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April 28, 2023

What to expect in Washington (April 28)

Speaker Kevin McCarthy (R-CA) successfully won House approval Wednesday of the Limit, Save, Grow Act of 2023 (H.R. 2811), which would suspend the statutory debt ceiling until March 31, 2024, or until $1.5 trillion of debt over the current statutory limit is incurred (whichever happens first), while making trillions in spending cuts across a broad swath of programs and repealing a number of tax breaks enacted in last year's Inflation Reduction Act (IRA). "Today's vote … sends a clear message to President Biden — continuing to ignore the problem is not an option. The President must come to the table to negotiate," Speaker McCarthy said. The President continues to call for a "clean" debt limit bill. "I'm happy to meet with [Speaker] McCarthy, but not on whether or not the debt limit gets extended. That's not negotiable," he said. Punchbowl reported Senate Majority Leader Chuck Schumer (D-NY) as saying of Speaker McCarthy, "His passing a bill was a step backward and brought us closer to default."

Despite the successful House vote, the impasse continues and what happens next is unclear, along with when it needs to happen. In terms of the congressional calendar, the House is out next week, but the Senate is in session. Treasury is already employing extraordinary measures to cover the nation's debts. A Huffington Post survey of debt limit watchers suggested, in light of new data on the 2023 tax season, the "X date" for necessary action to avoid default is unlikely to occur in June, but it is not impossible. An economist at analytics firm Wrightson ICAP said the new data pointed away from June for the "X date," but it's still too early to take it off the table definitively. Another economist, at Oxford Economics, expressed a "fairly high degree of confidence now that they can get past June 15" but said there is "no way to avoid a crisis in the absence of a debt limit increase or suspension by the beginning of August."

Politico reported Goldman Sachs as saying the government is unlikely to hit the drop-dead date for raising the debt limit until late July.

Political dynamics — The New York Times reported: "[B]usiness groups, fiscal hawks and some congressional Democrats are calling on Mr. Biden to begin negotiating in earnest toward a deal that would avoid a default on the debt, which could come as soon as June or July. Mr. Biden and his aides now must choose how quickly to engage with [Speaker McCarthy and other congressional leaders] — and on what terms. The president faces a cascading set of decisions as the nation, which has already bumped up against its $31.4 trillion debt limit, barrels toward default. He will need to find what, if any, common ground on spending cuts he has with Republicans, who do not share his preference for reducing the nation's debt path largely by raising taxes on corporations and the rich. He will need to determine if he is prepared to sign any debt limit increase that is attached to conditions demanded by House conservatives."

The Washington Post said, "The risk for Biden is that some voters may accept the argument that since Republicans have now offered a proposal, flawed or not, it is up to the White House to come to the table. Biden has long argued that raising the debt limit, which covers spending approved by both parties over the years, is a shared obligation, not something for which Republicans can extract concessions."

On the flip side, Politico reported, "After House Republicans barely passed their debt bill, House Democrats are getting ready to pull out the playbook that worked for them in 2018 to win back the majority in 2024. In those midterm elections, Democrats hammered Republicans over tough votes that swing seat lawmakers made on repealing Obamacare and enacting tax cuts. This time, Democrats think they'll be able to hitch vulnerable Republicans to Wednesday's vote pairing a debt limit hike with spending cuts."

Energy tax — The Joint Committee on Taxation staff released "Estimated Revenue Effects Of Division A, Title III Of H.R. 2811, The 'Limit, Save, Grow Act Of 2023,' As Amended" (JCX-7-23). The estimate showed the repeal of green energy tax credits would raise $515 billion over 10 years, after the rollbacks of ethanol and certain other credits were taken out by amendment.

Freedom Caucus Chairman Scott Perry (R-PA) April 26 introduced H.R. 2902, to repeal the alcohol fuels credit, the biodiesels fuel credit, the sustainable aviation fuel credit, the clean fuel production credit, the alcohol fuel, biodiesel, and alternative fuel mixtures credit, and other related provisions.

Tax — Separate from the debt limit effort, Politico Morning Tax reported on rumblings about an economic package House Republican tax-writers may be developing addressing TCJA tax provisions including restoring R&D expensing in the place of the IRC Section 174 R&D 5-year amortization requirement and the prior-law calculation for the IRC Section 163(j) interest deduction limitation, and the bonus depreciation phasedown. Addressing TCJA cliffs has long been mired in a partisan standoff over a child tax credit (CTC) expansion sought by Democrats. Regarding the House Republican bill, Politico said, "It may also include those still-secret retaliatory measures Republicans are preparing for European countries that impose a special tax on American companies as part of an international tax accord."

IRS — During the April 27 House Ways and Means Committee "Hearing on Accountability and Transparency at the Internal Revenue Service," Commissioner Daniel Werfel said the depletion of IRS resources has taken a toll on the ability to assess complicated returns from high-income taxpayers — individuals, partnerships, and organizations — and he wants the IRS to be resourced to ask the right questions, challenge issues, and ensure fairness. He later said the IRS is now not able to do the kinds of review the public wants to demonstrate that the tax system is fair. Werfel said none of the additional funds provided under the IRA will be used to audit taxpayers earning less than $400,000 annually. Chairman Jason Smith (R-MO) addressed energy credits in an opening statement, saying, "Democrats supercharged the IRS with the hope of raising billions to pay for special interest tax breaks for the wealthy that are now projected to cost three times that amount. Now the IRS is dedicating billions to support these green corporate handouts. It's clear Democrats are all about subsidizing the low-emission lifestyles of the wealthy."

Global tax — Bloomberg Tax reported an official as saying at an International Fiscal Association conference that the OECD expects to release administrative guidance this summer for the global minimum tax, along with the information return companies will file for the tax and details on a safe harbor. "The OECD expects midyear to finish the 'GLoBE information return' — the return companies will file under Pillar Two — as well as the safe harbor based on the qualified domestic minimum top-up tax, or QDMTT, which lets countries apply the 15% tax domestically, said Jeff Mitchell, senior adviser at the OECD," the report stated.


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Washington Council Ernst & Young
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