May 21, 2023
Americas Tax Policy: This Week in Tax Policy for May 19
This week (May 22-26)
Congress: The House is in session but out the following week (Memorial Day, May 29). The Ways and Means Committee has trade and Social Security hearings set, but nothing on tax. The Senate is scheduled to be in recess next week (the week of May 22). President Biden is at the G7 Hiroshima Summit being held May 19-21, returning Sunday — having cut the trip in half and scrapped the leg of the trip that included visits to Australia and Papua New Guinea — to attend to debt limit negotiations. The President said he will hold a press conference upon his return. Debt limit default looms as early as June 1, according to Treasury Secretary Janet Yellen.
Last week (May 15-19)
Debt limit: Discussions between White House negotiators and House Republicans were expected to continue Friday night and over the weekend after an earlier pause due to a disagreement over House Republicans' insistence that discretionary spending levels be set back to FY 2022 levels. Punchbowl reported, "The dispute here, broadly speaking, is that Republicans want to revert spending to FY 2022 levels and Democrats want to freeze current spending, according to sources. The gap between those two positions is more than $100 billion this year alone." As has been the case with leadership-driven negotiations on other issues, factions within both parties are expressing unease about the direction of the debt limit talks and speculating about the coalition of members necessary to get a bill enacted. The conservative House Freedom Caucus upset the talks May 18 by saying they should cease until the Senate passes the House-passed Limit, Save, Grow Act that includes undetailed spending cuts and a rollback of most Inflation Reduction Act (IRA) clean energy credits. The Speaker had previously expressed a new sense of optimism about negotiators reaching a deal over the weekend, which may be necessary to give Congress time to process a bill before a potential June 1 default deadline. "I see the path that we can come to an agreement. And I think we have a structure now and everybody's working hard. And I mean we're working two or three times a day, then going back getting more numbers," he said May 18, after the White House narrowed its negotiating team earlier in the week. The talks have focused on potentially palatable proposals like permitting reform, spending caps, and rescinding unspent Covid funds, and Speaker McCarthy has also been pushing for work requirements in certain entitlement programs.
Just as conservative Republicans are pumping the breaks on the negotiations, progressive Democrats are showing unease with President Biden's stated openness to some new work requirements for federal programs. In his latest comments, President Biden said before leaving for the G7, "I'm not going to accept any work requirements that are going to impact on medical, health needs of people. I'm not going to accept any work requirements that go much beyond what I voted years ago, for the work requirements that exist. But it's possible there could be a few others, but not anything of any consequence." The New York Times reported, "Talk of such a compromise has set off a wave of anger among liberals on Capitol Hill, who have begun openly fretting that the president might agree to a deal they cannot accept. 'I cannot in good conscience support a debt ceiling proposal that pushes people into poverty,' said Senator John Fetterman, Democrat of Pennsylvania. The pushback reflects the political crosscurrents at play in the talks between Mr. Biden and Mr. McCarthy, both of whom have to contend with slim majorities in Congress and uncompromising political bases that will find any agreement hard to swallow." Rep. Alexandria Ocasio-Cortez (D-NY) wrote on Twitter: "McCarthy has nowhere near the votes for a deal and therefore cannot negotiate [the] debt ceiling. You need 218 votes. GOP has maybe ~150. They will need anywhere from 50-100 House Dems to pass anything. Dems have 213 votes for a clean bill & just need to pick up 5."
Tax proposals ruled out: Democratic tax increase ideas have been ruled out of the negotiations, in public and behind closed doors. "There is not going to be a tax discussion in this debt ceiling," Speaker McCarthy said on CNBC May 17. "The Inflation Reduction Act is costing more than three times what they projected it would cost. For 21 years, we are spending more money than we bring in. No household would live this way." Tax increase proposals put forward by the White House — including what appear to be the Biden budget proposals to apply wash sale rules to cryptocurrency and repeal deferral of gain from Section 1031 like-kind exchanges — were earlier rejected in staff-level negotiations. The May 16 Washington Post reported, "On a phone call last week, senior White House officials floated about a dozen tax plans to reduce the deficit as part of a broader budget agreement with House Republicans, including a measure aimed at cryptocurrency transactions and another for large real estate investors … They were all swiftly rejected by the GOP aides on the call … " The report said, "The real estate plan and the cryptocurrency rule changes would probably raise about $40 billion in new tax revenue, compared with the $4.8 trillion in spending cuts Republicans are seeking to close the deficit."
Citing Republican unwillingness to consider new revenue proposals on individuals and corporations, Senator Bernie Sanders (I-VT) and 10 Senate Democrats called on President Biden to "exercise your authority under the 14th Amendment of the Constitution, which clearly states: 'the validity of the public debt of the United States … shall not be questioned.'"
Energy tax: The Senate Finance Committee's May 18 hearing on "Tax Incentives in the Inflation Reduction Act: Jobs and Investment in Energy Communities" was a response to House Republicans proposing to repeal nearly all of the clean energy policies in the IRA. Democrats sought to expose what is at stake if those incentives are forgone, while Republican members asserted that facilitating energy permitting — which House GOP negotiators are pushing in debt limit negotiations — trumps tax credits for expanding domestic energy production. Chairman Ron Wyden (D-OR) said, "It would be a major act of economic self-sabotage, because a majority of the investments announced since the IRA became law are going to states represented by Republican Senators." Ranking Member Mike Crapo (R-ID) said there are nontax impediments to emissions reductions, and some investments will be lost without a significant expansion of transmission lines, which gets into the issue of permitting reform. Senator John Thune (R-SD) similarly said permitting reform has always been the impediment to energy investment. Senator Bob Menendez (D-NJ) said the IRA is a driver of good-paying clean energy jobs, and if Republicans have their way, progress resulting from the bill would be lost.
An EY Alert, "IRS issues guidance on domestic content bonus for clean energy project credits," is available here.
Tax treaties: The Senate Foreign Relations Committee has noticed a June 1 (at 10:30 a.m.) business meeting on matters including the US-Chile tax treaty. The treaty, which was cleared by the Foreign Relations Committee in the last Congress but not the full Senate, may be poised to advance now that Republican concerns about potential double taxation relating to foreign tax credits have been addressed. The treaty must move through Foreign Relations again, and Chairman Menendez said he would bring it up. "Senate Finance and Foreign Relations Committee lawmakers and Treasury agreed late last week on language that addresses lingering concerns related to double taxation because of changes made under the 2017 tax law … [that] leaves the treaty and its reservations unchanged," Bloomberg Tax reported May 18. "A separate declaration will be added to the ratification resolution, saying the Senate and Treasury will continue conversations and remedy future tax treaties and conventions to reflect updated law … Because Senate lawmakers don't ratify treaties — they consent to ratification through approval of a resolution — the declaration reflects an agreement between the two branches and wouldn't create any new obligation or change the rights of Chile in any way."
Taiwan: There was some sense of potential movement on a US-Taiwan tax agreement after a bipartisan group of Senate Foreign Relations Committee members on May 5 introduced the Taiwan Tax Agreement Act of 2023, authorizing the Biden Administration to begin negotiations with Taiwan to conclude a tax agreement; followed by the bipartisan "Four Corners" group of congressional tax-writing committee leadership May 10 saying the issue "requires the expertise of the tax-writing Committees in Congress." However, a Politico article said the Senate Foreign Relations and Finance committees are apparently in a jurisdictional tussle over the issue, with Foreign Relations Chair Menendez saying, "As far as I'm concerned, it's a treaty, and virtually all treaties end up in the Foreign Relations committee." The Senate Finance Committee is working on its own approach, and Ranking Member Crapo said it's not a treaty issue but an attempt to use the tax code to accomplish the same objective. "The problem is coming to a head in the wake of a bipartisan push to develop U.S. semiconductor manufacturing capacity, which relies in part on investment by industry giant Taiwan Semiconductor Manufacturing Company and its suppliers. The firm is building a massive chip facility in Arizona," Politico said. The need for action has also attracted attention on the House side of the Capitol and in the Administration. During a House Ways & Means Committee hearing in March, Secretary Yellen said, "We recognize that there's a problem there and are looking at potential ways to address it."
Senate Budget Committee: The May 17 hearing, "The Rich Get Richer, Deficits Get Bigger: How Tax Cuts for the Wealthy and Corporations Drive the National Debt," focused on whether to continue or change the tax policies in the 2017 Tax Cuts & Jobs Act (TCJA); whether tax cuts or spending are responsible for the federal deficit and therefore should be changed to cut the deficit; and whether the green energy tax incentives were beneficial. Chairman Sheldon Whitehouse (D-RI) asked Samantha Jacoby from the Center for Budget and Policy Priorities about her testimony regarding profit shifting and how it poses a disadvantage to small businesses who are not able to make use of a tax haven. Jacoby said the TCJA changed the way multinational corporations are taxed and large corporations with big foreign profit centers pay less on those profits than on domestic profits. (Her testimony said, "The 2017 law exempted certain foreign income of U.S. multinationals from U.S. tax and added several provisions, including the global intangible low tax income (GILTI) minimum tax, to try to limit incentives for foreign profit shifting. These provisions have serious design flaws, however, and leave significant room for multinationals to avoid taxes by shifting their profits to low-tax countries.") Ranking Member Chuck Grassley (R-IA) suggested that transferability and other features for green energy credits in the IRA result in wealthy taxpayers and businesses paying less tax, and that extending R&D expensing and 100% expensing would be more beneficial than the green energy incentives in the IRA. With witness support, Senator Chris Van Hollen (D-MD) asserted that the TCJA did not pay for itself.
TCJA: A CBO report said if the expiring individual income tax provisions of the 2017 TCJA were extended, deficits would be larger than those in CBO's baseline, on net, by $2.5 trillion over the 2024–2033 period. Global tax: In the Bloomberg Daily Tax Report May 16, Finance Committee Ranking Member Crapo said of Pillar Two of the OECD-led global tax agreement, "the Biden administration agreed to the global tax code's enforcement mechanism that invites foreign governments to pursue new discriminatory taxes against our companies. This extraterritorial enforcement mechanism — the Undertaxed Profits Rule — blatantly undermines important, job-creating tax policies passed by Congress on a bipartisan basis." He continued, "The global tax code provides a sanctioned pathway for each foreign government to enact its own 15% domestic minimum top-up tax on income earned by large businesses in that country. What's the rub? The administration agreed to give foreign governments priority to soak up taxes collected by the US under the TCJA minimum tax."