March 12, 2023
Americas Tax Policy: This Week in Tax Policy for March 10
This Week (March 13 - 17)
Congress: The House is out but the Senate is in session.
Finance: The Finance Committee has scheduled a hearing on the Budget with Treasury Secretary Janet Yellen for Thursday, March 16 at 10 a.m.
The EY Webcast, “Tax in a time of transition: legislative, economic, regulatory and IRS developments,” is Friday, March 17 at 12 p.m.
Last Week (March 6 - 10)
Budget: President Biden released an FY 2024 budget proposal March 9 calling for $3 trillion in deficit reduction over the next 10 years mainly through tax increases on corporations and wealthy individuals. The Budget included a previously outlined quadrupling of the Inflation Reduction Act (IRA) stock buyback excise tax from 1% to 4% and a 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 the 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%, increasing the GILTI tax rate and requiring GILTI to be calculated on a jurisdiction-by-jurisdiction basis, 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, possibly not until 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 (FY 2023) that presumed enactment of the BBBA demonstrate significant revenue-generating potential. Overall, the FY 2024 Budget includes $4 trillion in net tax increases, which is more than the $2.5 trillion in the FY 2023 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. A WCEY Alert on the Budget is available here.
Yellen hearing: The policy issues in the Budget will increasingly be up for debate in Congress, including GILTI and other international tax changes reflecting the OECD-led global minimum tax agreement that Republicans have targeted for scrutiny. During Treasury Secretary Janet Yellen’s appearance for the customary post-Budget hearing at the House Ways and Means Committee March 10, Rep. Kevin Hern (R-OK) asked about the analysis requested by congressional Republicans of the effects Pillar One and Pillar Two on the US fisc. Sec. Yellen said the Budget presented estimates of Budget proposals relating to the global minimum tax under Pillar Two. Other nations have taken steps toward adopting the Pillar Two global minimum tax rules and it’s a “huge positive for the United States,” she said. Rep. Claudia Tenney (R-NY) asked how Treasury has the authority to negotiate a tax agreement with the OECD without consultation with Congress. Sec. Yellen said there have been staff briefings between Treasury and the Committee and she has had conversations with the chair and ranking member. She said Pillar Two is “something that cedes no taxing rights.” Tenney said Treasury didn’t fight for fair treatment of GILTI and CAMT in the negotiations and asked, “Why are other foreign entities and countries in the agreement allowed to tax our US-based companies?” Rep. Randy Feenstra (R-IA) said Congress and companies have been “sounding alarms” about Pillar Two since model rules were released in December 2021, and there are concerns about how it was negotiated and what was agreed to. He said under the agreement nonrefundable tax credits can bring companies’ effective tax rates below the 15%, making those companies subject to the undertaxed profits rule (UTPR) that other countries may adopt. Yet, he maintained other countries like the UK were able to protect their own R&D credit in their negotiations, and he asked why Treasury did not negotiate similar rules to protect the US R&D credit. Rep. Darin LaHood (R-IL) said it is his understanding that Pillar One negotiations have stalled, meaning digital services taxes (DSTs) could spread throughout the world. Sec. Yellen said the US stands to gain substantially under Pillar One and get increased taxing power as a large market jurisdiction. “However, there are also provisions on which we will lose and it’s a very fine balance. Zero is certainly a possibility with respect to revenue and there remain significant disagreements in the Pillar One negotiations,” she said. “Until those are resolved we can’t do the analysis that you want. But what we have said is that the likely impact on US revenues, while it could be slightly positive or slightly negative depending on the details, it is not likely to be large.”
What’s next: House Speaker Kevin McCarthy (R-CA) has suggested that the delay in release of the President’s Budget proposal will delay the release of the House Republican budget resolution. Budget Committee Chairman Jodey Arrington (R-TX) was quoted by a CNN reporter as saying of the House Republican budget resolution release, “It will probably be the second week in May.” He said during Friday’s hearing that Republicans would take time to unpack what is in the President’s Budget and, “We will be able to compare not just the numbers, but the priorities.” There is hope that release of the Republican budget will touch off bipartisan budget talks. In announcing his Budget March 9, President Biden said, “I’m ready to meet with the Speaker anytime — tomorrow, if he has his budget. Lay it down. Tell me what you want to do. I’ll show you what I want to do. See what we can agree on. What we don’t agree on…” Looking further forward, the President’s Budget document suggested he is willing to consider extension of TCJA individual tax provisions that expire at the end of 2025, under certain parameters including: a focus on rewarding work not wealth; no tax increases on those earning less than $400,000 annually; and opposition to “cutting taxes for the wealthy—either extending tax cuts for the wealthy or bringing back tax breaks that would benefit the wealthy.”
IRS Commissioner: 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.
SFC housing hearing: The March 7 Senate Finance Committee hearing on “Tax Policy’s Role in Increasing Affordable Housing Supply for Working Families” focused on the need for members to come together to act on bipartisan housing legislation, of which there is a substantial amount. Senate Finance Committee Chair Ron Wyden (D-OR) reintroduced the Decent, Affordable, Safe Housing for All (DASH) Act, which would among other things strengthen the Low-Income Housing Tax Credit (LIHTC) and establish a Renter's Tax Credit and Middle-Income Housing Tax Credit (MIHTC). He recognized Senator Maria Cantwell (D-WA) as a longtime LIHTC advocate and mentioned the bill (S. 657) by Senators Ben Cardin (D-MD) and Todd Young (R-IN) to boost investment in struggling neighborhoods. Ranking Member Mike Crapo (R-ID) mentioned the bills and said, “Targeted tax policies such as LIHTC are an important part of solving housing affordability and supply issues, but we must also address the drivers that are raising the cost of housing generally.”
Ways and Means: During the House Ways and Means Committee’s second field hearing “on the State of the American Economy: The Heartland” on March 7 in Oklahoma City, Republican members continued to call for additional tax reductions for working-class Americans, including extensions of TCJA provisions for individuals. Witnesses included a founder of a meatpacking company, an owner of a family-owned manufacturing company, a rancher, and a small oil producer. Chairman Jason Smith (R-MO) said ahead of the President’s Budget release on Thursday, “Biden’s last budget threatened $45 billion in new taxes on American energy producers. It spent $330 billion on policies that discourage work, worsen supply chains, and leave Main Street littered with ‘Help Wanted’ signs.” Rep. Mike Thompson (D-CA) asserted that Republicans should support extension of the expanded Child Tax Credit given the significant tax cut they provided to corporations in the 2017 TCJA. Other Democrats like Rep. Terri Sewell (D-AL) also highlighted the importance of a robust CTC.
Global tax: During an OECD panel of The Federal Bar Association 2023 Tax Law Conference March 6, Michael Plowgian, Deputy Assistant Secretary (International Tax Affairs), U.S. Department of the Treasury said, on South Korea’s 2024 effective date for implementing a UTPR, that the expectation was the UTPR would come into effect a year after the IIR, or no earlier than 2025. The effective date under the Korean legislation caught many people by surprise and it has been raised with them and a conversation about the effective date is at least taking place. Regarding whether Treasury will allow a foreign tax credit when a company is subject to both tax under GILTI and a local country’s QDMTT, he said, “We have said this many times, including in preambles to existing FTC regs, we are working on FTC reg guidance about the treatment of Pillar Two taxes, including QDMTTs. And, you know, I can’t get out too far ahead of the regulatory project, because there are just a lot of issues to work through. But we agreed to the rule order that QDMTTs come before CFC taxes which come before IIRs. And we expect to reflect that and we do not favor double taxation.”