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December 8, 2023

What to expect in Washington (December 8)

Bipartisan talks on border policy changes that Republicans view as their price for supporting a robust national security supplemental bill are just getting restarted after being on hold for nearly a week, leaving unsettled a major agenda item with only a week to go before the planned adjournment of Congress for the holidays (on December 14 for the House and December 15 for the Senate). The White House has warned it is running out of money to help Ukraine. A $110.5 billion national security supplemental along the lines of what the Administration proposed, with Ukraine and Israel funding, humanitarian assistance, and support for the Indo-Pacific — and to which Senate Majority Leader Chuck Schumer (D-NY) challenged Republicans to add a border policy amendment that could get 60 votes — failed 49-51 December 6. Senator Bernie Sanders (I-VT) was the lone member of the Democratic caucus opposed, and Senator Schumer voted 'no' for procedural reasons. Press reports said changing the standard immigrants must meet when applying for asylum appears key to a bipartisan deal on border security, but also that finding compromise is difficult.

"Republicans said they were encouraged on Wednesday when Biden said he was willing to do 'significantly more' on border security, without offering specifics. Some Republicans said that Biden must become more personally involved if he hopes to strike a deal," according to a story in today's Wall Street Journal. "'We're urging the president to get involved and fix this thing,' said Sen. Lindsey Graham (R., S.C.) at a press conference … White House staff are already deeply involved in communicating with Republicans … "

Punchbowl News December 7: "Leaders in both parties are already raising serious doubts about the path forward for the foreign aid measure — if there is one — following Wednesday's failed vote. Senate GOP negotiators are openly deriding their House colleagues' posture on the supplemental package. And Democrats are privately fretting that House Republican leaders may send members home for the holidays at the end of next week without acting, a potentially devastating delay for Ukraine."

Defense authorization — On Wednesday (December 6), the House-Senate conference committee negotiating the fiscal 2024 National Defense Authorization Act (NDAA) — considered a must-pass bill before Congress departs for the year — released the 3,000-page final text of the agreement. The $886 billion bill includes a 5.2% pay increase for service members; $300 million for military security assistance to Ukraine; military training for Taiwan; and a four-month extension of the controversial domestic surveillance authority called FISA section 702, which is expiring at the end of this year. The final agreement dropped some controversial House provisions.

A number of Senate-passed provisions were also dropped from the NDAA final agreement after they were opposed by conferee Rep. Patrick McHenry (R-NC), chairman of the House Financial Services Committee. McHenry, who served as the Speaker Pro Tempore during House Republicans' leadership turmoil in October, surprised many in Congress this week by announcing he would not run for re-election. The conference report "did not include Senate-passed provisions targeting fentanyl trafficking, foreign farmland ownership, artificial intelligence in banking, or anti-money laundering in crypto," Politico reported. McHenry had held up the Senate provisions in a bid to compel NDAA negotiators to include a bill (HR 4763) regulating cryptocurrency markets that was approved by the Financial Services Committee earlier this year. That bill has not yet come to the House floor. Senate Banking Committee Chairman Sherrod Brown (D-OH), a critic of cryptocurrency, dismissed the House crypto proposal as "an industry bill."

Notably, the final agreement also did not include controls on "outbound investment" that the Senate had passed 91-6 when it considered the NDAA in July. That amendment, sponsored by Sens. John Cornyn (R-TX) and Robert Casey (D-PA), would have required U.S. corporations and other entities to notify the Treasury secretary prior to deals with "countries of concern" that involve artificial intelligence, advanced semiconductors, satellite communications and quantum computing. McHenry and the chairs of several Financial Services subcommittees warned in a late November letter that the Cornyn-Casey measure "would create a new bureaucracy to regulate Americans' investments abroad." As an alternative, McHenry and others proposed expanding the existing sanctions process. The Senate is expected to pass the NDAA conference report next week, with the House following suit afterward.

FAA — The Senate Commerce Committee may not consider a five-year Federal Aviation Administration (FAA) reauthorization and taxes measure until January. Politico reported that a temporary FAA extension into March is expected to "pass the House early next week and the Senate shortly after that."

Punchbowl News reported on the overall challenges in moving much legislation before year end, "Speaker Mike Johnson looks ready to let members go home at the end of next week. The Senate may not move on any other major legislation once it clears the defense authorization bill, which could be as soon as Wednesday. Lawmakers could potentially have only a few days left in session before they leave town until mid-January. There are huge issues at stake: Ukraine, Israel, Taiwan, border security, government funding, FISA, FAA. It's just that party leaders and the White House can't seem to agree on anything."

Tax — With a dwindling number of trains leaving the station to serve as a legislative vehicle, tax-writers seem to be setting their tax package sights on a potential early January opportunity. It isn't clear what legislation tax could get combined with, but appropriations and FAA legislation will likely be necessary early in the year. Members have already expressed a wariness for waiting too long, saying they can't make major changes to the tax system after the filing season starts.

While tax committee chairmen have been tightlipped, other members have suggested talks on a tax package — addressing 174 R&D, 163(j) interest deductibility, expensing, Child Tax Credit (CTC) extenders, etc. — aren't very advanced. Tax Notes reported December 7, "Senate Finance Committee ranking member Mike Crapo, R-Idaho, brought together Republicans on the committee in a December 5 afternoon meeting to talk about next steps for negotiations and provide a 'state of play' on the talks … Crapo called the meeting not just to talk numbers, but to discuss whether to proceed with negotiations at all, according to Sen. Chuck Grassley, R-Iowa."

The Bloomberg Daily Tax Report (DTR) followed with a story today saying, "GOP Senate Finance members discussed the tax pact at a meeting this week, Sen. Bill Cassidy (R-La.) said Thursday. But he said the lawmakers didn't make any decisions, and just addressed possible parameters, given uncertainty over the House's position. 'We don't know what that House would do, so why go through a futile exercise that the House is not going to accept?' he said. Sen. John Thune (R-S.D.) said Wednesday that at the meeting Republican lawmakers mulled what the top line numbers of the package would be and whether Democratic demands are realistic." Perhaps alluding to House GOP demands, the report cited Ways and Means member Rep. David Schweikert (R-AZ) as saying he'd have trouble supporting a tax package that didn't include a way to offset the CTC costs.

Senate Finance Committee Chair Ron Wyden (D-OR) and others December 7 introduced the Workforce Housing Tax Credit (WHTC) Act to "increase the supply of affordable housing for middle-income families who earn too much to qualify for low-income affordable housing and not enough to afford housing near where they work."

During the December 6 Ways & Means Tax Subcommittee hearing on "Tax Policies to Expand Economic Growth and Increase Prosperity for American Families," Chairman Mike Kelly (R-PA) touted the success of the 2017 tax law and said, "As a car dealer that spent a lifetime fighting for my family's business — I know how important this committee's responsibility is to expand on this TCJA's wins for American workers." Americans for Fair Taxation testified, possibly addressing a January pledge from House Republican leadership to consider the Fair Tax, which would eliminate the national income tax and replace it with a national consumption tax. "Under the FAIRtax, the number of tax collection points reduces dramatically because the only entities collecting the FAIRtax will be retailers of new goods and retail services — estimated to be about 15 million businesses," Steve Hayes of AFFT said. "No longer are Americans required to submit forms containing their income and pay federal income and payroll taxes."

Democrats are opposed to the Fair Tax. Ranking Member Mike Thompson (D-CA): "Unfortunately, today's hearing appears to be focused on some of the most extreme and unpopular tax proposals ever put forth. Chief among them is the fair tax; legislation from the furthest right fringes of the Republican Conference that would continue the last Republican tradition of cutting taxes for the wealthy instead of helping ordinary Americans." Rep. Linda Sanchez (D-CA): "the Fair Tax Act is not a serious proposal. It's been championed by extreme members of the Republican Party. And what this reckless piece of legislation would do is eliminate the IRS and establish a hefty sales tax administered by states on behalf of the federal government."

Len Burman of the Urban-Brookings Tax Policy Center said, "Congress should consider setting up a regular process to evaluate all tax subsidies and eliminate or reform those found to be ineffectual or counterproductive."

Meanwhile, the Joint Committee staff has prepared a report on tax expenditures for fiscal years 2023–2027. Among the top expenditures are:

  • Reduced rates of tax on dividends and long-term capital gains ($265 billion in 2023)
  • Defined contribution plans ($225 billion in 2023)
  • Exclusion of employer contributions for health care ($202 billion in 2023)
  • Credit for children and other dependents ($122 billion in 2023)
  • Subsidies for insurance purchased through health benefit exchanges ($80 billion in 2023)
  • Earned income credit ($71 billion in 2023)
  • Exclusion of capital gains at death ($58 billion in 2023)
  • 20% deduction for qualified business income ($56 billion in 2023)
  • Reduced tax rate on active income of controlled foreign corporations ($51 billion in 2023)
  • Deduction for charitable contributions, other than for education and health ($43 billion in 2023)

On Wednesday, December 13 at 2 p.m., the Ways & Means Oversight Subcommittee will hold a hearing on "Growth of the Tax-Exempt Sector and the Impact on the American Political Landscape."

Retirement — Leaders of tax-writing and labor committees in both the House and Senate December 6 released a discussion draft with technical corrections and other clarifications with respect to the SECURE 2.0 Act, including Section 603 (on catch-up contributions as designated Roth contributions) language that unintentionally struck IRC Section 402(g)(1)(C) and could have eliminated catch-up contributions. IRS addressed the issue in August, announcing in Notice 2023-63 an administrative transition period that extends until 2026 the new requirement that any catch-up contributions made by higher income participants in 401(k) and similar retirement plans must be designated as after-tax Roth contributions. Retirements — Former Speaker Kevin McCarthy (R-CA) announced he is leaving Congress at the end of the year, after a bruising Speakership election in January and then ouster from the post in October over bipartisan engagement in government funding bills. "A departure before the end of his term means that, in the next two weeks, California Gov. Gavin Newsom (D) will call a special election to fill McCarthy's seat. Based on California law, that vote is unlikely to be held until summer," the Washington Post reported. "Until the special election, McCarthy's absence will further narrow a fractious Republican majority in the House. When the House returns in January, Republicans can lose only two votes from their ranks to pass any legislation at a time when the chamber faces major decisions on government spending and foreign aid."


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