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July 28, 2023

What to expect in Washington (July 28)

The Wall Street Journal reported on tension between the Biden administration's climate goals and "Made in America" requirements in the Inflation Reduction Act (IRA) and how they are defined, with some members and businesses pushing for a strict interpretation and others arguing that foreign elements in the supply chain help keep costs down. "In the latest salvo, a group of the largest steelmakers in the U.S., as well as the United Steelworkers union, criticized the Treasury Department's proposed approach to a bonus tax credit for clean-energy projects that rely largely on U.S.-made metal and components," the story said. "They argue that the department's treatment of a key component of solar panels [photovoltaic trackers] would let firms use steel from abroad and still qualify for the 10% credit, which would be available on top of other subsidies for building solar and wind farms."

The guidance is Notice 2023-38, addressing the IRA changes to IRC Sections 45 and 48 to provide a 10% domestic content bonus credit amount for facilities or projects, and the addition of new IRC Sections 45Y and 48E, which include a domestic content bonus credit amount for certain investments in qualified facilities or energy storage technologies. Before its release and since, the notice was the subject of speculation over what is classified as a manufactured product (versus simply steel or iron) because that allows for foreign-derived ingredients. Photovoltaic trackers are classified as manufactured products under the Notice.

Tax — The TCJA "pre-cliffs" on IRC Sections 163(j) and 174 plus bonus depreciation remain in limbo because of the partisan impasse over a potential Child Tax Credit (CTC) expansion, along with several tax extender provisions that expired at the end of 2021 and some that expired at the end of 2022 and probably some other tax proposals. Expiring at the end of 2025 are TCJA provisions affecting individuals and pass-throughs, as well as some significant tax extender provisions. These continue to be the subject of introduced bills, including:

  • House Ways & Means Committee member Lloyd Smucker's (R-PA) Main Street Tax Certainty Act (H.R. 4721) to permanently extend the IRC Section 199A 20% deduction of qualified income for pass-through businesses; and
  • Senate Finance Committee member Mark Warner's (D-VA) S. 2462, introduced July 26, to make permanent the seven-year recovery period for motorsports entertainment complexes.

The Government Accountability Office said in a July 27 report: "Between 2002 and 2019, the number of large partnerships — with over $100 million in assets and 100 or more partners — increased almost 600%. The IRS audit rate for large partnerships has dropped to less than 0.5% since 2007. About 80% of audits conducted don't find tax noncompliance. This may suggest that IRS isn't choosing the riskiest returns to audit or doesn't know how to find noncompliance in these businesses." Senate Finance Committee Chairman Ron Wyden (D-OR), long concerned over the issue, requested the report, and said, "The business structures are extraordinarily complicated, the tax rules that apply to them are riddled with loopholes, and the wealthy investors and corporations who use them to get out of paying a fair share know that the IRS has essentially zero ability to crack down."

Coming in September: A Finance markup of tax legislation intended to strengthen the US economic relationship with Taiwan was announced by Wyden and Ranking Member Mike Crapo (R-ID), following the July 12 release of a discussion draft on the issue with Ways & Means leaders. The Senate Foreign Relations Committee approved July 13 the Taiwan Tax Agreement Act (S. 1457) that would authorize the President to negotiate and enter into a tax agreement. The two proposals aren't necessarily mutually exclusive.

ERTC hearing — The House Ways and Means Oversight Subcommittee's July 27 hearing on the Employee Retention Tax Credit addressed the backlog of ERTC processing, IRS response to inquiries about ERTC credits, and other issues. Witness Linda Czipo of the New Jersey Center for Nonprofits highlighted "confusion and complexity surrounding the program's eligibility requirements and application procedures, and the proliferation of … third-party providers that siphon much-needed resources away from nonprofit missions and community programs." Under questioning from Subcommittee Ranking Member Bill Pascrell (D-NJ) about outreach services to make non-profits aware of the ERTC, Czipo said organizations conducted workshops, hosted Webinars, and sent emails to make organizations aware of the programs and changing requirements. "We still hear from members that don't know that non-profits are eligible for this program," she said. Czipo said streamlining the application process is a key point because complexity has led to unsavory behavior around the credit. "The simpler we can make this, the easier it is for organizations to deal with," she said, adding that extra time for the application matters because organizations need to analyze their systems. Pascrell said the IRA gave IRS funding to pursue enforcement efforts related to the ERTC.

Health — On Wednesday (July 26), the House Ways and Means Committee advanced two bills that aim to increase transparency in health care and address consolidation among providers and payers. Also on Wednesday, the Senate Finance Committee voted to advance the Modernizing and Ensuring Pharmaceutical Benefit Manager (PBM) Accountability (MEPA) Act, which includes several provisions aimed at advancing PBM transparency and preventing "abusive" practices such as spread pricing and remuneration based on the price of a drug, among other provisions, in Medicare Part D and Medicaid.

Global tax — An EY Tax Alert, "OECD/G20 Inclusive Framework releases Subject to Tax Rule model treaty provision and commentary," is available here.

An EY Tax Alert, "OECD releases public Consultation Document on Pillar One Amount B on baseline distribution," is available here.

Nominations — President Biden nominated former Maryland Governor (and Baltimore Mayor and presidential candidate) Martin O'Malley as Commissioner of the Social Security Administration. "As Mayor of Baltimore and Governor of Maryland, he adopted data and performance-driven technologies to tackle complex challenges facing the communities he served — and I saw the results firsthand when we worked together during my time as Vice President. As Governor, he made government work more effectively across his administration and enhanced the way millions of people accessed critical services," the President said. Senator Joe Manchin (D-WV), whose vote is closely watched for certain nominations, released a statement saying he applauded "the Biden Administration for selecting former Governor Martin O'Malley to serve as commissioner of the Social Security Administration. When we were both serving as governors, I found him to be a strong leader and compassionate person who understands the needs of America's seniors."

CBO Director Phillip Swagel was appointed to a second four-year term.

Congress — The House approved the Military Construction/Veteran's Affairs appropriations bill (H.R. 4366) on a vote of 219 to 211, overcoming concerns waged by conservatives, and is now out for six weeks. The chamber has designated the period from Friday, July 28 through Monday, September 11 as a district work period, returning September 12 with only 12 legislative days planned prior to the September 30 deadline for the FAA reauthorization and aviation excise taxes, the farm bill, and government funding.

Consideration of the other appropriations measure before the House this week, on Agriculture/FDA (H.R. 4368), was postponed until after the recess. It was widely observed that concerns expressed by conservatives about the first appropriations bill considered by the House — their insistence over FY2022 spending levels, without rescissions from unspent funds, and adequate time to review bills — portend the difficulty in moving the remaining 11 prior to the September 30 deadline. Freedom Caucus members are especially concerned about packaging the appropriations bills as one.

Reuters reported that this week's "Republican infighting over spending levels clouded the path ahead for the other bills." The report said, House Speaker "McCarthy and Senate Majority Leader Chuck Schumer met to discuss the prospects for compromise spending measures and other legislation on Thursday. The speaker later said they both committed to passing appropriations bills on time and discussed the possibility of early bicameral negotiations." House appropriators are marking up to FY2022 levels at the urging of conservatives, while the debt limit bill agreement called for adhering to FY2023 spending levels for FY2024 appropriations bills. Senate appropriators are pursuing a supplemental beyond the FY2023 levels. Regarding differences in funding, the report said, "With the two chambers at least $120 billion apart, some lawmakers expect Congress to avoid a shutdown on Oct. 1 by passing a stopgap measure that would give lawmakers time to negotiate into the fall and winter."

An article in today's New York Times (NYT) said the Ag/FDA bill was "stymied by internal divisions over funding and social policy that threaten to make it impossible for them to avoid a shutdown in the fall." Combined with the difficulty that preceded the vote on the Military/Veterans bill, the report said, "The spending clashes encapsulated the difficulties ahead for Republicans as Speaker Kevin McCarthy tries to mollify conservatives by cutting spending and adding culture-war provisions without losing the support of more mainstream Republicans, particularly those in districts won by President Biden."

Bloomberg reported: "The US House budget process ground to a sudden halt Thursday amid simmering conflicts over spending levels and hot-button social issues, raising the risk of a government shutdown ahead of a Sept. 30 deadline. Lawmakers in the House and Senate are leaving Washington this week for an extended August recess with budget disagreements entirely unresolved." The report said the House will return September 12 with not only 11 appropriations bills to approve before September 30 but the task of reconciling differences with the Senate.

Meanwhile, the Senate July 27 approved the National Defense Authorization Act for the fiscal year 2024 (S. 2226) on an 86-11 vote, then confirmed several nominations and took a procedural step on others. An NYT report said, regarding the NDAA vote, "The Senate on Thursday gave overwhelming approval to the annual defense policy bill, sidestepping a contentious debate over [issues] for service members and quashing efforts to limit aid for Ukraine in a show of bipartisanship that set up a bitter showdown with the House … its fate is deeply in doubt as the measure heads for what is expected to be a contentious negotiation between the Democratic-led Senate and the Republican-led House, where right-wing hard-liners have attached a raft of conservative social policy mandates. Republicans in the Senate decided not to pick such fights in that chamber, shelving amendments … The result is vastly different bills that could make it difficult for the House and Senate to hash out a bipartisan final agreement, something that has not eluded Congress in more than six decades."

Politico said, "The Senate version of the annual defense bill — and the big, bipartisan vote — was starkly different from what happened in the House, where the NDAA was loaded up with social policy amendments … As the bill moves to a conference committee, all eyes will be on Kevin McCarthy to see what kind of a deal the speaker can secure that moves a final version of the legislation to passage in both chambers."

Powell's remarks - After the Federal Reserve Board moved on July 26 to raise its benchmark interest rate another quarter-point, for a 22-year high of between 5.25% and 5.5%, Fed Chairman Jerome Powell told reporters that the central bank's staff is no longer predicting a recession in 2023. "The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession," Powell said. "I wouldn't use the term 'optimism' about this yet. We've seen so far the beginnings of disinflation without any real costs in the labor market. And that's a really good thing." On the prospects for a "soft landing" in which inflation is subdued without damaging the job market, Powell said, "We have to be honest about the historical record, which does suggest that when central banks go in and slow the economy to bring down inflation, the result tends to be some softening in labor market conditions. That is still the likely outcome here."

Powell indicated the Fed's campaign against inflation was far from over. "Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to 2% has a long way to go," he said. "We intend to keep policy restrictive until we're confident that inflation is coming down sustainably to our two percent target. And we're prepared to further tighten, if that is appropriate. We think the process still probably has a long way to go."

Crypto regulation — The House Financial Services Committee, working in tandem with Agriculture Committee Republicans, on July 26-27, approved the first regulatory frameworks for digital assets, in what Chairman Patrick McHenry (R-NC) called "a historic step for American innovation and consumer protection." Republicans were able to attract the support of six Democrats for their broad "market structure" cryptocurrency bill, which designates some digital assets as SEC-regulated securities and others as commodities regulated by the Commodity Futures Trading Commission (CFTC). Ranking Member Maxine Waters (D-CA) opposed the bill, saying, "You don't need to invent new regulatory structures simply because crypto companies refuse to follow the rules of the road."

A negotiating process that had fostered hopes for a separate bipartisan bill regulating payment stablecoins — a token whose value is pegged to that of a fiat currency like the U.S. dollar - broke down on Thursday, when the White House raised objections and Democrats asked to postpone the bill's consideration until after the August recess. Republicans instead pivoted to a previous GOP draft of the stablecoins bill and went ahead, in a markup that lasted until 10:30 p.m. Five Democrats supported the stablecoins bill despite the partisan discord. "It was the White House's unwillingness to compromise that has once again brought negotiations to a halt," McHenry said at the markup. "It's a shame, but at some point you have to put the pens down." Democrats protested the majority's move by leaving the room and noting the absence of a quorum, along with other dilatory tactics like making points of order, asking for roll call votes and requiring readings of the bill's complete text. On the Senate side, Banking Committee Chairman Sherrod Brown (D-OH), a crypto skeptic, appears to have little interest in mounting a similar effort.

The EY Webcast, "Tax in a time of transition: legislative, economic, regulatory and IRS developments," has been rescheduled to August 18. Register here.

What to Expect in Washington won't be published while Congress is away, but other WCEY Alerts will be issued as events warrant.


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