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March 8, 2024

What to expect in Washington (March 8)

In his March 7 State of the Union Address, President Biden sought to project that the middle class is his priority for tax policy and to provide a contrast to Republicans, who the White House says want to cut taxes further for wealthy individuals and corporations by extending TCJA expiring provisions and thereby add trillions to the deficit. He repeatedly challenged GOP lawmakers — at one point saying that, while they voted against his infrastructure policies, they are content to have projects in their districts — and invoked the argument for wealthy individuals and corporations to pay their "fair share" that has been the underpinning of Democratic tax policy goals going back at least a dozen years, to the Obama administration.

President Biden proposed increasing the corporate alternative minimum tax (CAMT) to 21% (from 15%), tightening executive compensation, and a new tax credit for first-time homebuyers and people who sell their starter homes, and repeated his previous proposal for a 25% billionaire's tax.

"Do you really think the wealthy and big corporations need another $2 trillion in tax breaks? I sure don't. I'm going to keep fighting like hell to make it fair! Under my plan nobody earning less than $400,000 will pay an additional penny in federal taxes … The way to make the tax code fair is to make big corporations and the very wealthy begin to pay their fair share … " the President said. "It's time to raise the corporate minimum tax to at least 21% so every big corporation finally begins to pay their fair share. I also want to end the tax breaks for Big Pharma, Big Oil, private jets, and massive executive pay! … I've proposed a minimum tax of 25% for billionaires. Just 25%. Do you know what that would raise? That would raise $500 billion."

In briefing documents, the White House said the President supports raising the corporate income tax rate to 28% (from 21%), which has been included in his Budget proposals, and ending corporate deductions for the compensation costs for any employee (not just top executives) of more than $1 million per year, which the President alluded to in his remarks.

Republicans pushed back on the ideas. House Ways & Means Committee Chairman Jason Smith (R-MO) released a statement saying, "President Biden tonight plans to make clear he's on the side of higher taxes and more corporate giveaways. These proposals will kill jobs, hurt families and small businesses … "

On health care, President Biden touted his efforts to reduce prescription drug costs and championed the Affordable Care Act, a "very big deal" for reasons including health insurance isn't denied because of pre-existing conditions. Further, he said, "I enacted tax credits that save $800 per person per year reducing health care premiums for millions of working families. Those tax credits expire next year. I want to make those savings permanent!"

Tax — Of course, tax is a pivotal issue in the 2024 elections given that who is in power will have more control over the fate of the TCJA individual and pass-through deduction provisions that expire after 2025. President Biden has expressed his support for continuing the provisions as they apply to those earning less than $400,000, as he alluded to in the FY 2024 Budget. (The new FY2025 Budget is out on Monday.) There has been significant speculation over what Republicans may propose to offset the cost of TCJA extensions, with a target on Inflation Reduction Act (IRA) energy tax credits, the cost of which has escalated in estimates by the government and the private sector.

House Budget Committee Chairman Jodey Arrington (R-TX), whose panel marked up a FY2025 Budget resolution March 7, said a permanent $10,000 limit on state and local tax deductions would be a high priority for Republicans in a bipartisan commission on the debt and cutting clean-energy tax incentives would also be a palatable revenue-raiser from conservatives' perspective, Bloomberg reported. Chairman Arrington said those two options would be among his favorites.

On another matter, Senate Majority Leader Chuck Schumer (D-NY) was asked this week about plans for the House-passed tax bill (H.R. 7024) and said only that leaders were looking for the best way forward on the bill, which has seemingly been further bogged down by recriminations over what Senate Finance Committee Republicans want in exchange for their support of the bill that was backed unanimously by Ways & Means members on the GOP side when it was marked up January 19, prior to House passage January 31. There have been multiple reports that the bill was a main topic during the Wednesday regular Senate Republican party lunch and that Senator Thom Tillis (R-NC), a sometime bipartisan dealmaker, continues to be a main detractor, arguing that the Employee Retention Credit (ERC) crackdown is a "fake" pay-for.

The Bloomberg Daily Tax Report March 7: "Some Senate Republicans … see a better chance to get their priorities over the finish line in 2025, when they may gain control of the Senate and the White House. That's also the year major tax talks will ramp up, with much of the Republicans' 2017 [TCJA] up for renewal. 'That was my question for Senator Crapo: Are we in a better position negotiating with you as chairman next year?' said Sen. John Cornyn (R-Texas), a member of the Finance Committee who's running for Republican leadership. 'I believe we're in a stronger position next year.'"

That view isn't shared among all Republicans, and there continues to be speculation over whether there are the requisite 9 or 10 GOP votes if the bill is put on the Senate floor. Semafor reported Senate Finance Committee member Todd Young (R-IN) as saying he intends to meet with Leader Schumer on the tax bill. "I'll do whatever I can to be supportive of the process," he said. Punchbowl reported Senator Young — a sponsor of a bill to restore R&D expensing, as opposed to amortization, that is a main plank of the broader House tax bill — as wanting to forge ahead even if Finance Ranking Member Mike Crapo's (R-ID) concerns can't be assuaged. He said that if Crapo "falls short in that effort to seek changes, we should still move forward. And I want to offer encouragement to colleagues that might join me in that."

Global tax - The March 7 House Ways & Means Tax Subcommittee hearing on "OECD Pillar 1: Ensuring the Biden Administration Puts Americans First" largely focused on this week's Joint Committee on Taxation (JCT) staff report showing that Pillar One would have resulted in a loss in US Federal receipts of $1.4 billion, based on one set of assumptions, had it been in effect in 2021. Some members said the report could provide an argument for the US to walk away from the project, but there was consensus that digital services taxes (DSTs) would proliferate if the OECD project falls apart.

Chairman Mike Kelly (R-PA) said while the OECD project was originally intended to eliminate DSTs, the burden of Pillar One will fall disproportionately on US companies. He said a two-thirds majority would be required in the Senate for US implementation of Pillar One, through a multilateral tax treaty, and said the project is designed to fall apart without US participation. Ranking Member Mike Thompson (D-CA) said the revenue loss projected in the JCT report might be the end of the discussion for some, under the premise of not giving up revenue to other countries, but we need to understand the benefits of the agreement, including on stability, and not just the cost. Those who look at the JCT report and say the US should "pack our bags and go home" should be asked, "What is the alternative?" Also, he said there is the question of whether the patchwork of DSTs that will doubtlessly spring into place would be preferable to Pillar One.

Rep. John Larson (D-CT) asked for confirmation that Amount A would be delivered through a multilateral convention (MLC) that would first be signed by Treasury then, similar to bilateral tax treaties, ratified by the Senate. Daniel Bunn of the Tax Foundation said the Senate would have to ratify the treaty with a two-thirds majority and legislative changes would be necessary as well for the US to claim the new taxing right. Bunn said the Senate has a reputation for not acting quickly on tax treaties, and Rep. Larson quipped that neither do they act quickly on House-passed legislation, possibly referring to the Tax Relief for American Families and Workers Act business provisions and Child Tax Credit bill.

Ranking Member Thompson pushed for Treasury representation during future hearings on the OECD project, and Chairman Kelly suggested Secretary Yellen would be before the Committee at the beginning of April, presumably to testify on the President's budget, which is scheduled to be released March 11, and thus she may be available to answer more questions. While there was a sentiment that the JCT report could make an argument for the US walking away from Pillar One, both Thompson and Rep. Kevin Hern (R-OK) deployed the oft-cited tax axiom that if not at the negotiating table, the US could find itself on the menu.

Banking — Federal Reserve Board Chairman Jerome Powell testified at the House and Senate this week, making some news on Wednesday when he told House Financial Services Committee Chairman Patrick McHenry (R-NC) that the Fed's proposed "Basel III Endgame" capital rules for larger banks would likely go through substantial changes before becoming final later this year. The Basel III proposal would toughen the required capital regime for large banks, which have lobbied and advertised against the proposal. Powell said, "We've received voluminous and very substantive comments … We really haven't made any decisions yet. But I think I can say a few things: First, we do hear the concerns, and I do expect that there will be broad and material changes to the proposal. I'll add that I'm confident that the final product will be one that does have broad support, both at the Fed and in the broader world." Powell also told McHenry that a complete reproposal of the rule is "a very plausible option."

When Powell testified at the Senate Banking Committee the next day (Thursday), Sen. Elizabeth Warren (D-MA) took him to task for his remarks, saying, "Public reporting … says that you are driving efforts inside the Fed to weaken the capital rule." She asked if Powell is still committed to "finalizing the strongest version of the Basel III capital rules this year." Powell told her, "I did not say that we would withdraw the rule … I said we hadn't made a decision on that. But if that turns out to be appropriate in the view of the Board of Governors, then that's something we would look at doing." Warren said, "When the heat was on last year, you talked a lot about getting tougher on the banks, but now the giant banks are unhappy about that, and you've gone weak-kneed on this."

Jon Tester (D-MT) asked Powell how the U.S. economy compares to other nations that faced economic and supply chain challenges during and after the pandemic. Powell told him, "We're doing the best of anybody. We've got the strongest growth and the lowest inflation of the advanced economies." Tester asked if Powell believes the U.S. is "basically in better shape than any other economy in the world?" Powell said, "Any other major economy. Yes."

Treasury/IRS - In Notice 2024-28, Treasury and the Internal Revenue Service (IRS) invite the public to submit recommendations for items to be included on the 2024–2025 Priority Guidance Plan.

Next week - Monday, March 11 is the release of the President's FY2025 Budget proposal. On Tuesday, March 12 (at 10:15 a.m.), Office of Management and Budget (OMB) Director Shalanda Young will testify before the Senate Budget Committee. The Senate Finance Committee has scheduled a hearing for Tuesday, March 12 at 10 a.m., titled, "American Made: Growing U.S. Manufacturing Through the Tax Code."

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For additional information concerning this Alert, please contact:

Washington Council Ernst & Young