March 17, 2023
What to expect in Washington (March 17)
Treasury Secretary Janet Yellen appeared before the Senate Finance Committee to discuss the President's FY 2024 Budget March 16. As was the case at the Ways and Means Committee last week, the focus was on Republican scrutiny of the OECD-led global tax agreement, particularly the undertaxed profits rule (UTPR) that Senator Todd Young (R-IN) said would "uniquely disadvantage American workers and job-creating businesses by providing our trading partners with the political blessing to tax the US activity of US companies." Other Republicans questioned whether the UTPR would violate US tax treaties. Members also targeted questions toward the banking crisis, implementation of Inflation Reduction Act (IRA) energy tax credits, and the IRA $80 billion IRS funding increase, which Sec. Yellen said will be mapped out within weeks.
Republican members said they had concerns with the tax increase proposals in the Budget but, between the OECD, energy tax, and the banking crisis, some admitted there just wasn't time to get into them, most of which are well-known already from previous Biden budgets and the House Build Back Better Act. Committee leaders framed the tax policy arguments lawmakers are taking into the debt limit negotiations and probably into the 2024 campaign. Chairman Ron Wyden (D-OR) said, similar to comments he has made for the past several years: "There's one set of rules for people who work for a living, teachers, nurses and firefighters, who pay taxes straight out of every paycheck. Then there's another set of rules for the uber-wealthy, who can pay what they want, when they want, and potentially nothing at all." Ranking Member Mike Crapo (R-ID) championed the competitive tax rates of the 2017 Republican TCJA and said, "Instead of considering bipartisan, pro-growth policies, the President's budget includes a whopping $4.7 trillion of new and increased taxes on American job creators, which ultimately means fewer jobs and lower wages."
Wyden's argument, which has roots going back at least to the 2011 Obama-era Buffett Rule, is consistent with the President's Budget, which said, "no billionaire should ever pay a lower tax rate than a schoolteacher or a firefighter." During an appearance before the Senate Budget Committee March 15, OMB Director Shalanda Young said, "The President's vision is clear here: there are billionaires, hundreds of millionaires in this country who pay a less effective tax rate than nurses, teachers and firefighters. Some analyses have shown some billionaires have an effective tax rate of 8%. The President believes that is inherently unfair." Director Young refuted GOP assertions that the President is proposing for the 2025 TJCA provisions to expire, saying, "We very clearly in the budget state that the President would support extending those tax cuts for those making under $400,000. Now he does believe we should pay for those."
Health — In addition to highlighting tax increases as Democrats' preferred approach for reducing the deficit, which House Republicans say is needed to tame the debt but should be done through spending cuts, the President has been suggesting those as-yet-unspecified GOP cuts could envision trimming public health benefits and has also been highlighting his successes in controlling drug prices.
On March 15, President Biden spoke about efforts his administration has taken to lower out-of-pocket health care costs for Americans, including insulin and other drugs. During his speech in Las Vegas, he announced that his administration had selected the 27 Medicare Part B drugs that will be subject to the IRA's inflation rebate program. Biden said the move will "change the way drugs are priced." According to a fact sheet, manufacturers will begin to receive invoices in 2025 to pay a rebate to the federal government for certain drugs whose prices rose faster than the rate of inflation. Medicare beneficiaries can expect to see lower coinsurance for those 27 drugs beginning April 1.
A Finance hearing on "The President's Fiscal Year 2024 Health and Human Services Budget" with HHS Sec. Xavier Becerra is set for Wednesday, March 22 at 10 a.m.
The House Ways and Means Health Subcommittee will hold a hearing on "Why Health Care is Unaffordable: The Fallout of Democrats' Inflation on Patients and Small Businesses" on Thursday, March 23 at 2 p.m.
Banking — A group of the nation's largest banks, in a move that took place after Sec. Yellen met privately with JPMorgan CEO Jamie Dimon on March 16, agreed to extend a $30 billion private-sector lifeline to struggling First Republic Bank of San Francisco. The money is intended to help the bank, which has been battered by withdrawals since the collapse of Silicon Valley Bank (SVB) last weekend, meet customer redemptions and bolster confidence in the U.S. banking system. "This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system," Treasury said in a statement Thursday. Under the agreement, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo will each make a $5 billion uninsured deposit in First Republic; Goldman Sachs and Morgan Stanley will each deposit $2.5 billion; and BNY Mellon, PNC Bank, State Street, Truist and U.S. Bank will each deposit $1 billion, all uninsured. A statement from the banks said that "regional, midsize and small banks are critical to the health and functioning of our financial system."
In her appearance before the Senate Finance Committee, Sec. Yellen defended federal regulators' intervention into the crisis at SVB and Signature Bank, saying, "This week's actions demonstrate our firm commitment to ensuring the safety of account holders' deposits … our banking system remains sound and … Americans can rest assured that the money they have deposited will be available when they need it." Yellen emphasized that moves by the Fed and FDIC to backstop all deposits at SVB and Signature did not use or risk taxpayer money, but she got a skeptical reception from Sen. James Lankford (R-OK), who told her other banks would likely subsidize the cost of the rescue, and that "every Oklahoman will pay higher fees." Ranking Member Crapo said he was "concerned about the precedent of guaranteeing all deposits," calling the action a "moral hazard."
Other senators were critical of the bank's management and its regulators for not detecting the risks of what Senator Mark Warner (D-VA) called the "interest rate mismatch" in SVB's assets, which led its portfolio of long-term bonds to lose value as rates rose for a year. Warner also pointed at the venture capitalists who withdrew deposits from the bank last week en masse, saying, "The idea that there is no responsibility for the equivalent of shouting 'fire' in a crowded theater presents a problem that I hope we can all put our heads together on." Warner said he was not sure "what regulatory system, anywhere, no matter how much capital and how many stress tests, would have protected any institution from a $42 billion bank run in a single day."
R&D — The Wall Street Journal reported on the TCJA IRC Section 174 five-year R&D amortization requirement that took effect in 2022, "For many biotech companies, contract manufacturers and software firms, the law means losing the ability to deduct the bulk of their expenses on the tax returns they are about to file. That means some businesses that broke even or lost money in 2022 are considered profitable for tax purposes — and are finding they owe money to the Internal Revenue Service." The story noted that addressing the provision is caught up in the partisan impasse over the Child Tax Credit — Democrats want the CTC expanded in any business tax bill, but Republicans say the expansion sought by Democrats removes incentives to work — but nonetheless cited Chairman Wyden as saying of 174, "I'm open to ideas. We've got to get this done."
Sens. Young and Maggie Hassan (D-NH) March 16 reintroduced their bill (S. 866) to roll back the IRC Section 174 R&D amortization requirement and otherwise enhance tax benefits for research activities.
Trade — The Senate Finance Committee has noticed a hearing on "The President's 2023 Trade Policy Agenda" for Thursday, March 23 at 10 a.m. One topic for discussion may be Sec. Yellen's recent comments that future limited free trade agreements focused on battery minerals with the European Union and other allies wouldn't need approval from Congress, which members from both parties have cited concerns about.
Congress — The House Republican retreat begins this Sunday in Orlando (the House is coming back in session on Wednesday of next week, March 22). Punchbowl reported that former Saints quarterback Drew Brees will address the group.
The EY Webcast, "Tax in a time of transition: legislative, economic, regulatory and IRS developments," is today, March 17 at 12 p.m.