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April 23, 2023

Americas Tax Policy: This Week in Tax Policy for April 21

This week (April 24-28)

Congress: The House and Senate are in session. The South Korean President has been invited to address a Joint Session of Congress on April 27. House Republican leaders plan to bring the Limit, Save, and Grow Act to a vote next week. The Senate next convenes at 3 p.m. on Tuesday, April 25, with a vote at 5:30 p.m. on the motion to invoke cloture on Executive Calendar #64 Joshua David Jacobs to be Under Secretary for Benefits of the Department of Veterans Affairs.

The House Ways and Means Committee will hold a "Hearing on Accountability and Transparency at the Internal Revenue Service with IRS Commissioner Werfel" on Thursday, April 27, at 1:00 p.m.

Last week (April 17-21)

Debt limit: House Republican leaders are preparing for a vote next week on the Limit, Save, and Grow Act to suspend the debt limit until March 31, 2024, or until $1.5 trillion of debt over the current statutory limit is accrued, whichever occurs first. The measure is filled with Republican priorities like the Lower Energy Costs Act (H.R. 1), rescinding amounts provided to the Internal Revenue Service (IRS) in the Inflation Reduction Act (IRA), repealing some IRA energy tax incentives and returning some green energy incentives to prior law, clawing back unspent COVID funds, and prohibiting the President's student loan debt forgiveness plan. The bill's release and momentum toward a floor vote capped a week that began with House Speaker Kevin McCarthy (R-CA) declaring in a New York Stock Exchange speech that "a no-strings-attached debt limit increase cannot pass," then assembling a package of priorities Republicans have long been pushing to roll back divisive Administration policies and reduce spending. With a 222-213 majority, Speaker Kevin McCarthy (R-CA) can lose only 4 votes presuming Democratic opposition, and the work of gauging and winning support continues.

"After trying and failing to coalesce lawmakers around a budget blueprint of their own, Republican leaders have instead framed the legislation as an opening offer to Democrats and a way to get the White House to come to the negotiating table … " the New York Times reported. "The bill … aims to assuage conservatives by proposing freezing spending to last year's levels. That would effectively force budget cuts. As costs of government programs rise with inflation over time, lawmakers would have to cut some programs to stay under the cap. That would require Republicans to identify spending cuts totaling $3.6 trillion over a decade, by their own calculations, and this bill does not outline them," leaving decisions to appropriators.

Democratic reaction: Republican leaders are looking toward House passage of the bill as putting political pressure on the Democratic-led Senate and President Biden, who continue to call for a clean debt limit bill, to negotiate an agreement that includes limits on federal spending. However, Democrats aren't likely to accede to demands to roll back the IRA, which they say provides necessary funds to combat tax evasion and help reduce US emissions levels. Democratic leaders have thus far been unmoved, and it's unclear if and how the House GOP effort will propel the debate forward. Senate Majority Leader Chuck Schumer (D-NY) said the bill "has no chance of moving forward in the Senate, and it doesn't move us any closer than we were yesterday to avoiding default." President Biden said in an April 21 speech, "Republicans in Congress want to repeal climate provisions" in the IRA and "threaten to default on the US economy."

Ways & Means field hearing: During the third House Ways and Means Committee field hearing April 21, in Peachtree, Georgia, members and witnesses made the case for addressing TCJA tax provisions, including restoring R&D expensing in the place of the IRC Section 174 R&D five-year amortization requirement and the prior-law calculation for the 163(j) interest deduction limitation, and extending the 199A deduction beyond 2025. They also described supply chain challenges and increased costs in the restaurant, building, and other industries. Witness David Bergmann, who owns a supplier of products used to control electrical power, said R&D expensing is essential for companies to take the risks associated with research. Restaurant owner Matt Livingston said the 199A expiration would be devastating given price increases in his industry, and Chairman Jason Smith (R-MO) asserted that it would put small businesses at a competitive disadvantage with large restaurant companies. Rep. Kevin Hern (R-OK) said everyone on the Committee should be concerned about the long-term effects of the stricter limitation on interest deductibility.

R&D bill: 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 expensing provision expired.

Small business hearing: 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.

Senate Budget hearing: 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:

  • The Medicare and Social Security Fair Share Act (S. 1174) to require Social Security contributions on all income above $400,000, however earned (the wage base is currently capped at $160,200);
  • The Paying a Fair Share Act (S. 1173) to codify the "Buffett Rule" with a minimum 30% tax rate on income over $1 million per year, whatever the source; and
  • The No Tax Breaks for Outsourcing Act (S. 357) to end the preferential tax rate for offshore profits by eliminating the deductions for global intangible low-tax income (GILTI) and foreign-derived intangible income (FDII) and apply GILTI on a per-country basis.

Witness and former Treasury official Kimberly Clausing, now at the UCLA Law School, advocated fully taxing foreign income of US companies 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.

SFC IRS hearing: During the April 19 Senate Finance Committee hearing on "The President's Fiscal Year 2024 IRS Budget and the IRS's 2023 Filing Season," Chairman Ron Wyden (D-OR) asked how the IRA funding increase for the IRS would help crack down on the use of offshore accounts by wealthy individuals. Commissioner Daniel Werfel said the enforcement funds in the IRA will be focused on improving the capacity to review the taxes of high-wealth individuals, large corporations and complex partnerships, which the IRS has been "historically severely under-resourced to take on." He said, "Our plan is to build capacity, and that means subject-matter experts, specialized accountants, data scientists, lawyers, all of which who understand how these things are set up and can help us navigate them and figure out where the funds are that should have been paid back." Senator John Cornyn (R-TX) expressed concern about the IRA's EV credits, especially supply chain issues and the potential to drive an increase in sales of batteries being made overseas.

Green energy: Concerns about green energy credits incentivizing the sale of foreign-made components were also on display at the April 19 House Ways and Means Committee green energy hearing, which featured a relitigating of the IRA. Republicans asserted that the IRA green energy provisions incentivize the use of materials derived from other nations and that, based on calculations from analysts, the IRA will cost more than $1 trillion, far more than projected by the government at the time of its enactment. Democrats contended that the IRA's energy credits would push the US toward a green energy future while protecting workers with prevailing wage and apprenticeship requirements and sought to level the GOP's same criticisms of the IRA toward the 2017 TCJA, a signature Republican law. A WCEY Tax Alert has details.

Ahead of the hearing, Committee Republicans released a Joint Committee on Taxation analysis finding that companies with over $1 billion in sales receive more than 90% of green energy tax subsidies, and banks and insurers alone receive over half of green energy tax incentives.

A separate JCT report described energy tax changes made by the IRA.


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