflation Reduction Act's (IRA) $80 billion IRS funding increase, and there was reporting about the potential to take up legislation addressing TCJA temporary provisions for individuals and pass-throughs next year, well before their expiration in 2025. The WSJ reported November 17: "Key provisions of the 2017 tax law — lower individual tax rates, a higher standard deduction and a 20% deduction for closely held businesses — are scheduled to expire after 2025. GOP lawmakers see the tax cuts as a success in spurring economic growth and say taxpayers deserve the certainty of knowing they will continue. Democrats say the cuts were too tilted toward high-income households. While the dispute probably won't be resolved soon, lawmakers are likely to argue about it ahead of the 2024 election."

Law360 reported Chairman Wyden as saying he wants to focus on housing and energy issues in the next Congress, including continued efforts to improve the Low-Income Housing Tax Credit (LIHTC) and potential creation of a new middle-income housing tax credit applicable to those between 60% and 100% of area median income. "Additionally, Wyden wants to improve upon the clean energy tax provisions passed under the Inflation Reduction Act," the report said.

FTC regulations: IRS proposed regulations relating to the foreign tax credit — including guidance with respect to the reattribution asset rule for purposes of allocating and apportioning foreign taxes, the cost recovery requirement, and the attribution rule for withholding tax on royalty payments — were posted November 18. The Daily Tax Report cited Michael Plowgian, counselor to the assistant Treasury secretary for tax policy, as saying the package "goes a long way" toward addressing companies' concerns on the regulations and, "We absolutely are still listening to taxpayers and the issues that they're raising."

Global tax: It appears the UK will be the "first mover" jurisdiction to enact the OECD's global minimum tax rules. An EY Tax Alert has details on the November 17 statement by UK Chancellor Jeremy Hunt calling for tax increases and confirming he will implement the Base Erosion and Profit Shifting (BEPS) Pillar Two rules put forward by the OECD by including the rules in a finance bill to be processed by Parliament in the spring. Specifically, the rules will be implemented for accounting periods beginning on or after 31 December 2023. This will involve:

  • An Income Inclusion Rule (IIR) which will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%
  • A supplementary Qualified Domestic Minimum Top-up (QDMTT) tax rule which will require large groups to pay a top-up tax where their UK operations have an effective tax rate of less than 15%

Both the IIR and QDMTT will incorporate the substance-based income exclusion that formed part of the G20-OECD agreement. The UK intends to implement the backstop Undertaxed Profits Rule (UTPR) in the UK, but with effect no earlier than accounting periods beginning on or after 31 December 2024. HMRC had previously indicated that if a QDMTT rule were introduced it would come in alongside the UTPR, however, the Autumn Statement announcements make it clear it will come in with the IIR from 1 January 2024. EU: Bloomberg Tax reported, "A stalled EU plan to implement the global 15% minimum tax in the bloc could be agreed by Christmas, an EU official said Monday. 'We have reasonable hope to be able to finalize it by the end of the year,' Benjamin Angel, director of direct taxation in the European Commission, the EU's executive arm, told a hearing of the European Parliament's tax subcommittee. Czechia, which currently holds the rotating presidency of the Council of the EU, in which the governments of EU countries meet, is aiming for agreement by a Dec. 16 summit of EU leaders, Vojtech Munzar, vice-chair of the budget committee of the Czech Parliament, told the subcommittee. Hungary has held up adoption of the minimum tax, saying it could harm companies at a time of economic difficulty."


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