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January 8, 2024

What to expect in Washington: Congress returns (January 8)

Congress returns from the holiday recess this week with only 10 business days before a partial government shutdown if lawmakers can't agree by January 19 to extend the first tranche of appropriations in the two-step continuing resolution (CR), funding Military Construction-VA, Agriculture, Transportation-HUD, and Energy & Water appropriations. The remainder of government funding expires February 2. Senate Majority Leader Chuck Schumer (D-NY) and House Speaker Mike Johnson (R-LA) January 7 announced a $1.66 trillion topline agreement to set FY2024 spending levels at $886 billion for defense and $772.7 billion for nondefense and achieve $10 billion in savings by rolling back IRS funding and $6 billion from Covid relief.

House conservatives had urged Speaker Johnson to challenge the June 2023 Fiscal Responsibility Act (FRA), which set FY2024 spending at the FY2023 total of $1.59 trillion but allocated the spending differently to be split between $886.35 billion for defense and $703.65 billion for nondefense, and a side deal between President Biden and ex-Speaker Kevin McCarthy (R-CA) to boost the low nondefense level. Revisiting the side deal didn't happen and the FRA plus the side deal were essentially kept intact. "By securing the $772.7B for non-defense discretionary funding, we can protect key domestic priorities like veterans' benefits, health care, and nutrition assistance … " Schumer and House Democratic leader Hakeem Jeffries (D-NY) said January 7.

Conservative members aren't satisfied with that approach. Rep. Chip Roy (R-TX), a Freedom Caucus member, said on social media last night, "A $1659 topline in spending is terrible & gives away the leverage accomplished in the (already not great) caps deal. We'll wait to see if we get meaningful policy riders … but 1) the NDAA was not a good preview, & 2) as usual, we keep spending more money we don't have."

The New York Times said the agreement's $772.7 billion for nondefense includes "$69 billion of added money agreed to through a handshake deal between Mr. McCarthy and the White House," and the IRS and Covid funding rollbacks offset some of that. The report cited the difficulty of enacting a four-bill appropriations package in sufficient time for those that are slated to expire January 19, and said a temporary measure is possible even though Speaker Johnson long ago ruled out that approach. The report said, "If the effort to pass the spending bills stalls, Congress could also pass a yearlong continuation of current funding and vote to eliminate the 1 percent cut. That approach would wipe out any policy and funding changes … "

If appropriations bills aren't enacted by April 30, an FRA sequester to take effect then would set spending at FY2023 enacted levels reduced by 1%. A January 5 Congressional Budget Office (CBO) letter to Budget Chairman Jodey Arrington (R-TX) and Ranking Member Brendan Boyle (D-PA) demonstrated that under the FRA trigger, the revised levels would result in an increase in nondefense discretionary budget authority and a decrease for defense discretionary spending levels compared with the FY2024 levels set by the FRA. The amounts in the Consolidated Appropriations Act (CAA) of 2023 are $858 billion for defense and $744 billion for nondefense activities, "so the section 102 caps for 2024 are $850 billion for defense and $736 billion for nondefense funding."

Spending levels aside, there are many policy decisions over what to fund and what to restrict that won't be easily agreed to by both parties. "We have made clear to Speaker Mike Johnson that Democrats will not support including poison pill policy changes in any of the twelve appropriations bills put before the Congress," Leaders Schumer and Jeffries additionally said. Speaker Johnson said the topline deal provides a path for Republicans to "fight for the important policy riders included in our House FY24 bills."

Bipartisan negotiations continue in the Senate on border policies addressing asylum processes and other issues in an effort that began before the holiday recess to unlock Republican votes for a Ukraine-Israel national security supplemental. The focus seemed to shift as House Republicans signaled more profound border security measures like wall construction mirroring those in the House-passed H.R. 2 were necessary to win their support for extending government funding beyond the January 19/February 2 deadlines, as opposed to the supplemental. Senator James Lankford (R-OK) said on Fox News Sunday that "we're hoping to get text by later on this week," and that the operative bill remains the national security supplemental.

The January 6 Wall Street Journal (WSJ) said beyond the Senate border talks, "Some hard-line conservatives, meanwhile, are calling for Republicans to withhold support for funding the federal government until their favored border legislation, known as HR 2, passes. That measure, passed in the spring by the Republican-controlled House without any Democratic votes, would revive Trump-era policies such as wall construction and would make it nearly impossible for most migrants to qualify for asylum."

Tax — With government funding, national security, and immigration rife with partisan differences, a deal on a tax package that could emerge as soon as this week addressing IRC Section 174 R&D, IRC Section 163(j) interest deductibility, expensing, the Child Tax Credit (CTC), extenders, and other provisions is "one bipartisan deal Congress could strike in January," according to a January 4 Washington Post report. The report cited unnamed sources as saying House Ways & Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR) "have agreed on a framework," with the intention of writing a $100 billion bill. Members previously said the cost would need to be roughly split between business and family provisions, and others have said revenue offsets for the package are possible.

Politico reported December 27: "Tax writers are privately considering a crackdown on the Employee Retention Credit to help defray the cost of a long-sought tax bill expanding the child credit. With concern mounting over government red ink, and a ton of fraud associated with the pandemic-era jobs provision, lawmakers are examining a number of options. But while fraudulent claims appear rife, wringing money out of the credit that lawmakers could then use as an offset is harder than it may look. It's difficult for Congress to cancel fraudulent claims without also zapping legitimate ones too — and many lawmakers are loath to cross small-business owners who may have done nothing wrong."

The Bloomberg Daily Tax Report (DTR) January 4 cited a Senate Finance Committee spokesman as saying, "The tax-writing committees are continuing to have productive, bipartisan discussions as we work toward an agreement. We're optimistic, and the goal remains getting this done in time for changes to take effect in this upcoming filing season."

Punchbowl News January 5: "Any bipartisan tax deal would be a huge development. And lead negotiators are eyeing a very ambitious deadline. They could try to attach a tax compromise to whatever government funding deal leaders cobble together later this month, just in time for the 2023 filing season."

Even beyond the time crunch, there are numerous open questions. It was previously thought that a tax package must ride on an appropriations package or other bill like the Federal Aviation Administration (FAA) authorization and taxes measure. Those bills have their own controversies, and there have been signals from House Republican leadership that a tax measure could be put to a standalone vote. And, as has been the case for years, since soon after the TCJA capped the state and local tax (SALT) deduction at $10,000 annually, members from high-tax states have sought to reverse or increase the cap. Rep. Nick LaLota (R-NY), who has been outspoken on the issue, posted on social media, "I won't vote for a tax package without a meaningful increase in the SALT cap."

Regulations — IRS guidance released around the holidays includes:

  • December 15: Notice 2024-10 on the corporate alternative minimum tax (CAMT).
  • December 15: Notice 2024-06 on the new Sustainable Aviation Fuel (SAF) credit.
  • December 22: Proposed regulations (REG-117631-23) on the IRC Section 45V hydrogen credit.
  • December 22: Notice 2024-12 clarifying and modifying Notice 2023-63 (which addresses rules that the IRS is considering for inclusion in proposed regulations under IRC Section 174) and Revenue Procedure 2024-09 on obtaining automatic changes in methods of accounting.
  • December 26: IRS updated EV credit FAQs to say vehicles with battery components manufactured or assembled by a foreign entity of concern aren't eligible for any credit amount.
  • January 4: IR-2024-02 announced more time for dealers and sellers of clean vehicles to submit time-of-sale reports.

On a related note, the Senate Energy and Natural Resources Committee will hold a hearing to examine federal electric vehicle incentives including the federal government's role in fostering reliable and resilient electric vehicle supply chains on Thursday, January 11 at 10:00 a.m.

Congress — Prior to the recess, Majority Leader Schumer said the second session of the 118th Congress agenda would include legislation on drug prices, artificial intelligence, railroad safety, and online privacy. The Senate returns today at 3 p.m., with a procedural vote at 5:30 p.m. on the nomination of John A. Kazen to be United States District Judge for the Southern District of Texas. The House returns on Tuesday to convene for the start of the Second Session of the 118th Congress with a recorded vote on the quorum call at 6:30 p.m., followed by some Financial Services bills on the suspension calendar for Wednesday.

Former Speaker McCarthy has left Congress and Republicans can only lose three votes in any party-line bill (if all Dems vote no); or only two votes after January 21, when Rep. Bill Johnson (R-OH) retires. Rep. Steve Scalise (R-LA) is taking a leave of absence for medical treatment, meaning after January 21 Republicans will effectively have a 218-213 voting majority until the February 13 election to replace George Santos (R-NY).

Elections — Tax policy is set to be a major issue in the 2024 presidential election, especially with the TCJA 2025 cliff around the corner. President Biden has continued to champion tax provisions in the IRA, the campaign has criticized the TCJA (including around the sixth anniversary of the law on December 22), and the tax issue is being used to draw contrasts with Republicans.

CNN reported January 2: "'Americans were presented with and sold a version of what this bill could accomplish, and the economy and middle-class families received something very different,' Brian Deese, Biden's first director of the National Economic Council, said in a call with reporters, adding later that the promise that the tax cuts would pay for themselves was 'unrealistic at the point it was uttered, and it has not been what has come to pass.' White House deputy chief of staff Bruce Reed pointed to recent events when Biden has asked audience members to raise their hands if they think the tax code is fair. Going into 2024, Reed said, Biden 'really wants to have a national debate on tax fairness.'"

Bloomberg reported January 6, "Donald Trump plans to make permanent the 2017 individual tax cuts that he enacted as president while keeping corporate tax levels unchanged in an appeal to working and middle class voters should he retake the White House … Trump's preference to keep the 21% corporate rate marks a shift from his desire while president to lower the corporate rate to 15%, which generated opposition from both Republicans and Democrats."

Further on taxes, a trade-focused article in the December 27 WSJ said, "Trump has hinted at confronting European nations over taxes on software, online subscriptions and other digital services."

A focus of House elections is the 18 Republican seats in Biden-won districts, including in New York, that helped to put the GOP in control of the chamber in the last election. "Cook Political's current analysis shows that Republicans have stronger odds to keep the majority, and Democrats would need to win two of every three of the seats ranked as tossups to take the majority," said a story in the January 4 WSJ. "Redistricting questions will also affect the 2024 battle, including whether new congressional district maps for New York are ready in time for the election. The new maps in New York are expected to benefit Democrats, but it is unclear by how much. Six of the seats held by Republicans in Biden districts are in New York. Court rulings have already made it likely that Democrats will lose three seats they hold in North Carolina, while Republicans are expected to lose an Alabama seat."

Financial services — In the weeks leading up to the December recess, House Financial Services Committee Chairman Patrick McHenry (R-NC) tried to muscle his committee's bill creating a new regulatory framework for cryptocurrency, which has not yet been voted on by the full house, into the conference report for the National Defense Authorization Act (NDAA). The bill (HR 4763) would define when a cryptocurrency is a security or a commodity and curtail the SEC's role in this market while expanding the Commodity Futures Trading Commission's (CFTC) oversight of the crypto industry. But NDAA conferee Sen. Sherrod Brown (D-OH), chairman of the Senate Banking Committee, dismissed McHenry's effort as "an industry bill." When McHenry's hardball crypto maneuver failed, he retaliated by stripping the NDAA of finance-related Senate provisions, including an "export controls" regime for vetting outbound investments and a popular measure targeting fentanyl trafficking. McHenry has said that going forward in 2024, he plans to attempt a similar play for the crypto legislation with the must-pass appropriations bills and the farm bill.

McHenry also roiled the political world with his announcement in December that he would not seek re-election. That left most observers figuring the contest to lead House Financial Services Republicans in 2025 would be between the well-respected Rep. French Hill (R-AR) and Blaine Luetkemeyer (R-MO), but Luetkemeyer then stunned the financial services community last week when he announced that he, too, would retire at the end of 2024. Luetkemeyer's exit would seem to offer the inside track for Hill's bid to become HFSC chairman if Republicans retain the majority, though senior committee members Bill Huizenga (R-MI) and Andy Barr (R-KY) appear likely to contend for the gavel as well. In the meantime, McHenry has plotted an aggressive start to the year for the Financial Services Committee, with oversight hearings this week on the Labor Department's controversial fiduciary rule and the Financial Stability Oversight Council's recently revived "SIFI" designation regime. The committee also plans additional hearings this month on the Federal Reserve's proposed capital increases for banks pursuant to the "Basel III Endgame," and in February, McHenry plans to focus on global "bad actors" like China with hearings on money-laundering rules and Treasury's Financial Crimes Enforcement Network (FinCEN).

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