March 22, 2023
What to expect in Washington (March 22)
The Treasury Department March 21 released proposed regulations (REG-120653-22) on the IRC Section 48D Advanced Manufacturing Investment Credit (CHIPS ITC), established by the CHIPS Act of 2022, that define key terms and provide information on how to claim the credit. The credit is generally equal to 25% of an eligible taxpayer's qualified investment in a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment, for qualified property that began construction after enactment of the CHIPS Act (August 9, 2022) and was placed in service after December 31, 2022. Qualified property includes any building or its structural components satisfying certain requirements unless the building or a portion of it is used for offices, administrative services, or other functions unrelated to manufacturing, Treasury said.
The Wall Street Journal reported, "The proposed rules don't set a percentage of a project's revenue or production that qualifies as a primary purpose. That means the Internal Revenue Service, during audits of companies claiming the credit, can look at each project and assess its primary purpose, a senior Treasury official said." The WSJ report also said, "Companies can get the credit even if they don't owe income taxes, and they could receive net payments from the government. The Treasury Department is planning future rules about how the mechanics of these refundable tax credits will work; several such tax breaks also appear in the separate healthcare and climate law known as the Inflation Reduction Act."
On a related note, Bloomberg Government reported, "The Biden administration is preparing to decide how much American-made equipment must be used in renewable projects in order to get an extra tax credit under the new climate law, addressing a key dispute between energy developers and solar panel manufacturers … At issue is a so-called domestic content bonus — worth up to 10% in extra tax credits — designed to help lure clean energy manufacturing back to the US. Under the Inflation Reduction Act, renewable projects generally qualify if they contain at least 40% of US fabricated products."
Budget — Punchbowl reported Speaker Kevin McCarthy (R-CA) as saying at the House Republican retreat in Orlando that he would try to combine a debt limit bill with provisions in H.R. 1, the Republican energy proposal, and that he would seek work requirements for government programs, possibly to include Medicaid. "[I]f we had H.R. 1, and we had energy prices lower, there'd be lower inflation. So banks would be safer. Americans would have more money in their pocket, there'll be more jobs and the world would be safer," Speaker McCarthy said. "If we put in work requirements, it would help people get back to work, so that would deal with the supply chain. More people would be working, more revenue would come in … "
Roll Call reported House Budget Committee Chairman Jodey Arrington (R-TX) as saying at the retreat that the House GOP budget resolution will propose to cap spending at fiscal 2022 levels over the next 10 years, which would produce $3 trillion in savings over the decade, and that the goal of a balanced budget has slipped. The report said Rep. Arrington plans to use an alternative to the Congressional Budget Office baseline that caps topline spending increases at 1% annually, rather than assuming discretionary spending will grow 2.1% each year. "Arrington will further deviate from the CBO baseline in assuming the tax cuts from Republicans' 2017 law that are set to expire in 2025 are made permanent," it said.
Meanwhile, House Appropriations Committee Ranking Member Rosa DeLauro (D-CT), in conjunction with Administration agency heads, said that the House Republican leadership's reported proposal to cut fiscal year 2024 discretionary spending back to the fiscal year 2022 enacted level would cut essential programs like shutting down Air Traffic Control Towers after some near misses, cutting rail safety jobs after recent derailments, cutting health care services after a pandemic, and others.
Health — With the Public Health Emergency (PHE) set to expire on May 11, 2023, Washington Council Ernst & Young (WCEY) published a resource to help US health care leaders as well as employers think through the possible implications of this shift: "The PHE is ending: What it means for COVID-19 waivers, funding & other flexibilities." The guide includes an overview of existing COVID-19 waivers, emergency funding and other flexibilities — and the regulatory or congressional actions needed to extend or make permanent those flexibilities.
Key areas covered in this analysis include:
A Senate Finance hearing on "The President's Fiscal Year 2024 Health and Human Services Budget" with HHS Sec. Xavier Becerra is today, 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.
Global tax — Bloomberg Tax reported Michael Plowgian, deputy assistant secretary for international tax affairs at Treasury, as saying at a Tax Executives Institute conference that the US believes clean-energy credits in the 2022 tax-and-climate law that can be transferred, or sold, should qualify as refundable credits, which are treated favorably relative to non-refundable credits. "But a number of other countries involved in the global tax agreement that imposed the 15% global minimum tax 'think about it differently,' Plowgian said. As a result, it will be an 'uphill battle' for the US to get that kind of treatment, though it continues to be a subject of discussion."
Plowgian was cited in Tax Notes as saying negotiations on a permanent safe harbor in the global anti-base-erosion (GLOBE) rules under the OECD's pillar 2 minimum taxation framework have been so challenging that the provision seems unlikely at present: "I would characterize the discussions in the inclusive framework as essentially being that if delegates thought that there was a simpler rule that they could rely on to get to the right answer, they would have just made that [the rule rather than a safe harbor] under the GLOBE rules."
Estate tax — Senators Elizabeth Warren (D-MA), Bernie Sanders (I-VT), Chris Van Hollen (D-MD), and Sheldon Whitehouse (D-RI) called on Treasury to use "existing authority to limit the ultra-wealthy's abuse of trusts to avoid paying taxes." In a letter, they called for action on grantor retained annuity trusts ("GRATs") including revoking some revenue rulings, requiring GRATs to have a minimum remainder interest value equal to or greater than 25% of the contributed assets (from Biden FY 2023 Budget), reissuing family limited partnership regulations, clarifying that Intentionally Defective Grantor Trusts are not entitled to stepped-up basis, and issuing clarifying regulations on certain valuation rules for estate and gift tax purposes.
Trade — The House Ways and Means Committee has set its "Hearing on the Biden Administration's 2023 Trade Policy Agenda with United States Trade Representative, Ambassador Tai" for Friday, March 24 at 9 a.m. The Senate Finance Committee previously announced a hearing on "The President's 2023 Trade Policy Agenda" for Thursday, March 23 at 10 a.m.
Retirement — President Biden issued his first veto March 20, of H.J. Res. 30, a resolution that would disapprove of the Department of Labor's final rule titled "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights," clarifying that retirement plan managers can consider environmental, social and corporate governance ("ESG") factors when making investment decisions for those plans. The Senate passed the resolution 50-46 March 1, and the February 28 House vote was 216-204. Those margins make it unlikely that the resolution could garner the 2/3 vote of each chamber necessary to override the veto.
Fed squeezed from both sides as interest rate announcement looms today — The Federal Reserve Board finds itself in a difficult position for its monthly rate-setting decision today, with Chairman Jerome Powell's inclination to keep pressing hard against inflation moderated by a banking crisis that has starkly dramatized the effects of higher interest rates. Numerous sources have urged the Fed to slow down, including Goldman Sachs economists who wrote in a note on March 21 that higher rates risk further destabilizing small and midsize banks, while Nomura economists have argued that the Fed should actually cut rates "to reduce the risk of further bank runs," the New York Times reported. Meanwhile, other sources like former Treasury Secretary Lawrence Summers have said the banking industry turmoil should not deter the Fed from its campaign against inflation. The consensus expectation is for a 0.25-point increase. Sen. Mark Warner (D-VA), rarely a critic of the Fed, told Politico, "I do think a pause would be appropriate in the sense that you're trying to slow the economy. Clearly, this banking issue is slowing the economy."
Meanwhile, as the tumult among regional-size banks continued, shares in San Francisco lender First Republic closed up 30% on Tuesday after Treasury Secretary Janet Yellen told an American Bankers Association conference, "Our intervention [in Silicon Valley Bank] was necessary to protect the broader U.S. banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion. Large banks play an important role in our economy, but so do small- and mid-sized banks. Treasury is committed to ensuring the ongoing health and competitiveness of our vibrant community and regional banking institutions." But even with Tuesday's modest rally, First Republic's stock has lost more than 80% of its value over the past two weeks, and the bank reportedly has started to plan for the possibility that it may need to sell off parts of its business or get a government backstop. Major banks and private equity firms have balked at offering First Republic a capital infusion out of fear of releasing losses on its loan book and investment portfolio, Reuters reported. And according to a new study by four researchers, there may be as many as nearly 190 lenders at risk of failure because of unrealized losses on their balance sheets.
The Senate Banking Committee announced that it would hold a hearing next Wednesday (March 29) on the banking crisis with the same three officials who are set to appear the following day at the House Financial Services Committee: Fed Vice Chair of Supervision Michael Barr, FDIC Chairman Martin Gruenberg and Nellie Liang, Treasury Under Secretary for Domestic Finance. Finally, members this week have been processing the idea of possibly legislating an expansion of deposit insurance for banks. When asked if Senate Democrats would press such an approach, Majority Leader Chuck Schumer (D-NY) told reporters Tuesday that regulators "have done a really good job at stopping the contagion, but there's more to do and we're going to look at a lot of different things." Sen. Warren said larger banks should not get more FDIC deposit insurance without tighter regulation, Bloomberg reported. "The big banks cannot have it both ways. They can't say they want the government to backstop them and they don't want any additional regulation," Warren said. "That's not the way the world works, or at least not the way it should."