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May 24, 2023

What to expect in Washington (May 24)

Debt limit discussions between House Speaker Kevin McCarthy (R-CA) and President Biden and their staffs are again at an impasse, with the two sides far apart and each laying the groundwork for blaming one another for a potential default that could come as soon as June 1. After the President previously said he would be "blameless" in the event of default — as Republicans alone are insisting that a spending cuts-plus discussion happen in the context of addressing the debt limit — Speaker McCarthy said in a May 23 statement that after the President refused to negotiate for around 100 days, "any default would be the Biden Default." The sharply worded statement followed optimism after a Monday meeting that Speaker McCarthy said was "better than any other time we've had discussions" and productive. "I believe we can get it done," he said.

"Bottom line is that we're going to have to see some movement or some fundamental change in what they're doing," Rep. Garret Graves (R-LA), a lead negotiator, said of the White House negotiating team, as reported by Bloomberg Government. "Right now, we don't have additional meetings set up." Still, the report said, "Graves acknowledged that there has been 'substantial progress' and the two sides are 'very close' in some areas."

Concessions to Republicans to accompany a debt limit bill that remain under discussion include spending caps, energy permitting, rescinding COVID funds, and work requirements for federal programs. Conservative Republicans are the most insistent on spending cuts as a "redline," while Democrats are wary of work requirements. "The political reality is weighing on both Republicans and Democrats in the debt-limit talks, which continued Tuesday on Capitol Hill with no sign of imminent resolution," the New York Times reported. "Mr. McCarthy and Mr. Biden are weighing compromises that would likely result in losing the votes of both the hard left and right flanks in Congress, meaning they would need to assemble a coalition of Republicans and centrist Democrats to back any final deal to avert a default."

Along with both sides setting up the other for blame in the event of default, there is broad speculation about the coalition of members necessary to get a bill enacted. A tweet last week from Rep. Alexandria Ocasio-Cortez (D-NY) — "McCarthy has nowhere near the votes for a deal and therefore cannot negotiate debt ceiling. You need 218 votes. GOP has maybe ~150. They will need anywhere from 50-100 House Dems to pass anything" — was cited by the Washington Post as being praised by some Senate Democrats as a recognition of the leverage the party still possesses in the talks.

Politico reported today, "White House aides privately estimate they may need to deliver as many as 100 Democratic votes to ensure an eventual debt limit deal can pass the narrowly divided House … the realization that the party might need to supply a sizable percentage of the House votes to avert an economically disastrous default — not to mention passage in the Democratic-controlled Senate — has increasingly shaped the White House's negotiating strategy. Aides have hardened their stance against certain GOP-proposed budget cuts and social welfare restrictions for fear of sparking a revolt among Democrats they may ultimately need to support a deal."

Tax — In Politico Morning Tax May 23, Rep. Ron Estes (R-KS) reupped his concerns about Pillar Two of the OECD-led global tax agreement, after expressing his support for Pillar One during March hearings in the Committee. Estes said the 15% global minimum tax doesn't have sufficient support from either party to advance in Congress. "I think the right answer is: Let's put a moratorium onto Pillar Two and actually focus on getting Pillar One done, so that we can actually correct some of the problems with what's Pillar Two right now," Estes said. He also penned a letter in Tax Notes May 8 expressing concerns about Pillar Two, including with the undertaxed profits rule, which "allows other countries to impose an extraterritorial tax on U.S. companies if they determine that their U.S. profits are not taxed at 15 percent," and the treatment of U.S. credits including the R&D credit.

Estes plans to accompany Chairman Jason Smith (R-MO) on a delegation next week to Paris to discuss the OECD global tax agreement, plus Germany and maybe other destinations, though the trip depends on progress on the debt limit deliberations ahead of a potential June 1 deadline. The House plans to adjourn on Thursday and, while Speaker McCarthy said it is possible and necessary to reach a deal this week, a 72-hour review has been promised for legislation, prompting speculation that the House could be back next week.

The report also said the Committee plans action before mid-June on a tax/economic package that is expected to address (among other things) TCJA tax provisions including restoring R&D expensing in place of the IRC Section 174 R&D five-year amortization requirement, the prior-law calculation for the IRC Section 163(j) interest deduction limitation, and the bonus depreciation phasedown.

As part of the package there has been discussion of a proposal to penalize companies based in countries that tax US companies under the global tax deal's UTPR mechanism, which may be made public sooner than the broader package, possibly this week. The Bloomberg Daily Tax Report reported today, "Before lawmakers depart [to Europe], the panel is expected to unveil legislation taking aim at the UTPR, according to a GOP Ways and Means staffer … Republican members of the committee are set to get a first glimpse at legislation Wednesday during their weekly meetings … The panel hasn't provided many details to members but the bill is likely to impose a reciprocal tax on countries imposing a UTPR or similar taxes, the staffer said. A bill introduction is expected to come as early as Thursday."


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Washington Council Ernst & Young
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