November 5, 2023
Americas Tax Policy: This Week in Tax Policy for November 3
This week (November 6-10)
Congress: House business may include consideration of the Transportation-HUD appropriations bill. The Ways & Means Committee is holding a hearing on "Ensuring that 'Woke' Doesn't Leave Americans Broke: Protecting Seniors and Savers from ESG Activism," on Tuesday, November 7 at 10 a.m.
The Senate returns to session at 3 p.m. on Monday, November 6, with a procedural vote related to the nomination of Monica Bertagnolli to be Director of the National Institutes of Health (NIH) at 5:30 p.m.
The Finance Committee and Budget Committee are both holding hearings targeting the taxation of high-income individuals this week:
The exact impetus for the hearings isn't clear, but the Wall Street Journal reported in a story on Republican efforts to roll back the IRS funding boost in the IRA, "Natasha Sarin, who helped develop the IRS expansion as a Treasury Department official, said the agency is showing real progress that threatens wealthy tax dodgers. 'Once the IRS starts lodging concrete successes from the IRA investments, it's going to be much harder, even for critics of the agency, to defend why they want wealthy people to not pay taxes their constituents are paying,' said Sarin, who now teaches at Yale University."
Last week (October 30-November 3)
The big picture: 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 scored as a revenue loss, not gain. The House approved the Israel Security Supplemental Appropriations Act (H.R. 6126) November 2 by a 226-196 vote (with 12 Democrats in favor and 2 Republicans opposed). The bill calls for clawing back unobligated IRS funds on enforcement, operations support, direct file, Treasury Inspector General for Tax Administration, Office of Tax Policy, Tax Court, and departmental offices — 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." The bill with the IRS funding source won't be taken up by the Democratic-led Senate, and Senators from both parties support considering Israel aid in conjunction 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.
The Wall Street Journal said November 2, "The standoff over foreign aid could converge with a bigger battle later this month over federal spending, with Congress facing a 12:01 a.m. deadline on Nov. 18 to avert a government shutdown. Some lawmakers have said that the foreign-aid package could end up being resolved when Congress also has to pass the new bill funding government operations." While both the House and Senate made progress on the regular slate of 12 annual appropriations bills this week, the expectation is that another continuing resolution (CR) will be necessary after current government funding expires November 17. Speaker Johnson has proposed a CR until January 15 rather than the regular year-end deadline, which he signaled will help deter potential Senate efforts to impose an omnibus appropriations bill on the House.
Tax bill prospects: It's unclear how a January CR target may scramble efforts to move tax and other outstanding items by the end of the year, which are seen as most likely to move with some future government funding bill. A tax package could be anchored by relief from TCJA pre-cliffs on 174 R&D, 163(j) interest deductibility, and 100% expensing, and potentially address other tax extenders that expired in 2021 and 2022 and perhaps other tax provisions. A package continues to hinge on reaching a bipartisan agreement to make the Child Tax Credit (CTC) more generous. Fixing the TCJA business provisions through 2025 costs about $50 billion, the 2021 version of the CTC is $100 billion per year but Democrats will likely accept a less-generous version, and somehow matching up the costs of the two priorities to achieve some level of parity is probably the key to a deal. The Bloomberg Daily Tax Report (DTR) cited House Ways & Means Committee Chairman Jason Smith (R-MO) as saying November 2 that he was "optimistic of getting a tax package." Chairman Smith was visiting the Senate floor to talk with members, an uncommon but not unprecedented practice. "Not saying what it's going to be attached to, but I really enjoy working with Senator Wyden," Chairman Smith said. Urgency for a deal continues to be expressed by the business community. A November 2 letter from the National Association of Manufacturers (NAM), U.S. Chamber of Commerce, National Retail Federation, Information Technology Industry Council and other groups called for immediate action to address the TCJA pre-cliffs. "Although legislation has been introduced in both chambers in support of these policies, Congress must act immediately to extend these competitive tax policies. Failing to do so will put hundreds of thousands of family-supporting jobs, cutting-edge innovation and pro-growth investments in America at risk," the letter stated.
As for the vehicle for such a tax package, they usually ride along on a year-end omnibus appropriations bill, but the desire by the Speaker to have another continuing resolution through early January complicates tax package prospects as these stop-gap spending bills tend not to be used as a vehicle for costly tax cut packages.
IRS: The Senate Finance Committee November 2 approved the nomination of Marjorie Rollinson to be Chief Counsel for the IRS and an Assistant General Counsel in the Department of the Treasury by a 16-11 vote, paving the way for a full-Senate vote on confirmation. Senators Bill Cassidy (R-LA) and Thom Tillis (R-NC) joined the Committee's 14 Democrats in approving the nomination. Ranking Member Mike Crapo (R-ID) said prior to the vote, "Ms. Rollinson has a strong resume and impressive technical expertise, and I appreciate both her prior service at the IRS and her willingness to serve today. However, the agencies to which she has been nominated continue to be plagued by various issues … [and] given the many existing unresolved issues at the IRS and Treasury, I cannot support Ms. Rollinson's nomination today. That said, I do look forward to working with Ms. Rollinson on addressing the concerns my colleagues and I have raised throughout this process and making progress." He cited as a concern, "Treasury's advancement of the OECD Pillar 2 negotiations without meaningful congressional input, to the likely detriment of domestic businesses and workers."
The IRS announced November 1 that sellers of EVs can now register using the new IRS Energy Credits Online tool to "allow dealers and sellers of clean vehicles to complete the entire process online and receive advance payments within 72 hours. The tool will generate a Time of Sale report that the taxpayer will use when filing their federal tax return to claim or report the credit."
The dollar limitations for retirement plans and certain other dollar limitations that become effective January 1, 2024, have been released by the IRS in Notice 2023-75. The dollar limitations adjusted by reference to IRC Section 415(d) are modified annually for inflation and, consequently, most of them are changed for 2024. Of note, the 2024 pretax limit that applies to elective deferrals to IRC Section 401(k), 403(b) and 457(b) plans increased from $22,500 to $23,000. The dollar limitation for catch-up contributions for participants aged 50 or over remains at $7,500. An EY Tax Alert has details.
A November 1 Bloomberg Daily Tax Report story on the October 30 Executive Order (EO) on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence (AI) cited IRS Commissioner Danny Werfel as saying the agency is "absolutely committed" to the President's push to regulate how the federal government uses AI. "The Treasury Department received a directive from the executive order to put out a public report to assess AI specific cybersecurity risks for financial institutions. It will also work with various agencies on assessing AI risks on other parts of the order, a Treasury spokesperson said." The report cited Commissioner Werfel as saying, "I think the president is indicating in this executive order, 'Explore, be innovative, but do it carefully.'" Further, "It shouldn't all be just about cost savings and process efficiency, it's about that balanced against the other downsides that can manifest with AI," he said.
Disaster tax relief: The House Ways and Means Committee November 2 approved 38-0 the Federal Disaster Tax Relief Act (H.R. 5863). Introduced by Rep. Greg Steube (R-FL), 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. In an opening statement, Chairman Smith said, "This package builds on three pieces of bipartisan legislation to help families recover in the aftermath of a disaster. First, it offers important relief to victims of disasters across the country, including Hurricane Ian last year — which was the costliest storm in Florida history, and which claimed countless lives. This bill will help those individuals and families deduct disaster losses against their tax bill. This bill also exempts from taxes the disaster relief payments received by victims of recent wildfires in California and Hawaii, as well as the train derailment in East Palestine, Ohio last February." Ranking Member Richard Neal (D-MA) said, "These bills under consideration will help Americans facing personal and financial loss from wildfires and support our ongoing efforts to bolster enforcement of U.S. trade laws … these bills have an easy glidepath to the floor and to becoming law." As Politico noted about the disaster bill, "Lawmakers hope to attach the plan to a potential year-end tax bill. Republicans made it harder to claim casualty deductions as part of their 2017 tax cuts, to help defray the cost of that legislation." Changes made in the 2017 TCJA restrict casualty loss deductions to federally declared disasters, whereas, before 2017, casualty losses were generally deductible, the Congressional Research Service said in a report, "Tax Policy and Disaster Recovery."
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.
IRA guidance tracker: This table describes select IRS guidance related to the Inflation Reduction Act.