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March 10, 2023

What to expect in Washington (March 10)

President Biden released an FY2024 budget proposal March 9 calling for $3 trillion in deficit reduction including through tax increases on corporations and wealthy individuals like a previously outlined quadrupling of the Inflation Reduction Act (IRA) stock buyback excise tax from 1% to 4% and billionaire's tax to impose a 25% minimum tax — higher than the previously proposed 20% — on total income, inclusive of unrealized capital gains, for taxpayers with wealth of greater than $100 million.

The White House had earlier in the week previewed the proposal to prolong the Medicare Trust Fund through provisions that include increasing the Medicare tax rate on earned and unearned income above $400,000 from 3.8% to 5%, similarly increasing the Net Investment Income Tax (NIIT) rate to 5% for those above that income threshold, and expanding the tax to include business income, as well as income from investments, wages, and self-employment. The application of the NIIT to business income, which was in the House BBBA, and increase in the rate would raise $650 billion in additional revenue.

The 5% NIIT rate combined with the proposals for a 39.6% highest individual tax rate and taxing long-term capital gains and dividends of taxpayers with taxable income of more than $1 million at ordinary income rates could result in capital gains and dividend rates as high as 44.6%. The Budget continues to call for other tax provisions that fell out of the Build Back Better negotiations that eventually led to the Inflation Reduction Act, including raising the corporate tax rate to 28%, taxing carried interests as ordinary income, and repealing deferral of gain from like-kind exchanges.

The Budget is a blueprint for the President's preferred policies irrespective of their chances of being enacted, and generally is intended to strike a contrast with spending cuts called for by House Republicans, which may not be detailed until their budget resolution is released in May. (Many of the proposals couldn't pass the last all-Democratic controlled Congress and stand virtually no chance in a divided government.) The tax proposals collated from Biden's first Budget (FY 2022), the House BBBA, and last year's Budget (FY2023) that presumed enactment of the BBBA demonstrate significant revenue-generating potential. Overall, the FY2024 Budget includes $4 trillion in net tax increases, which is more than the $2.5 trillion in the FY2023 Budget, but that baseline assumed passage of the House-passed BBBA.

The proposal to prolong the Medicare Trust Fund through an expansion of the program's taxes and a NIIT increase demonstrates the President's commitment to health programs at a time when he and other officials are insinuating that the as-yet-unspecified spending cuts House Republicans are calling for in the debt limit debate could envision clipping some public health benefits.

The Washington Post listed "Biden has a plan for Medicare" as one of seven takeaways from the Budget. "This looming Medicare shortfall has alarmed experts for years. But the White House had not proposed a solution until now. The plan would give the administration authority to negotiate what price the federal government pays for more drugs than the limited number approved as part of Democrats' legislative package last year, while also increasing taxes on people earning more than $400,000 per year. The administration says its proposal would extend the solvency of Medicare for at least 25 years," the report said.

All of these policy issues will increasingly be up for debate in Congress. Treasury Secretary Janet Yellen will appear for the customary post-Budget hearings at the House Ways and Means Committee today, March 10, and Senate Finance Committee next Thursday, March 16. The Budget includes GILTI and other changes reflecting the OECD-led global tax agreement, which Republicans have targeted for scrutiny.

IRS — The Senate March 9 confirmed the nomination of Daniel Werfel to be IRS Commissioner 54-42. Democrat Joe Manchin (D-WV) opposed — he has openly battled Treasury/IRS over implementation of EV credit requirements — and Republicans Bill Cassidy (R-LA), Susan Collins (R-ME), Chuck Grassley (R-IA), Thom Tillis (R-NC), and Todd Young (R-IN) supported the nomination.

R&D/FDII — The Wall Street Journal reported on the TCJA IRC Section 174 R&D five-year amortization requirement that took effect this year potentially resulting in greater foreign-derived intangible income (FDII) deductions. "In annual reports … companies can count the research deductions they will get to take in future years as deferred tax assets usable against future earnings," the report said. "That means their net income, as measured under accounting standards, is unchanged. At the same time, the smaller research deduction means many companies can get a bigger advantage from the export tax break."

Debt limit — The Ways and Means Committee March 9 approved 21-17 H.R. 187, the "Default Prevention Act," which would guarantee the sovereign debt of the United States Government by authorizing the Treasury Secretary to continue to borrow to pay interest and principal due on the debt, even in the event of an impasse concerning the debt limit. Most of the debate during the markup focused on what the bill would and wouldn't do. Rep. Bill Pascrell (D-NJ) said if Republicans refuse to support raising the debt ceiling, Social Security checks would stop, and Medicare reimbursements would freeze. Rep. Linda Sanchez (D-CA) said that Treasury secretaries from multiple administrations have confirmed that payment systems cannot accommodate prioritization plans.

Budget Committee Chairman Jodey Arrington (R-TX) said the measure is intended to provide certainty to creditors and the American people that we won't default, and to allow Congress and the President to have a discussion about the nation's balance sheet, free of any worry.

On a related note, Chairman Arrington was quoted by a CNN reporter as saying of the House Republican budget resolution release, "It will probably be the second week in May."

Global tax — An op-ed in the March 9 WSJ argued that "a central feature of Pillar Two … punishes low-tax nations that don't comply with its rules … through its 'undertaxed profits rule,' which purports to allow countries to 'tax' — that is, to confiscate the assets of — a covered company on the grounds that an affiliate's taxes are too low in any other country. The global tax code thus eliminates each country's authority to make its own tax law and prioritizes increased corporate taxation over economic growth. Never mind that such provisions violate international law and existing treaties … "

Energy - Speaker Kevin McCarthy (R-CA) announced H.R. 1, the Lower Energy Costs Act, focusing on two main priorities: increasing the production and export of American energy and reducing the regulatory burdens that make it harder to build American infrastructure and grow our economy. The legislation is being introduced by Majority Leader Steve Scalise (R-LA).

Rep. Scalise said in Punchbowl: "The bill is focused on opening up American energy by streamlining the permit process. Having a one-stop shop for things like pipelines, where right now you might have to go through five different federal agencies to get approval to build a pipeline and it drags these projects out to the point where they don't happen … We are forcing more lease sales so that we can have more areas being explored so that we can produce more energy … And we're also dealing with mining as well of rare-earth minerals."


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Washington Council Ernst & Young
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