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February 12, 2023

Americas Tax Policy: This Week in Tax Policy for February 10

This week (February 13-17)

Congress: The House and Senate are in session before a weeklong President's Day recess the following week.

The Senate Finance Committee will hold a "Hearing to Consider the Nomination of The Honorable Daniel I. Werfel, of the District of Columbia, to be Commissioner of Internal Revenue for the term expiring November 12, 2027" on Wednesday, February 15 (10:30 a.m.).

The Committee also scheduled a February 16 trade hearing, "Ending Trade that Cheats American Workers by Modernizing Trade Laws and Enforcement, Fighting Forced Labor, Eliminating Counterfeits, and Leveling the Playing Field."

OECD: The third edition of the OECD Tax and Development Days is February 15-16. "The event will convene tax experts from international organisations, governments, business and civil society, to provide an update on some of the OECD's initiatives to strengthen tax capacity and improve tax policy and compliance in developing countries, and explore future challenges," OECD said.

EY Webcast: Friday, February 17 (12 p.m.) is the EY Webcast, "Tax in a time of transition: legislative, economic, regulatory and IRS developments."

Last week (February 6-10)

The big picture: In the February 7 State of the Union (SOTU) Address, President Biden called on Congress to dial up the stock repurchase excise tax and to impose a billionaire's tax and promised $2 trillion in deficit reduction in his FY2024 Budget to be proposed on March 9. The President suggested House Republicans should detail their proposed spending cuts, which they are calling for as a condition of allowing a bill addressing the debt limit to advance; and that he would return to the negotiating table with House Speaker Kevin McCarthy (R-CA), albeit with starkly different menus for achieving deficit reduction. The SOTU and Republican jeers during the speech to insinuations that they support entitlement cuts have brought Social Security and Medicare to the forefront of the debate over spending cuts Republican members are demanding in exchange for supporting a debt limit increase. Meanwhile, scrutiny of the OECD-led global tax agreement continues from the House Ways and Means Committee Republican leadership.

SOTU: In the SOTU address, President Biden called for quadrupling the stock repurchase excise tax included in the Inflation Reduction Act (IRA), possibly from 1% to 4%; and for a "billionaire's tax" that was quickly dismissed in the legislative process that led to the IRA after being floated by some Senate Democrats and then picked up in the Administration's FY2023 budget. Regarding tax and other items, the President implored Congress to, "Let's finish the job," which was a thematic rallying cry during the speech. The buyback tax increase and billionaire's tax have faint hopes at best of being enacted in the divided Congress but were likely included to draw contrasts with Republicans' resistance to tax increases in favor of spending cuts to reduce the deficit/debt. The billionaire's tax proposal included in last year's Budget would "impose a minimum tax of 20 percent on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) of an amount greater than $100 million."

Budget: President Biden said, "Next month when I offer my fiscal plan, I ask my Republican friends to offer their plan. We can sit down together and discuss both plans together. My plan will lower the deficit by $2 trillion. I won't cut a single Social Security or Medicare benefit." Rather, he said he "will pay for the ideas I've talked about tonight by making the wealthy and big corporations begin to pay their fair share."

Debt limit: In his own remarks at the Capitol on February 6, Speaker McCarthy said leaders must continue to sit down and negotiate on the debt limit and enumerated some previously suggested principles for debt limit discussions, including: cuts to Medicare and Social Security are off the table; defaulting on the debt is not an option, "but neither is a future of higher taxes;" and "we must move towards a balanced budget and insist on genuine accountability for every dollar we spend." Still, the President seized on past statements by Republicans mentioning the prospect of entitlement cuts and took the message on the road (to Wisconsin and Tampa) in the days following the speech. A White House fact sheet said President Biden would "contrast his commitment to protecting and strengthening Medicare and Social Security and lowering prescription drug prices, with Congressional Republicans' plans to cut these programs," and provided several examples of proposals offered by Republican senators.

The New York Times reported, "President Biden traveled to Florida on Thursday afternoon with a political gift he had not been expecting before Tuesday night's State of the Union speech. The perfect foil. Republican outbursts during his address to Congress — and Mr. Biden's real-time exchange with heckling lawmakers about the fate of Social Security and Medicare — gave him exactly that, and he eagerly tried to use the episode to his advantage on Thursday in an event before a small audience of supporters here. Standing in front of two huge American flags and a sign that said 'Protect and strengthen Medicare,' the president made clear he relishes the fight on the issue. 'I guarantee it will not happen,' Mr. Biden said of cuts to the entitlement programs."

Republican leaders are trying to steer attention away from members' proposals and towards the top-down assertion that there will be no benefit cuts. Senate Republican Leader Mitch McConnell (R-KY) — who has suggested the debt limit stalemate that is the context for spending cut discussions is House Republicans' fight to wage — said in a radio interview Thursday that Speaker McCarthy said Social Security and Medicare "are not to be touched and I've said the same. And I think we're in a more authoritative position to state what the position of the party is than any single senator."

Global tax: Scrutiny of the OECD-led global tax agreement continues from the House Ways and Means Committee Republican leadership. In a February 10 letter to OECD Secretary-General Mathias Cormann, Chairman Smith defended the global intangible low-taxed income (GILTI) regime and said other countries are considering a minimum tax only if they can impose the "fundamentally flawed" Under Taxed Profits Rule (UTPR) on US companies. He warned that the UTPR would target US tax incentives like the R&D credit "as well as the operations of American companies in third-party jurisdictions." Chairman Smith said House Republicans "will aggressively pursue tax and trade countermeasures to protect American jobs, sovereignty, and tax revenues."

A WSJ story regarding the letter said: "Republicans have long been critical of the deal, and they now control the House. One way to avoid other countries boosting taxes on U.S. companies under the agreement would be for Congress to make the U.S. tax system comply with the deal, but Republicans oppose the tax increases that would require. Convincing Democrats to take any steps to retaliate against countries that implement the deal would be difficult, because the Biden administration backs the OECD agreement. Any legislative action may wait until 2025, when many tax provisions are scheduled to expire."

An EY Alert on the latest OECD guidance released on February 2 for implementing Pillar Two, "OECD's Pillar Two Administrative Guidance raises implications for US multinationals," is available here.

Doggett/Whitehouse bill: For the fourth consecutive Congress, Ways and Means Committee Member Lloyd Doggett (D-TX) and Senate Finance Committee Member Sheldon Whitehouse (D-RI) introduced the No Tax Breaks for Outsourcing Act. Newly this year, they put the measure in the context of, "Were it not for the Trump tax law, the U.S. would not have hit the debt limit so soon." The bill would:

  • eliminate GILTI and foreign-derived intangible income (FDII) deductions and apply GILTI per-country
  • repeal the 10% exemption for tangible investments
  • treat corporations managed and controlled in the US as domestic corporations
  • tighten the definition of expatriated entity
  • restrict the deduction for interest expense for multinational enterprises with excess domestic indebtedness
  • eliminate the tax break for foreign oil and gas extraction income

However, the chances of this legislation moving forward in a divided Congress over the next two years are very slim.

Ways & Means: The House Ways and Means Committee "Field Hearing on the State of the American Economy: Appalachia" February 6 in West Virginia — the Committee's first full hearing this Congress — featured witnesses airing concerns of area business owners and operators, including food and energy costs and supply chain and workforce issues, and members relitigating the benefits of the Tax Cuts & Jobs Act (TCJA) and IRA. Rep. Don Beyer (D-VA) represented Democrats at the hearing and touted the IRA's tax credits and rebates for replacing older appliances, increasing home efficiency, and lowering energy costs. Chairman Smith continued to call for refocusing the Committee's work toward individuals and small businesses, and away from corporations. "[O]ver the last few years, this committee's work — and that of Congress — has drifted from the needs of these good people," he said. "We must course correct. We must prioritize the voices in rooms like this one, and not those of the Washington political class." He said more field hearings are likely. Committee Vice Chairman Vern Buchanan (R-FL) discussed his bill to increase the deduction for start-up expenses and said lawmakers would hopefully change the scheduled phase-out of bonus depreciation under the TCJA, both of which witnesses supported.

A Wall Street Journal (WSJ) profile of Chairman Smith said it isn't clear how much his "emphasis on working Americans will lead to changes in Republican tax policy, which has been defined for three decades by opposition to tax increases." Divided government, and the resulting tough legislative landscape, for the next two years gives him "time to flesh out his agenda before significant pieces of the tax code expire at the end of 2025. Mr. Smith said he opposes Democrats' approach to helping low-income households, which calls for expanding tax credits to families, including those who don't earn income. And he says lower taxes encourage job growth, linking corporate taxes and workers. 'We're not changing our values on anything,' Mr. Smith said. 'We're changing our priorities.'" The article said he routinely criticizes "woke corporations," which were targeted by Rep. Mike Kelly (R-PA) during the field hearing.

Revenue: Regarding revenue after the TCJA, Senate Finance Committee Ranking Member Mike Crapo (R-ID) pushed back against Democratic assertions that corporations are not paying their fair share of tax following a January GAO report on average effective tax rates of large corporations before and after the 2017 law. In a WSJ opinion article, Senator Crapo said the TCJA shouldn't be viewed as part of the problem in the debt limit debate, Crapo argued; rather, it's part of the solution. "Despite reduced corporate and individual tax rates, revenues reached an all-time high of $4.9 trillion last year. If Congress preserves and builds on those pro-growth tax reforms, it would help reignite our economy and restore fiscal sustainability."

Senate Finance Committee: Senate Finance Committee Chair Ron Wyden (D-OR) and Ranking Member Crapo February 9 announced subcommittee assignments. Senator Michael Bennet (D-CO) will chair the tax subcommittee and Senator John Thune (R-SD) will serve as Ranking Member.


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