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January 27, 2023

What to expect in Washington (January 27)

The contours of the debate over how lawmakers should address the federal debt limit, which has already been exceeded, are becoming more defined. Senator Joe Manchin (D-WV), who has challenged the position that Democrats should not negotiate on the debt limit, met with House Speaker Kevin McCarthy January 25 and urged him to negotiate with President Biden, which The Hill newspaper called "a sign the senior West Virginia senator could play a pivotal role in bipartisan talks."

Punchbowl reported that Manchin said McCarthy "agreed" with him that cutting Social Security and Medicare shouldn't be part of any debt-ceiling negotiation with Biden, and that the Speaker continues to seek a budget cap agreement of the type that accompanied debt limit suspensions in 2018 and 2019 during the time when Budget Control Act discretionary spending limits for defense and nondefense spending were in effect and lawmakers routinely struck deals to raise them.

Those scenarios involved lawmakers lifting previous caps, with Republican interests in defense spending and Democratic priorities for nondefense spending bringing each side to the table. Some Republicans seem to envision essentially applying such caps anew. Senator Rand Paul (R-KY) said January 25 that both would need to be dialed back: "We have an opportunity here. It could be done. But it would take compromise between both parties … Republicans would have to give up the sacred cow that says we will never touch a dollar in military, and the Democrats would have to give up the sacred cow that they will never touch a dollar in welfare."

Roll Call reported January 26, "House Republicans are mulling an attempt to buy time for further negotiations on federal spending and deficits by passing one or more short-term suspensions of the statutory debt ceiling this summer, including potentially lining up the deadline with the end of the fiscal year Sept. 30."

While Senate Republican Leader Mitch McConnell (R-KY) and other Senators have suggested the debt limit is House Republicans' fight to wage, some conservative members are vocally backing the effort. Senator Ted Cruz (R-TX), whose objection resulted in the 2013 government shutdown, said in Punchbowl, "We will use the debt ceiling as leverage to force real and meaningful structural reforms to fix the underlying problem. It doesn't have to be a total solution for everything. But it has to be real and meaningful progress."

A January 25 Washington Post opinion piece said Democrats were employing a two-prong plan to challenge Republican resistance to a debt limit bill: "Part 1: Lay out the simple argument that Republicans are recklessly inviting an economic meltdown even by talking about a possible default. Part 2: Force House Republicans to put forward a plan on the table and watch as they struggle with the fallout."

Tax conference — At the D.C. Bar 2023 Tax Legislative and Regulatory Update Conference "Ways and Means Roundtable: What Does the Future Hold for U.S. Tax Policy," Rep. Kevin Hern (R-OK) discussed the May 2022 foreign tax credit regulations letter he penned with Rep. Brad Schneider (D-IL), who he said was unable to join him at the event. Hern said some policy directions were to be set at a Thursday meeting of Ways and Means Republicans, bemoaned the lack of hearings on the OECD-led global tax agreement, and said it isn't necessarily inevitable that there will be legislation to make the US Pillar Two-compliant.

Also at the conference, multiple members of the Joint Committee on Taxation staff, including Tom Barthold, said a "Blue Book" on legislation enacted in the 117th Congress is in the works but not imminent. They said the SECURE 2.0 retirement package in the year-end 2022 omnibus appropriations bill will be reflected and that work is slowing the process. Other congressional staff said there is a low likelihood of Congress addressing the TCJA cliffs that include Section 174 R&D amortization, especially early in the year. A House Democratic staffer said it is going to be a "rocky path" to get it done in 2023.

During one of multiple sessions on the corporate alternative minimum tax (CAMT) enacted under the Inflation Reduction Act, a Treasury official said Notice 2023-7 represented a basic scaffolding for guidance, and the Department is still identifying what issues should be addressed and would welcome input. The official said more detailed regulations will be issued later this year, prompting a comment from a private sector participant that one of the questions will be the effective date, as there will be a lot of choices.

Another official said mark-to-market adjustments — the Notice highlighted life insurance company separate account assets and certain financial products as examples — and unrealized gains and losses are being studied. The official also mentioned other comprehensive income (OCI), saying that is an issue Treasury is looking at but that he couldn't comment further. He did note the IRA colloquy (Cardin-Wyden) that asserted that OCI is not included in financial statement income.

During a January 26 international session focused on the OECD-led global tax agreement, officials said the Secretariat and US Treasury insist the Undertaxed Profits Rule (UTPR) is legal. An OECD official said the transitional safe harbor is essentially set in stone — though some additional administrative guidance may be forthcoming — and most likely will not become permanent, as it was designed to be temporary. A Treasury official said, regarding additional administrative guidance, that a first tranche is forthcoming and will cover transitional issues, the QDMTT, CFC push down rules for blended CFC regimes like GILTI and Subpart F, and some guidance on US investment tax credits. Another Treasury official also said guidance will be issued very soon on 25-30 issues related to Pillar Two implementation, including treatment of US tax credits.

Fair Tax — In a speech in Springfield, VA, January 26, President Biden cited the Fair Tax Act (H.R. 25), to replace the income tax with a national consumption tax, which Speaker McCarthy has committed to bring to a vote. The President said Republicans in the House want to "impose a 30% national sales tax on everything from food, clothing, school supplies, housing, cars — whole deal, 30%."

Democratic leaders in Congress are also taking aim. During a joint news conference on the Fair Tax Act with Senate Majority Leader Chuck Schumer (D-NY) January 25, House Democratic Leader Hakeem Jeffries (D-NY) said: "It will impose an age tax on older Americans in this nation who throughout their lives paid into the system through income tax, and now will be double- and triple-taxed by the imposition of a 30% sales tax. That would create an enormous burden on older Americans in this country. Third, this unfair tax act would detonate Social Security by eliminating its source of funding. This legislation is extreme, and it is functionally the GOP tax scam, part two. We will expose it, and under the tremendous leadership of Senate Democrats, Leader Schumer in partnership with House Democrats, do everything we can to stop it."

A January 25 Wall Street Journal story said:

  • "Rep. Lauren Boebert (R-CO) listed a FairTax vote among the commitments she said Mr. McCarthy made to secure the job."
  • Speaker McCarthy said he doesn't personally support the proposal.
  • Chairman Jason Smith (R-MO) "co-sponsored the FairTax during his first two terms. Now, as the new chairman of the tax-writing Ways and Means Committee … he is staking out a more neutral position. 'The FairTax is an interesting idea,' Mr. Smith said."

Bills of interest from January 24-25:

  • Rep. Brett Guthrie (R-TN) to extend beyond the COVID-19 emergency period, with certain modifications, the Emergency Declaration Blanket Waiver relating to training and certification of nurse aides to alleviate burdens imposed on staff of skilled nursing facilities and nursing facilities.
  • Senator Manchin, S. 63, to adjust the effective date for application of certain amendments made with respect to the credit for new clean vehicles (see below).
  • Rep. David Kustoff (R-TN), H.R. 515, to amend the Internal Revenue Code of 1986 to repeal the excise tax on repurchase of corporate stock.

A Manchin press release said S. 63, the American Vehicle Security Act (AVSA), would direct the U.S. Department of the Treasury to implement the 30D new consumer vehicle tax credits for vehicles according to the law by requiring compliance with battery and battery material sourcing requirements as of January 1, 2023. "The IRA and the EV tax credits must be implemented according to the Congressional intent to ensure the United States, as the superpower of the world, is not beholden to countries that don't share our values," said Manchin.

Congress — Rep. Vern Buchanan (R-FL) has been named Vice Chairman of the House Ways and Means Committee, Chairman Smith announced. While an official announcement has not been made by the Ways and Means Committee majority, it appears the following members will lead Ways and Means Subcommittees this congress:

  • Health: Rep. Buchanan
  • Trade: Rep. Adrian Smith (R-NE)
  • Tax: Rep. Mike Kelly (R-PA)
  • Oversight: Rep. Dave Schweikert (R-AZ)
  • Work/Welfare: Rep. Darin LaHood (R-IL)
  • Social Security: Rep. Drew Ferguson (R-GA)

Senate Leader Schumer announced Senate Democratic committee memberships. Senate Republicans haven't not finalized their committee rosters, as there have been negotiations over whether more than one senator per state can sit on powerful committees, with the focus on Judiciary. That has kept the Senate from passing an organizing resolution.


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Washington Council Ernst & Young
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