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May 1, 2024

What to expect in Washington (May 1)

The partisan debate over how to address the expiration of TCJA individual and pass-through provisions at the end of 2025 continued during the April 30 House Ways & Means Committee hearing with Treasury Secretary Janet Yellen. Chairman Jason Smith (R-MO) said the TCJA increased taxes on the rich, cut them for lower income earners, increased real median household income, reduced poverty, and reversed the trend of profit shifting. Sec. Yellen said the law disproportionately benefited the wealthy and large corporations and enriched corporate shareholders. President Biden's April 23 post about letting the TCJA expire was a focus of Republicans, and the Secretary said he has "principles that will guide his negotiations with Congress over how to handle this" and won't allow tax increases on those earning less than $400,000.

The other main topic was the OECD-led two-pillared global tax agreement, which Republicans have frequently targeted over process issues and the projected cost to the US. Sec. Yellen repeatedly said that prior to the OECD agreement the US was the only country to impose a tax on the overseas profits of its multinational companies, and other countries doing so creates a level playing field for American companies. Chairman Smith said the deal "has no path forward in Congress," a sentiment echoed by other members.

Rep. Mike Kelly (R-PA) asked whether Treasury would consult with Congress before signing an OECD Pillar One agreement. Sec. Yellen said she has heard from members of Congress regarding Pillar One that certainty over Amount B is important, as well as establishing clear definitions regarding Digital Services Taxes (DSTs). She said Treasury agrees with these concerns and these are the redlines the Administration is focused on resolving in the final months of negotiations. The Secretary also assured Chairman Smith that Treasury is "negotiating with other countries right now to try to get favorable treatment to the R&D tax credit," addressing concerns that the nonrefundable R&D tax credit isn't exempted from determining a company's US effective tax rate under the Pillar Two agreement. A WCEY Alert has details.

2025 — Looking ahead to 2025, some Senate Finance Republicans seem positioned to rely on the economic growth potential for tax cuts — Ranking Member Mike Crapo (R-ID) and Senator Thom Tillis (R-NC) list the precedent set by including an offset among reasons to oppose the Tax Relief for American Families and Workers Act (H.R. 7024) — while Ways & Means members appear more open to offsets, if their support of H.R. 7024 is any indication. There wasn't much talk of this disparity at the hearing, though Rep. Mike Thompson (D-CA) did note the TCJA was not paid for — "and that by definition is inflationary" — and asked Sec. Yellen about "responsible ways that we might offset the costs of any of the TCJA extensions." She listed some of the President's budget proposals, including increases in the stock buyback excise tax, Corporate Alternative Minimum Tax (CAMT), and corporate rate, and imposing a billionaires' tax. She also committed to prioritizing changing the tax treatment of carried interest.

Addressing the 2025 revenue issue, an April 25 American Enterprise Institute (AEI) post said, "Virtually all individual income tax changes and a reduced effective tax rate on pass-through income (Section 199A) are scheduled to sunset on December 31, 2025 … There will be pressure to extend these tax policies, but policymakers should be concerned about the fiscal burden of a straight TCJA extension." The post, by former Ways & Means Republican staffer Alex Brill, called for consideration of "additional reforms to broaden the tax base" like curtailing the SALT deduction and slowing the growth of the standard deduction.

Charitable giving — An April 30 Law360 story said advocates for nonprofits want Congress to revive an above-the-line charitable contribution deduction of the type enacted in 2020 and that expired after 2021, citing data that it increased giving and donations have declined since the expiration. The report cited Senator James Lankford (R-OK) as supporting the effort and having pushed, unsuccessfully, for an above-the-line giving incentive in the House-passed Tax Relief for American Families and Workers Act (H.R. 7024) and looking ahead to push the issue in the context of the 2025 TCJA tax cliff. Lankford said the 2025 tax talks "will be a massive tax fight," according to the report. Senator Lankford raised the issue during the April 16 Senate Finance IRS budget and filing season hearing.

Congress - At 3 p.m. today, the Senate is scheduled to hold a procedural vote in relation to the Federal Aviation Administration (FAA) reauthorization and taxes bill (H.R. 3935) required to be enacted by the expiration of the current short-term measure May 10. House and Senate compromise legislation was released Sunday night, but that doesn't ensure swift Senate passage and there may need to be another short-term extension before it can be enacted.

Politico reported Senate Republican John Thune (R-SD), the vote-counting Whip, as saying there are several amendment requests, including for off-topic non-germane amendments, and consideration could slip into next week. "Once you go down that path, then everybody wants their non-germane amendment too," Thune said. Punchbowl News said Democratic attempts to include cannabis banking and stablecoin reform were rebuffed along with federal cost share related to the Key Bridge collapse, for which there's no estimate yet. The FAA bill is a tax measure and among the final remaining must-pass bills prior to the election. Still, there have been no indications about an attempt to add the H.R. 7024 business tax and CTC bill, which could impose too much controversy upon an FAA bill under negotiation since at least last summer. Morning Tax observed: "It would be a real, real surprise if the tax deal found its way on to the FAA reauthorization."

Energy tax — On April 29, Treasury and IRS issued Notice 2024-36 for owners of clean energy manufacturing and recycling projects, greenhouse gas emission reduction projects and critical material projects, announcing the second round of credit allocations for the program to allocate the remaining $6 billion credits.

On April 30, IRS issued Notice 2024-37, which provides guidance and safe harbors regarding the Sustainable Aviation Fuel (SAF) credit created by the Inflation Reduction Act of 2022 (IRA). The notice provides additional safe harbors using the 40BSAF-GREET 2024 model, a joint effort by the Energy and Treasury departments and other federal agencies that includes specifications for and limitations on taxpayer inputs and background inputs.

Bloomberg Government reported that the Administration "is paving the way for producers of US corn ethanol to profit from a growing market for green jet fuel … The guidance signals corn-based ethanol and other crop-based fuels could qualify for tax credits in certain cases."

Not everyone is pleased with the guidance. Senator Chuck Grassley (R-IA), a Finance Committee member and former Chairman and ethanol advocate, said: "Here are two main issues with the Biden administration's GREET Model decision: First, this new formula is going to be easy to violate. Second, without grain in the formula, there won't be enough feedstock to make all the Sustainable Aviation Fuel environmentalists are crying for … Widespread use of Sustainable Aviation Fuel will help fight global warming. But rejecting grain feedstocks will impede efforts to produce that fuel on a commercial scale. Some people might argue this decision won't impact farmers' bottom lines, because they can sell their corn and soybeans elsewhere. That's hogwash, and it shows the people saying it don't know much about how farmers deliver their grain. These new barriers to entry will strip farmers of a significant market opportunity."

Health — Today (May 1) at 9 a.m., the Senate Finance Committee will hold a hearing, "Hacking America's Health Care: Assessing the Change Healthcare Cyber Attack and What's Next."

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For additional information concerning this Alert, please contact:

Washington Council Ernst & Young