October 29, 2023
Americas Tax Policy: This Week in Tax Policy for October 27
This week (October 30 - November 3)
Congress: The House is out of session until Wednesday, November 1. Under the schedule set by Speaker Johnson to pursue regular-order consideration of spending bills, the week of October 30 is Legislative Branch, Interior & Environment, and Transportation-HUD; the week of November 6, Financial Services & General Government and Commerce, Justice, Science; then, the week of November 13, Labor-HHS and Agriculture. The Ways & Means Committee does not currently have any hearings scheduled.
The Senate will next convene at 3 p.m. on Monday, October 30, with a judicial nomination vote at 5:30 p.m. Majority Leader Chuck Schumer (D-NY) has taken a procedural step (filing cloture) toward a vote on the nomination of former Treasury Secretary Jack Lew to be Ambassador to Israel. Work is also expected to continue on the three-bill appropriations minibus comprising the Military Construction-VA, Agriculture, and Transportation-HUD bills.
On Thursday, November 2, the Senate Finance Committee will hold a hearing on the nomination of former Maryland Governor (and Baltimore Mayor and presidential candidate) Martin O'Malley to be Commissioner of the Social Security Administration.
Last week (October 23 - 27)
Speaker elected: Rep. Mike Johnson (R-LA) was elected Speaker of the House with all 220 Republicans voting (there was one GOP member absent) for him on October 25, the fourth candidate for the position in a three-week process. He has already set an ambitious schedule for regular-order consideration of appropriations bills, said a continuing resolution (CR) after November 17 should end January 15 or April 15 so the Senate can't "jam" the House with a year-end omnibus, and said he would create a bipartisan debt commission. Rep. Johnson was lesser known than other candidates prior to his ascension to the Speaker role, which was widely observed to have been a benefit in a chamber with many relatively new members, some with an aversion to the Washington establishment. The dust is still settling from the three-week process of electing a new Speaker, but the November 17 deadline for government funding could potentially be controversial. Bloomberg reported Rep. Chip Roy (R-TX) as saying a next CR can't be a "punt," but rather needs significant spending reduction like the Republican CR proposal (to adhere to the FY2022 top-line spending level) that was blocked by some members September 29. Some Republicans have said they are opposed to CRs under any circumstances; it's unclear if that opposition softens under a new Speaker and given the turmoil that preceded his election, but it's also clear that Democrats will not support a CR that follows these conservative Republican objectives.
The impetus for Republican calls for spending cuts is concern over the deficit. On the related issue of economic growth, President Biden October 26 trumpeted 3rd quarter GDP growth as an affirmation of his policies. "I always say it is a mistake to bet against the American people, and just today we learned the economy grew 4.9% in the third quarter … " he said. "It is a testament to the resilience of American consumers and American workers, supported by Bidenomics — my plan to grow the economy by growing the middle class … I hope Republicans in Congress will join me in working to build on this progress, rather than putting our economy at risk with reckless threats of a shutdown or proposals to cut taxes for the wealthy and large corporations, while slashing programs that are essential for hard-working families and seniors."
Tax bill prospects: Of course, the selection of a new Speaker and return to legislating raises questions about what will happen with tax and other items that might ride on future government funding bills. Tax Notes was the first to report on these prospects October 26, saying Republicans from New York and other high-tax states were told by Speaker Johnson that a major tax package wouldn't move without an increase in the TCJA $10,000 state and local tax deduction cap. Some prominent members expressed doubt about the potential for such a package this year. House Budget Committee Chairman and Ways & Means member Jodey Arrington (R-TX), who sponsors a bill (H.R. 2406) to extend 100% expensing, "has his sights set on 2025 for action on the TCJA provisions," according to the report. "We'll put it out, we'll get it out," he said of tax legislation. "We just won't get it done. SALT's going to be the big rub." Senators John Cornyn (R-TX) and Chuck Grassley (R-IA) were cited as suggesting the gulf between the two parties on expanding the Child Tax Credit (CTC) could be too wide for a deal before 2025.
The Bloomberg Daily Tax Report (DTR) reported Senator Cornyn, a Finance Committee member, as saying, "It's hard for me to see the House and the Senate coming together on a package of extenders and other provisions that typically get taken up at the end of the year." The report cited other senators as saying tax package discussions are continuing, but that fully formed legislation is still a long way off. "Discussions are continuing to be ongoing between both Senate Finance and Ways and Means leaders and I believe that we all intend to see if a package can be put together," Senate Finance Ranking Member Mike Crapo (R-Idaho) told Bloomberg Tax. "I'm not saying I know where they're going to end up, we aren't at that point yet."
Politico Morning Tax offered a more optimistic assessment: "Now that the House has gotten back on track, at least for the moment, lobbyists have said that talk about a year-end tax bill has picked up — if for no other reason than people need to be ready in case the climate does become favorable near the end of the year. Also keep in mind: Those Republicans from New York and California wouldn't have quite the same amount of leverage — or de facto veto power — over a bipartisan tax bill, nor is this year their last or maybe even best chance to score SALT changes. (The current cap expires at the end of 2025, along with lots of other individual provisions from the Tax Cuts and Jobs Act.)"
R&D: An October 24 Wall Street Journal (WSJ) story on the IRC Section 174 five-year amortization requirement for R&D expenses (15-year for foreign research) rather than expensing that took effect in 2022 described tax liabilities for businesses small and large and resulting layoffs. "At best, it is a cash flow challenge, costing large public companies hundreds of millions or billions of dollars, which finance chiefs have said could dent their R&D spending," the story said of the change. "At worst, business owners wonder if their companies will make it, with some who run small and medium-size firms slowing growth, laying off workers or dipping into personal savings to cover tax bills due this month." The story noted the oft-described bipartisan support for reversing the policy, impeded by differences over whether to pair it with a child tax credit expansion. It also said, "The weekslong effort to name a House Speaker isn't expediting any change." The WSJ previously wrote about the issue in the September 12 print edition, as "Bipartisan Support Isn't Enough to Change Tax Law."
Education tax: At the October 25 House Ways & Means Committee hearing on education tax policy, Chairman Jason Smith (R-MO) discussed expanding 529 accounts. "In 2017, Republicans took the first step and allowed 529 accounts to cover K-12 education tuition up to $10,000. But 529 accounts could also be amended to cover other educational costs like books, tutoring to help kids catch up after multiple years of forced virtual school, educational therapies for students with disabilities, and supplies for the many families now choosing to homeschool," he said. "These 529 accounts could also help address America's skilled labor shortage by expanding to cover skilled trade or licensing programs." In response to a question from Rep. Danny K. Davis (D-IL) about what programs are complementary to vocational training programs, witness Girard Melancon said the Work Opportunity Tax Credit (WOTC) is a viable tool for training workers, especially those that have been left out of the workforce pipeline. The credit Incentivizes employers to invest in their workers, Melancon said.
Global tax: Both Tax Notes and the Bloomberg DTR reported OECD official Juan Carlos Perez Peña as saying the Inclusive Framework on BEPS is considering issuing Pillar 2 guidance on the treatment of deferred tax assets in jurisdictions with federal and subnational taxes. Tax Notes reported that Perez Peña, at an International Fiscal Association event in Cancun, Mexico, said that the GLOBE rules on which Pillar 2 is based create a deferred tax asset in the jurisdiction in which the entity records a loss, instead of using a loss carryforward mechanism. Upon the suggestion that it may be possible to recast the deferred tax asset at 15% accounting for both the federal and subnational level, because GLOBE rules do not distinguish between the two, he said, "We are working on this issue … The result has to be equivalent to a 15 percent [rate]."
DTR reported Perez Peña as saying that, regarding additional guidance on its treatment of deferred losses in countries that have multiple levels of taxation, "This is something we're already working with the Inclusive Framework on." The story explained: "If a company has a 'deferred tax asset' — in this case, a loss that a company can carry forward and use to lower a taxpayer's liability in the future — in a country that imposes a tax rate below 15%, the Pillar Two rules 'recast' the loss at a 15% rate. That means it is treated as a deferred loss under the new minimum rate. However, the Pillar Two rules don't address how a deferred tax asset is recast under the 15% rate when a company is in a jurisdiction that taxes differently at the state and federal levels, such as in the Swiss cantons or the US."
The October 26 OECD technical webinar on the Multilateral Convention to Implement Amount A of Pillar One included a description of limited exclusions, including for regulated financial services, extractives, autonomous domestic business, and supplies with a defense purpose. There was discussion of, under the Tax Certainty Framework on Amount A, strict deadlines for review processes and reaching decisions on a review in the interest of tax certainty, and consequences if deadlines aren't met. Further, there was also discussion of the list of existing measures subject to removal once the MLC enters into force.
IRA guidance tracker: This table describes select IRS guidance related to the Inflation Reduction Act.