November 10, 2023
What to expect in Washington (November 10)
The trickle of reporting about the ingredients of a potential year-end tax package continues. Politico reported November 9, on the long-time standoff over business tax provisions that hinges on expanding the child tax credit (CTC), that "Senate Democrats have been floating a short-term CTC expansion that would make the credit fully refundable at a cost of $49 billion," citing a Senate Democratic aide.
Central to a business tax package are TCJA pre-cliffs that relate to the five-year amortization for R&D expenses rather than expensing under IRC Section 174 and the IRC Section 163(j) interest deduction limitation based on EBIT rather than EBITDA, both of which took effect in 2022; and 100% expensing, which is phased down in increments after 2022. Fixing those provisions through 2025 was estimated to cost $47 billion when considered by Ways & Means as part of a larger package in June. It has long been thought that somehow matching up the costs of the business items and CTC to achieve some level of parity is probably the key to a deal. A previous report said Republicans are looking to advance $35 billion to $40 billion of business relief.
The TCJA pre-cliffs have attracted support from House and Senate tax-writing committee members of both parties and there hasn't been a lot of Democratic criticism given the widespread effects, despite the widely accepted notion that Republicans added them as revenue offsets to the 2017 TCJA with the expectation that future congresses may want to fix the provisions. That changed yesterday, as Senator Elizabeth Warren (D-MA) said regarding the TCJA, during a Finance Committee hearing on taxing high-income individuals: "the $2 trillion price tag on this doesn't actually tell the full story. That's because some of the corporate tax breaks had expiration dates. Now expiration dates, not because they actually wanted those tax breaks to expire, but expiration dates because that meant they could represent that the total cost of the giveaways would look smaller than they really were."
Witness Chye-Ching Huang, director of the Tax Law Center at the NYU School of Law, said there were "trillions going into buybacks and dividends" following the TCJA; retroactive fixes would be "wasteful" because "you can't change past investments or wages;" and permanent fixes to the provisions would be vastly more expensive than addressing them through 2025. Senator Warren said, "We should not be rubberstamping Trump tax cuts for giant businesses."
Appropriations — A tax package would most likely be attached to some upcoming government funding bill, and an approach to passing a continuing resolution (CR) to extend government funding beyond November 17 and avoid a government shutdown hasn't been announced. Senate Majority Leader Chuck Schumer (D-NY) has taken procedural steps to tee up a CR for next week that would reportedly last into December. House Speaker Mike Johnson (R-LA) has said he wants a CR into January to avoid getting jammed by the Senate, and it's still unclear if he will pursue a "laddered CR" by which four appropriations bills would be extended into December and the remaining eight into January.
The House has hit some roadblocks in pursuing regular-order appropriations bills this week. The Transportation-HUD remains stalled over Amtrak funding. The Financial Services & General Government appropriations bill (which funds the Treasury Department and IRS) was pulled from House consideration over issues related to reproductive rights and funds for a new FBI headquarters, Politico reported.
High-income hearings — During the Finance Committee hearing on taxing high-income individuals, Chairman Ron Wyden (D-OR) said senators were "putting the final details on our proposal that we have been working on for some time" to address billionaire tax avoidance, which the Bloomberg Daily Tax Report said would be released this year. He described "Buy Borrow Die" tax planning: "a corporate raider buys a business, and then borrows against its growing, untaxed value to fund their extravagant lifestyle: Everything from superyachts to luxurious vacations, expensive art deals, you name it. It goes up and up in value all while not paying a dime in tax. And when they die, their assets are passed to their kids — often entirely tax-free — and the cycle continues." He also called for ending abuses of Roth IRAs. An EY Tax Alert has details.
Chairman Wyden has for many years been highlighting the disparity in taxation of work income versus investment income, and had proposals for IRAs, mark to market taxation, and other issues, including:
The November 8 Senate Budget Committee hearing on "wealthy tax cheats" focused more on the Internal Revenue Service (IRS) funding boost enacted in the Inflation Reduction Act (IRA), which Democrats and some witnesses defended as allowing the agency to expand audits to additional types of entities that have had little audit coverage in the past, including complex partnerships, and some Republicans suggested may be an overreach. House Republicans proposed rescinding funds in a national security supplemental bill.
Natasha Sarin, formerly of the Biden Treasury Department and now a Yale professor, said the IRS has been able to measure the individual tax gap but has had "no real capacity to measure the corporate tax gap, the partnership tax gap, and the digital assets tax gap." The new IRA funds are going to enable IRS to capture and measure those types of evasion that happen at the top of the income distribution, through partnerships and offshore bank accounts, that today the agency "just isn't able to see," she said.
Notably, Senator Mitt Romney (R-UT) broke with fellow Republicans and said the idea that Congress is going to reduce the number of IRS agents and audits is wrong, and perhaps a ploy to appeal to some voters. Still, he said, complex structures aren't necessarily to cheat on taxes, it is "just the reality of what happens if you are making multiple investments." He provided the example of an entity that buys houses: buys 1,000 homes, there are unique situations for each one perhaps, with different purchase prices, different investors joining in, perhaps a foreign investor or not-for-profit organization. "That's the complication of investments made by entities that are making lots of different investments in lots of different places," he said. An EY Tax Alert has details.
Treasury/IRS — Yesterday, the Treasury Department released proposed regulations (REG-132422-17) under IRC Section 987 with guidance on determining income and currency gain or loss with respect to a qualified business unit. The Proposed Regulations maintain the structure of final regulations published in 2016 and 2019, which generally adopted the foreign exchange exposure pool (FEEP) method.
Treasury/IRS plans to issue guidance on claiming the new IRC Section 45V tax credit for hydrogen production by the end of the year, even if a government shutdown intervenes, US Treasury Climate Counselor Ethan Zindler said in a Bloomberg report. "Our intention is to get this done by the end of the year, and we're going to try to stick with that," Zindler said at a conference.
Health — On Wednesday (November 8), the Senate Finance Committee unanimously advanced the bipartisan Better Mental Health Care, Lower-Cost Drugs, and Extenders Act, which aims to expand access to mental health care, address certain pharmacy benefit manager (PBM) practices that affect access to community pharmacies and increase out-of-pocket costs, extend certain Medicare and Medicaid programs set to expire, and shore up Medicare physician payments. Chairman Wyden November 9 lauded the unanimous vote, saying, "You can't get 26 Senators to order a 7UP right now without a big controversy." An EY Tax Alert has details.
The Senate Finance Health Care Subcommittee has scheduled a hearing, "Ensuring Medicare Beneficiary Access: A Path to Telehealth Permanency," for Tuesday, November 14 at 2:30 p.m.
Congress — Senator Joe Manchin (D-WV), who was central to passing the 2021 infrastructure bill and 2022 IRA, announced that he is not running for re-election. "I have made one of the toughest decisions of my life and decided that I will not be running for re-election to the United States Senate, but what I will be doing is traveling the country and speaking out to see if there is an interest in creating a movement to mobilize the middle and bring Americans together," Manchin said. It is widely noted that this will make it more difficult for Democrats to hold on to the WV Senate seat in the 2024 elections, when they are already as a disadvantage with 23 Democrats and Independents up for re-election, compared to 11 Republicans. House Ways & Means Committee member Brad Wenstrup (R-OH) also announced he will not run for re-election.