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The chances of a short-term continuing resolution (CR) only into early 2023, as opposed to a funding bill through the duration of the fiscal year, are increasing, based on comments from House and Senate Republican leaders, who cited the desire for the party to have greater influence over the appropriations process and the absence of a bipartisan agreement on topline numbers for defense and non-defense discretionary spending, respectively. If that is the case, it would dim prospects for a year-end tax package.

House Republican Leader Kevin McCarthy (R-CA), who earlier said a short-term CR was possible, December 5 called for that approach when asked on Fox News whether Republicans acceding to an omnibus bill in 2022 would be a missed opportunity. "We're 28 days away from Republicans having the [House] gavel. We would be stronger in every negotiation. So, any Republican that's out there trying to work with [Democrats] is wrong." Asked if that includes Senate GOP Leader Mitch McConnell (R-KY), he said, "Yes. Why would you want to work on anything if we have the gavel inside Congress? … Wait until we're in charge."

Senator McConnell — who last week suggested the approaches on the table were an omnibus appropriations bill or a year-long CR, both of which would extend funding through September 30, 2023 — said following the regular Tuesday party lunches, "We have not been able to agree on a topline yet and I think it's becoming increasingly likely that we may need to do a short-term CR into early next year. We're running out of time and that may end up being the only option left that we could agree to pursue." Senate Majority Leader Chuck Schumer (D-NY) has called for an omnibus bill, and House Speaker Nancy Pelosi (D-CA) has said a one-year CR would be the fallback option.

Conservatives have long been urging a CR into early 2023. Some have stated their desire to use government funding deadlines to try to force action on immigration and the Inflation Reduction Act's (IRA) IRS funding increase. McCarthy is vying for the speakership and faces a full vote House on January 3. It's possible for Democrats to pass a funding measure with only their votes in the House, but Republicans could block a measure in the Senate, where 60 votes would be required in the chamber's current 50-50 split.

Punchbowl reported Senate Appropriations Committee Ranking Member Richard Shelby (R-AL), who like Chairman Pat Leahy (D-VT) is retiring, as saying of an omnibus, "Out of the $1.7 trillion, we're probably looking at $25 [billion] $26 billion [apart], which is a lot of money. But in the throes of things. I think we got a good chance to work this out before we leave here later this month."

"We need the Democrats to realize that we're serious about our offer, the president's number, and go from there. They got a lot of the social spending out of reconciliation. They don't want to count that. We do." Senator Shelby said Congress will likely need to pass a short-term spending patch to keep federal agencies open past December 16 and, "Sometimes good things happen at the last minute. Sometimes bad things happen."

A separate report said, "The current continuing resolution expires on Dec. 16. The question is whether that new deadline is late December or do party leaders kick it into 2023, when Republicans take over the House and a deal gets even tougher? Democrats are hoping that their victory in Georgia and the release of the NDAA will break the stalemate and prod Republicans to cut a funding deal."

The approach to government funding will affect whether a tax package and other items can be appended to the bill. Politico Morning Tax December 6: "If lawmakers can't agree to a spending bill that is looking to cap out at $1.7 trillion, Congress will likely need to pass stopgap legislation before government funding runs out on Dec. 16. And if there's a continuing resolution, you can probably kiss goodbye any hopes of enacting tax provisions on everything from research and development expensing to family support."

The report cited Senate Finance Committee Chairman Ron Wyden (D-OR) as suggesting a different level of urgency for tax changes on the table this year — which include relief from the tax code IRC Section 174 R&D amortization and IRC Section 163(j) TCJA cliffs and non-energy tax extenders, with energy tax extenders having been addressed in the IRA — compared to extenders packages from years past. "It is a very different conversation than the one we had years and years ago when you had all these tax extenders with a shelf life shorter than a carton of eggs," Wyden said.

Tax Notes December 6 reported Chairman Wyden as saying, "'We are in the season where rumors are kind of like tailbones — everybody's got one' … when asked about the prospects for a year-end tax title. Another complicating factor is that it is the expensive, sweeping extenders like the child tax credit and bonus depreciation that are leading the talks, as opposed to the usual mishmash of largely energy-related tax breaks."

Georgia Senate runoff — Senator Raphael Warnock (D-GA) won the December 6 runoff, meaning Democrats will hold a 51-49 advantage in the Senate next year and have majorities on committees.

Bloomberg observed, "For the first time in the more than 100 years that voters have elected senators, all senators who sought re-election this year won."

NDAA — After the Senate returned to session Tuesday afternoon, Majority Leader Chuck Schumer said, "We have 26 days left in the calendar year, and there is still a lot we have to do. This week, the House is expected to take up the annual Defense authorization bill, priming the Senate to take action, perhaps as soon as next week." The NDAA agreement set for House consideration this week was slowed by issues including Republicans' insistence that the coronavirus vaccine mandate for U.S. service members be repealed in the bill, which Democrats have reportedly agreed to as "a major concession," The Hill newspaper reported. The story said, "Another potential policy hurdle, a proposal by Sen. Joe Manchin (D-W.Va.) aimed at speeding up the approval process for energy infrastructure permits, also appears unlikely to make it into the final defense bill if lawmakers want to get it across the finish line."

Text of an agreement reached between the chairmen and ranking members of the House and Senate Armed Services Committees on the NDAA for Fiscal Year 2023 was released late last night. The House Rules Committee will meet to discuss parameters for consideration of the measure at 11:30 today.

Tax — A December 5 post by The Tax Foundation that considers interest expense deduction limitation rules in other OECD countries said: "As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States enacted a new limitation on interest deductions for businesses. While it is common for countries across the Organization for Economic Cooperation and Development (OECD) to set limits for interest deductions, starting this year, the U.S. became an outlier by using earnings before interest and taxes (EBIT) as the limit's tax base. The change effectively tightens the limit for U.S. firms just as interest rates are rising, creating a tax increase for many firms. A better approach would be to reconsider the potential economic fallout of this change and re-establish EBITDA as the interest limit, consistent with international norms."

The Treasury Department and Internal Revenue Service December 6 issued proposed regulations identifying certain syndicated conservation easement (SCE) transactions as "listed transactions" — abusive tax transactions that must be reported to the IRS. "In these transactions, investors typically acquire an interest in a partnership that owns land and then claim an inflated charitable contribution deduction based on a grossly overvalued appraisal when the partnership donates a conservation easement on the land," a news release said.

Global tax — The planned discussion of "the directive on ensuring a global minimum level of taxation for multinational groups in the Union" was pulled from the agenda of the December 6 EU ECOFIN meeting. Hungary has continued to oppose the directive. Tax Notes reported: "The Czech presidency of the EU Council has warned that there will be either a comprehensive agreement covering pillar 2, financial aid for Ukraine, and Hungary's recovery plan, or no agreement at all. … 'I see the new macro-financial support for Ukraine, Hungary's national recovery plan, and pillar 2 directive as one package. The approval of the package depends on the development of the measures that Hungary is taking to protect the EU budget,' Czech Finance Minister Zbynek Stanjura told reporters."

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