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November 17, 2023

What to expect in Washington (November 17)

With the 87-11 Senate passage of the House continuing resolution (CR) November 15 and the President's signature November 16, government funding has been extended through January 19 for some appropriations bills — Military Construction-VA, Agriculture, Transportation-HUD, and Energy & Water appropriations — and the remainder through February 2. Ten Republicans voted against the bill, in addition to one Democrat, Senator Michael Bennet (D-CO), who protested the absence of Ukraine funding. With shutdown risks put off for at least two months, the question becomes how a long-term deal on spending can be reached and what else will happen in Congress between now and the January-February deadlines.

The House has approved seven of the 12 annual appropriations bills. Conservatives there haven't threatened the speakership of Mike Johnson (R-LA) over passing a CR with Democratic support, which they oppose. They did, however, scuttle floor consideration of two regular-order appropriations bills, the Labor-HHS-Education and Commerce-Justice-Science, in protest before leaving for Thanksgiving and ending a 10-week stretch in session after having given up a planned October break amid the Speaker elections. Freedom Caucus Chair Scott Perry (R-PA) said, "We're done with the failure theater here in Congress — we're not just going to pass bills that don't address the problems that Americans face." Last week, the Transportation-HUD bill was stalled over Amtrak funding and the Financial Services & General Government appropriations bill (which funds the Treasury Department and IRS) was pulled over funds for a new FBI headquarters and reproductive rights issues, which also kept the Agriculture-FDA bill from passing.

Conservatives have called for spending to be reduced to FY2022 levels, which are reflected in House bills along with controversial policy riders. Senators of both parties support holding FY2024 appropriations bills to FY2023 spending levels, as the debt limit bill prescribed, but the Senate has passed only three of the dozen spending bills, as a single minibus. Politico reported Senate Appropriations Committee Ranking Member Susan Collins (R-ME) expressed an interest in bundling four appropriations bills together in the next package, including Labor-HHS, Defense, Energy & Water, and Commerce-Justice-Science. "There was a lot of pent-up demand for amendments on the first package and that's why it took so long," Collins said.

Politico also said it was unclear whether Speaker Johnson would push for the more than $100 billion in spending reductions at FY2022 levels relative to the Fiscal Responsibility Act (FRA) deal to set FY2024 spending at FY2023 levels. Johnson's predecessor, Kevin McCarthy (R-CA), walked away from that agreement and towards the spending cuts sought by conservatives, at least as a negotiating tactic, and while his tenure in the leadership position was in constant peril due to the single-member motion to vacate.

Relative to the FRA, "House Republicans … are intent on slashing tens of billions of dollars from that total, plus throwing in a lot of culture war provisions on climate change, transgender policy and other issues into appropriations bills. This guarantees the bills aren't going anywhere, but House GOP lawmakers — pushed by hardline conservatives — keep trying," Punchbowl News said November 15. "Plus, the Senate is laboring to pass a huge national-security funding package that will include provisions conservatives hate — Ukraine aid, for example — as well as border-security changes that won't go far enough for a lot of House Republicans."

One motivating factor to find a bipartisan deal on full-year spending bills is the FRA provision under which there will be temporary caps at 99% of current funding levels (FY2023) if all 12 appropriations bills are not passed by January 1 of either 2024 or 2025, respectively (with the technical sequester enforcement mechanism related to the funding reduction taking effect on April 30).

The CR includes health provisions and a farm bill extension (through September 30, 2024), but a tax package is not included. There won't be a must-pass year-end appropriations bill, to which such tax packages are typically appended, and it remains to be seen whether tax provisions can be added to spending bills to follow in January or February, or other legislation in between now and then. Federal Aviation Administration (FAA) authorization and taxes expire December 31, under the prior CR, and it's unclear how they will be addressed. Additionally, Section 702 of the Foreign Intelligence Surveillance Act (FISA) will expire at the end of December, and after the CR vote November 15 the Senate voted to go to conference with the House on the National Defense Authorization Act (H.R. 2670).

Tax — In a November 16 Bloomberg Daily Tax Report (DTR) story on prospects for a tax package, Ways & Means member Rep. Ron Estes (R-KS) "cited legislation like the Federal Aviation Authorization, which contains tax provisions, as potential vehicles … Most observers were more pessimistic, though, calling the end of the year the final chance for getting a bill done until after the 2024 election. Following the election, Congress will need to address many of the 2017 GOP tax law provisions set to expire after 2025. 'If we don't get it done this year, we may not get it done before '25,' said Rep. Kevin Hern (R-Okla.), a Ways and Means member. 'There's no mechanism to get it done next year in an election year.'"

New this morning: IRS proposed regulations (REG-132569-17) relating to the energy credit under Section 48. "In connection with the Inflation Reduction Act of 2022, the proposed regulations would: update the types of energy property eligible for the energy credit, including additional types of energy property added by that law; clarify the application of new credit transfer rules to the energy credit recapture rules applicable to failures to satisfy the prevailing wage requirements, including notification requirements for eligible taxpayers; and include qualified interconnection costs in the basis of some lower-output energy properties," IRS said. "The proposed regulations would also provide additional requirements and rules generally applicable to energy property, such as rules regarding: functionally interdependent components; property that is an integral part of an energy property; application of an '80/20 Rule' to retrofitted energy property; dual use property; separate ownership of components of an energy property; property that could be eligible for multiple Federal income tax credits; and the election to treat qualified facilities eligible for the renewable electricity production credit instead as property eligible for the energy credit."

Senate Finance Committee Chair Ron Wyden (D-(OR) and others November 16 announced The Ending the Carried Interest Loophole Act to prevent re-characterization of income by requiring fund managers to recognize their annual compensation, which would then be taxed at ordinary income rates.

An EY Tax Alert, "Proposed regulations on qualified business units include simplified elections for determining IRC Section 987 gain or loss, but restrict the recognition of losses," is available here.

Health - On Wednesday (November 15), the House Energy and Commerce Health Subcommittee advanced 21 bills to the full committee. The bills advanced cover a range of topics, including baring certain pharmacy benefit manager (PBM) practices and increasing transparency, accelerating Medicare beneficiaries' access to new treatments and services, limiting Part D beneficiaries' out-of-pocket costs, addressing Medicare physician pay and expiring incentive payments and more.

Banking — A pair of hearings with banking regulators this week, which were expected to focus mostly on a 1,000-page proposal to strengthen capital levels for larger banks, were somewhat upstaged by an emerging scandal at the Federal Deposit Insurance Corporation (FDIC), whose chairman, Martin Gruenberg, testified at both hearings. The Wall Street Journal published a withering investigative story on Monday (November 13) describing a culture of harassment among the FDIC's bank examiner staff that led dozens of employees to resign from the agency over a period of years. At the hearings — first at the Senate Banking Committee, then the House Financial Services Committee — Gruenberg was repeatedly questioned about the revelations, responding that he was "personally disturbed and deeply troubled" by the allegations and had hired a law firm to conduct a "comprehensive" independent review. (Two Republican members of the FDIC's board later called for Gruenberg and the agency's general counsel to recuse themselves from that investigation.) At the House Financial Services hearing, Chairman Patrick McHenry (R-NC) asked Gruenberg if he had ever been personally investigated for inappropriate conduct; Gruenberg first said he had not, then later in the hearing revisited his answer to say that "in 2008, I was interviewed pursuant to a review done in response to a concern raised by an employee."

The Journal published a follow-up story Wednesday evening critical of Gruenberg and his top deputies. On Thursday, three Republican senators — Thom Tillis (NC), John Kennedy (LA) and Joni Ernst (IA) — called upon Gruenberg to resign. On social media, Ernst wrote, "Not only did he fail his employees, he lied to Congress. Accountability is coming. He should resign." In a statement, Tillis said, "Desperately needed changes at the FDIC are not possible if the agency is still being led by an individual who himself was investigated for alleged mistreatment."

Amid the turmoil, the FDIC canceled a public meeting Thursday at which it was set to approve a surcharge on banks to replenish the Deposit Insurance Fund, after more than $22 billion from the DIF was used to rescue failing Silicon Valley Bank and Signature Bank earlier this year. The board instead held the vote over a video call.

Today, November 17 is the EY Webcast, "Tax in a time of transition: Legislative, economic, regulatory and IRS developments." Register here.

What to Expect in Washington will not be published the week of Thanksgiving.


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