April 19, 2023
What to expect in Washington (April 19)
House Speaker Kevin McCarthy's (R-CA) Monday speech declaring that "a no-strings-attached debt limit increase cannot pass" — and must be accompanied by GOP proposals like returning the federal government to 2022 spending levels, clawing back unspent COVID funds, the Lower Energy Costs Act (H.R. 1), and work requirements for federal programs — hasn't moved the debate forward. "Clean debt ceiling is the way to go," Senate Majority Leader Chuck Schumer (D-NY) said after the Tuesday party lunches. "Speaker McCarthy … traveled all the way to New York to deliver a speech with no new substance, no new facts or details, and most importantly, no plan," Schumer said, adding that McCarthy could lead the country into default.
However, Senate Republican Leader Mitch McConnell (R-KY) said there may be an opening for a bipartisan achievement on energy issues in H.R. 1, though he didn't specify whether it would be in the debt limit context. "With all the skepticism about whether anything could be accomplished on a bipartisan basis, it seems to me that the energy bill that the House passed on a bipartisan basis was not given enough attention in terms of potential accomplishments during this divided government," he said. "So, I would encourage the Majority Leader to take another look at the House's passed energy bill, bring it up, give us a chance to offer amendments. And let's see if we can surprise everyone and actually achieve some important bipartisan accomplishments for the country during this period of divided government."
Democrats appear committed to a clean debt limit bill, and certainly not inclined to roll back one of their signature laws, the Inflation Reduction Act (IRA), which is what some conservatives are calling for, recalling the protracted negotiations that preceded McCarthy's Speaker vote. Freedom Caucus Chair Scott Perry (R-PA) said on Fox yesterday, "The new IRS, the cost of that, the Inflation Reduction Act, where $277 billion in Green New Deal tax incentives now are being touted as probably $1.5 trillion. We need to claw all that back, not spend that money, put it towards the debt … " Speaker McCarthy said on CNBC after his speech that he didn't yet have the backing of members. "I think I have the support of America. I'll get the party behind it," he said.
Along with conservatives, the Republican Study Committee wants the debt limit package to repeal the Inflation Reduction Act's $80 billion IRS funding boost, though Politico reported RSC Chair and Ways and Means Committee member Kevin Hern (R-OK) as saying leadership warned that Democrats could use the IRS provisions against the GOP in political messaging, i.e., suggesting that Republicans only care about the wealthy. The Washington Post observed, "Republicans run the risk that repealing IRS funds could complicate the math behind their own bill, since an enhanced IRS would help raise revenue — and a repeal would eliminate potential savings." The report also noted that analysts have suggested that tax receipts so far suggest the X date deadline for the debt limit could come in June but more likely in July.
Huffington Post reported a vote on a debt limit proposal could be planned for next week and, while several Republicans remained unsure about it, things would become clearer in the coming days. "McCarthy's debt ceiling strategy recalls his speaker bid in January, when he launched into a series of votes without his party fully behind him, but eventually pulled together enough support," the report said. "Ultimately, however, a debt ceiling bill will require approval from Biden and Senate Democrats, meaning this month's action in the House represents little more than Republicans finally firming up their initial negotiating position."
While previous reports have suggested the debt limit could be suspended or increased for about a year, until May 2024, the exact approach and duration/increase amount were still being discussed among House Republicans yesterday along with which federal programs would be subject to work requirements.
A White House readout from a call between the President, Senator Schumer, and House Democratic Leader Hakeem Jeffries (D-NY) said they all "agree that we won't negotiate over default and Republicans should pass a clean bill like they did three times in the previous administration."
Trade — During the House Ways and Means Trade Subcommittee's April 18 "Hearing on Countering China's Trade and Investment Agenda: Opportunities for American Leadership," Republican members suggested they wanted to replicate the USMCA trade deal in the Indo-Pacific region. Rep. Jodey Arrington (R-TX) said he was impressed with the Trump administration's free trade framework, and it needs to be replicated in the Indo-Pacific area, but what is lacking is the same assertiveness and leadership on trade from the current Administration. Rep. Vern Buchanan (R-FL) lauded the USMCA for receiving a strong bipartisan vote in the House and said Pacific nations have called on the US to become active and engaged on trade. Rep. Ron Estes (R-KS) said China has increased its R&D activity through incentives, while the US is threatening its own activity through the Section 174 R&D 5-year amortization (rather than expensing) requirement.
Tax — Reps. Estes and John Larson (D-CT) — along with Reps. Darin LaHood (R-IL), Suzan DelBene (D-WA), Jodey Arrington (R-TX), Jimmy Panetta (D-CA) and 56 additional original cosponsors — April 18 reintroduced their American Innovation and R&D Competitiveness Act that would permanently allow for immediate research and development expensing retroactive to 2022 when the provision expired.
The 174 R&D issue featured prominently during a House Small Business Committee hearing, "Paying Their Fair Share: How Tax Hikes Crush the Competitiveness of Small Businesses," along with the IRC Section 163(j) interest deduction TCJA cliff that also took hold in 2022 and the bonus depreciation phasedown. More generally, Republican members and witnesses sought to make the case that small businesses use the money they save from tax relief provisions to reinvest in their businesses through property, plants, and equipment.
In another non-tax-writing committee tax hearing, the April 18 Senate Budget Committee hearing "A Rigged System: The Cost of Tax Dodging by the Wealthy and Big Corporations" rekindled the years-long debate in Congress over whether taxes should be held at current rates under the 2017 TCJA or increased through proposals like expanding payroll taxes, enacting a "Buffett Rule" minimum tax on the wealthy, and international changes. Chairman Sheldon Whitehouse (D-RI) advocated bills he has introduced, including:
Witness and former Treasury official Kimberly Clausing, now at the UCLA Law School, advocated fully taxing foreign income at the U.S. rate on a country-by-country basis and eliminating the tax-free return on foreign tangible assets. She also said extending the TCJA provisions that expire at the end of 2025 would total over $3 trillion over 10 years or $1.8 trillion if restricted to just those with income below $400,000.
Financial Services — The House Financial Services Committee yesterday (April 18) held a hearing on oversight of the Securities and Exchange Commission with SEC Chair Gary Gensler. The session provided Republicans with a long-awaited opportunity to confront Gensler about the SEC's aggressive series of proposed rules since 2021, including rules on climate risk, equity market structure, private fund advisers, open-end mutual funds and other areas. They also faulted Gensler's assertion of authority over most cryptocurrency products and the SEC's enforcement actions against crypto firms, while questioning his responsiveness to their oversight inquiries. Chairman Patrick McHenry (R-NC) said that under Gensler's leadership, "the SEC has brought nearly 50 separate enforcement actions against digital asset firms. And now your agency is requesting an additional $78 million to expand your enforcement agenda. At the same time, you have refused to provide clarity on whether digital assets offered as part of an investment contract are subject to securities laws — and, more importantly, how these firms should comply with those laws," McHenry said. "You're punishing digital asset firms for allegedly not adhering to the law, when they don't know it will apply to them. That's nonsensical. Regulation by enforcement is not sufficient nor sustainable." McHenry said that in the past two years, the SEC "has proposed 53 new rules at a breakneck pace. That's twice as many rules as your predecessors, Mary Jo White and Jay Clayton, in the same amount of time. This raises serious concerns that the rulemaking process is being rushed, undermining the quality of our securities laws and risking negative unintended consequences. These concerns have been echoed by senior personnel at your own agency. Ranking Member Maxine Waters (D-CA) said the hearing was happening "because last Congress, Republicans threatened to do a 'big number' on the SEC and Chair Gensler, and today is the start of them making good on that promise … The SEC has on average provided over twice the legally required time for comment on its proposals to strengthen Wall Street's rules, and yet Republicans still claim that things are still moving too fast."
Gensler consistently argued that "Nothing about the crypto markets is incompatible with the securities laws. As I've said numerous times, the vast majority of crypto tokens are securities … . Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called … . It's the law; it's not a choice. Calling yourself a 'DeFi' platform … is not an excuse to defy the securities laws." When House Majority Whip Tom Emmer (R-MN) asked, "Does it concern you that your approach to the digital asset industry is actually driving this industry out of the United States?" Gensler replied, "I'm trying to drive it to compliance, and if they're not complying with the laws then they shouldn't be offering their products to U.S. investors." Several Republicans were critical of the torrid pace of the SEC's rulemaking under Gensler, often citing an October report by the SEC's inspector general that raised concerns about the agency's ability to carry out all of the rules it had proposed, and pointed to attrition among SEC staffers. On the SEC's controversial climate risk disclosure proposal, which came under withering assault from committee Republicans at the hearing, Gensler said, "We've gotten 15,000 comments. On the investors' side, it's almost uniformly supportive of mandating climate risk disclosures. Many of the comments we received from actual investors have said they would like to have better consistency around greenhouse gas emissions." Gensler said hundreds of companies are already making climate disclosures because investors want them, and the SEC's goal is to make that information more consistent and comparable.
Hearings — Committee hearings set for the remainder of this week include the following.
Wednesday, April 19
10 a.m., Senate Finance Committee hearing on "The President's Fiscal Year 2024 IRS Budget and the IRS's 2023 Filing Season"
2:30 p.m., Senate Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies hearing to examine proposed budget estimates for FY 2024 for the Food and Drug Administration
Thursday, April 20
Friday, April 21
On Friday, April 21 (12:00 p.m. ET) is the EY Webcast, “Tax in a time of transition: legislative, economic, regulatory and IRS developments.” Register