November 1, 2023
What to expect in Washington (November 1)
The increase in Internal Revenue Service (IRS) funding enacted in the Inflation Reduction Act (IRA) is, suddenly, back in the news, as new House Speaker Mike Johnson (R-LA) proposed rescinding some of the new money to pay for $14.3 billion in Israel aid even though clipping funding for the agency is widely regarded as a revenue loss, not gain. The Israel Security Supplemental Appropriations Act could be voted on as soon as Thursday and Democrats are likely to be opposed. The bill calls for clawing back unobligated funds on enforcement, operations support, direct file, Treasury Inspector General for Tax Administration, Office of Tax Policy, Tax Court, and departmental offices; essentially, most areas targeted for funding except taxpayer services and modernization.
On Fox News, Speaker Johnson said, "My intention and my desire in the first draft of this bill is to take some of the money that has been set aside for the building and bulking up the IRS right now. They have about $67 billion in that fund, and we will try to take the $14.5 [billion] necessary for this immediate and urgent need. We will deal with the rest of that issue later." Asked about Democratic support, he said, "I understand their priority is to bulk up the IRS. But I think, if you put this to the American people, and they weigh the two needs, I think they're going to say standing with Israel and protecting the innocent over there is in our national interest and is a more immediate need than IRS agents."
The inclusion of the IRS funding source makes even more complicated the Israel aid issue, which has already caused divisions among Democrats. There are differences among Republicans as well. Senate Republican leader Mitch McConnell (R-KY) supports pairing Israel aid with money for Ukraine, along the lines of the Administration's more than $100 billion supplemental funding request to cover those two issues plus border security resources. Ukraine funding has been opposed by some conservative Republicans and was dropped from consideration in conjunction with the September 30 continuing resolution (CR).
The narrow bill won't be accepted by the Democratic-led Senate. Majority Leader Chuck Schumer (D-NY) October 31 criticized the House bill as inadequate, for the omission of other priorities and the IRS funding rescission. He said emergency spending should not be offset, and that has historically been the case. Senate Finance Chair Ron Wyden (D-OR) opposed the funding cut in a letter, and separately "said he plans to hold a hearing in the coming weeks as he investigates how the wealthy avoid paying taxes," the Bloomberg Daily Tax Report said. On a related topic, the Senate October 31 confirmed by a 53-43 vote the nomination of former Treasury Secretary Jack Lew as Ambassador to Israel. The Senate may as soon as today pass a three-bill appropriations minibus comprising the Military Construction-VA, Agriculture, and Transportation-HUD bills.
Both Senators Schumer and McConnell said following the regular Tuesday policy lunches that they were working on details of a supplemental funding package.
The House is back in session today for the first time this week, with Legislative Branch, Interior & Environment, and Transportation-HUD appropriations bills on the agenda. The chamber is slated to have DC workweeks until Thanksgiving, or essentially a 10-week stretch in session after having given up a planned October break amid the Speaker elections. Rep. Earl Blumenauer (D-OR), a longtime Ways & Means Committee member known for his efforts on transportation and trade policy and signature bowties and bicycle lapel pins, October 30 announced his retirement. Rep. Kay Granger (R-TX), Appropriations Committee Chair, may soon announce that she won't run for reelection, according to news outlets in her district. Blumenauer and Granger both were elected to Congress in 1996.
Disaster tax relief — The House Ways and Means Committee markup of the Federal Disaster Tax Relief Act (H.R. 5863), introduced by Rep. Greg Steube (R-FL), that was postponed from October 4 has been rescheduled for tomorrow, November 2. The bill would provide personal casualty loss relief for any disaster area declared since 2020, provide an exclusion from gross income for amounts received as qualified wildfire relief payments, and treat East Palestine train derailment payments as qualified disaster relief payments. The Committee was also slated to consider bills on Customs and Border Protection revenue functions, protecting personally identifiable information in the context of tariffs, and extending reemployment services and eligibility assessments to all claimants for unemployment benefits.
A new addition, which was not on the agenda for the original October 4 markup, is the Clergy Act (H.R. 6068), sponsored by former Speaker Kevin McCarthy (R-CA) and Rep. Mike Thompson (D-CA), to allow a period in which members of the clergy may revoke their exemption from Social Security coverage.
Retirement — The Administration's Employee Benefits Security Administration October 31 published a proposed rule on the Definition of an Investment Advice Fiduciary. "The proposed rule and related proposed amendments to prohibited transaction exemptions (PTEs) detail when advice providers are acting in a fiduciary role under federal pension laws and explain the conditions they must follow to protect retirement investors." The impetus for the rule, according to EBSA, was, "Conflicts of interest can put an investment advice provider in the position of choosing between what's good for them and what's best for you. That could result in excess fees and/or lost investment returns that reduce a person's retirement savings. The existing definition is from 1975 and doesn't work in today's marketplace."
"Hidden junk fees make it even harder for families to have a little bit of that breathing room. That's why, over the past two years, my administration has taken steps to crack down on unfair and deceptive junk fees in banking, hotel costs, rental housing, cable, Internet, concerts, airlines, healthcare … " President Biden said in announcing the rule. "When the advice is self-serving, annuities drain peoples' savings and deliver much less than is expected by that person. And they can be unclear and confusing. Look, the fine print can be filled with hidden fees. They cost too much; they don't pay much back. But some brokers sell bad annuities because these brokers get big commissions that amount to thousands of dollars over time. They're going into the broker's pocket instead of the client's pocket."
Global tax — At the U.S. Council for International Business conference in Washington October 30, Treasury officials continued to tout the Pillar One multilateral convention (MLC) released October 11, with some items unsettled, as representing significant progress toward the OECD-led two-pillar solution to address the tax challenges arising from digitalization and globalization. Assistant Treasury Secretary for Tax Policy Lily Batchelder said extending the moratorium on digital services taxes (DSTs) is a key issue, as is the treatment of nonrefundable credits like the US R&D credit under Pillar Two.
AI — President Biden on Monday (October 30) signed an Executive Order (EO) on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence (AI). According to a White House Fact Sheet, the EO "establishes new standards for AI safety and security, protects Americans' privacy, advances equity and civil rights, stands up for consumers and workers, promotes innovation and competition, advances American leadership around the world, and more." The EO outlines federal priorities on AI, deploys numerous agencies to develop standards and safeguards, and instructs the creation of a White House AI Council to coordinate cross-agency activities. An EY Tax Alert has details.
"The order requires that companies building the most advanced AI systems perform safety tests, a practice called 'red teaming,' and notify the government of the results before rolling out their products. The order uses the Defense Production Act … to require that companies share red-teaming results with the government," the Washington Post said. "The order also directs the government to develop standards for companies to label AI-generated content, often referred to as watermarking, and calls on various agencies to grapple with how the technology could disrupt sectors including education, health services and defense."