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May 22, 2024

What to expect in Washington (May 22)

On May 21, the House Ways & Means Committee announced that, in conjunction with the formation of Republican Tax Teams, the Committee has launched a new comment portal where stakeholders and members of the public can share information on the impact higher taxes resulting from end-of-2025 TCJA expirations would have on their families, businesses, and communities. Comments will be accepted through Tuesday, October 15, 2024.

The tax teams, announced on April 24, focus on:

  • American Manufacturing
  • Working Families
  • American Workforce
  • Main Street
  • New Economy
  • Rural America
  • Community Development
  • Supply Chains
  • U.S. Innovation
  • Global Competitiveness

Field hearing — One of the tax teams was spotlighted by Ways & Means Chairman Jason Smith (R-MO) during Monday's Tax Subcommittee Field Hearing in Erie, PA on "Creating More Opportunity and Prosperity in the American Rust Belt." Chairman Smith said the Community Development team, chaired by Tax Subcommittee Chairman Mike Kelly (R-PA), will focus on "how we can encourage and incentivize more Main Street investment, expand housing opportunities, and support small communities so they can grow and meet the needs of families where they live and work."

The hearing largely focused on Opportunity Zone investment benefits, targeted toward economically distressed communities, and the TCJA pre-cliffs that switched to IRC Section 174 five-year amortization from R&D expensing, a less favorable calculation for 163(j) interest deductibility, and a gradual phasedown of 100% bonus depreciation. Four witnesses spoke about Opportunity Zones and the fifth about the R&D issue. Rep. Ron Estes (R-KS) said since the switch from R&D expensing to five-year amortization, companies have been found to spend far less on R&D. Three-quarters of R&D spending is on wages and salaries, he said, making it a jobs issue.

Ways & Means is holding a meeting today (May 22) on documents protected from disclosure under Internal Revenue Code Section 6103.

Disaster relief — On an adjacent issue to the hearing, the House last night passed the Federal Disaster Tax Relief Act (H.R. 5863) by a vote of 382-7 (the bill was considered under the "suspension of the rules" process, requiring a two-thirds majority vote for passage). The bill had been folded into the Tax Relief for American Families and Workers Act (H.R. 7024) addressing the IRC Sections 174 and 163(j), and bonus depreciation issues, along with Child Tax Credit (CTC) changes and a Taiwan tax bill. H.R. 7024 is stalled in the Senate over numerous stated Republican objections, and the disaster bill isn't likely to be broken off for a separate vote there. Tax Notes reported Finance Committee Chairman Ron Wyden (D-OR) as saying he would put a hold on the bill in the Senate, hoping instead to pass the broader bill.

As a policy matter, the disaster relief bill would allow losses from federally declared disasters occurring from January 1, 2020, through the date of enactment to be deducted from income taxes without itemizing and without a reduction based on adjusted gross income, and exclude compensation for losses from some wildfire disasters and the East Palestine, Ohio, train derailment from gross income. The path to House passage of the bill is remarkable from a political standpoint because Rep. Greg Steube (R-FL), who was compelled to aggressively pursue consideration after the broader package stalled in the Senate by an airport encounter with a constituent, as recounted in a Wall Street Journal article, forced a House vote through a discharge petition around Republican leadership and with support from Democrats.

Child savings accounts — The May 21 Senate Finance Committee hearing, "Child Savings Accounts and Other Tax-Advantaged Accounts Benefiting American Children," largely focused on Senator Bob Casey's (D-PA) 401Kids Savings Act (S. 3716) to create children's savings accounts (CSAs) for post-secondary education, starting a business, buying a house, or retirement security, that would be built on state 529 college savings platforms. Senator Casey's questioning during the hearing focused on how such accounts would aid lower- and middle-income children. Some witnesses praised the expanded use of 529 accounts envisioned by the Casey bill. Chairman Ron Wyden (D-OR) said of such accounts, "The idea behind them is, on day one a newborn child automatically gets an account with some seed money that grows over time. Later on, with enough contributions, they're able to use it in a way that will help them live out their own American Dream, whether it's getting an education, buying a home, starting a business."

Ranking Member Mike Crapo (R-ID) said of child-focused savings accounts, "Expanding options to save is a worthy goal, but we must do so in a way that does not exacerbate already out-of-control government spending or create another unsustainable government program." Crapo also said the corporate tax has significant impact on retirement savings.

Ahead of the 2025 tax cliff, some Republicans focused on the importance of extending TCJA expiring provisions. Senator John Thune (R-SD) said Congress should be focused on making the TCJA permanent and asked how the tax code could be changed to increase saving. Witness Adam Michel of the Cato Institute recommended universal savings accounts (USAs) — without restrictions on who can contribute, when funds can be spent, or on what they can be spent — and said full expensing was a boon for investment, as much or beyond the corporate rate reduction.

Senator Steve Daines (R-MT) asked why Biden housing incentives as proposed in the Budget and State of the Union address are harmful. (These included a new tax credit for first-time homebuyers and people who sell their starter homes.) Michel said housing costs are elevated because of a supply constraint on businesses, and "throwing money" at the problem makes inflationary and other concerns that much worse.

The staff of the Joint Committee on Taxation's report in conjunction with the hearing, "Present Law and Data Relating To Tax-Preferred Accounts For Education and Other Purposes (JCX-25-24)" is available here.

Global tax — A May 21 story in the Bloomberg Daily Tax Report (DTR) said, "US multinational companies are … dissolving their overseas holding companies and reshoring ownership of their subsidiaries to delay paying the new 15% global minimum tax." The story cited practitioners as saying US companies are seeking to "move ownership of their foreign subsidiaries to the US, which has yet to sign up to the global minimum tax," which "triggers a one-year delay in compliance." It also said minimum tax compliance costs will be substantial, as companies will have to track and manage parts of a business to ensure each is following the law and provide additional details to authorities and investors. "Many companies, as they work through their modeling, are discovering that many aren't going to be looking at a significant increase in tax liability in any one jurisdiction, but the compliance burden is going to be very, very high," said Jose Murillo, Ernst & Young partner and national tax department leader.

A follow-on story this morning on compliance hurdles said, "In order to pay their global minimum tax bill in a timely manner, large companies need to build new systems to synthesize thousands of pieces of new data and track the differences between countries' local laws applying the levy." Further, "Companies must also keep track of the differences in the way countries apply Pillar Two rules. Barbara Angus, global tax policy leader at EY, said countries will have to translate these rules into their own languages and feed in their own legal history and culture. Some countries are making reference to the rules in their domestic law, others are copying them word-for-word, she said."

The Wall Street Journal reported Treasury Secretary Janet Yellen, ahead of a G7 finance ministers meeting, as rejecting other countries' proposals for a global wealth tax on billionaires akin to the proposed global corporate minimum tax, with the aim of preventing the shifting of wealth into countries where tax can be avoided. "We believe in progressive taxation. But the notion of some common global arrangement for taxing billionaires with proceeds redistributed in some way — we're not supportive of a process to try to achieve that. That's something we can't sign on to," she said.

Congress — Senate Majority Leader Chuck Schumer (D-NY) took a procedural step toward consideration of a bipartisan border security proposal, the Border Act of 2024 (S. 4361), setting up a Senate floor vote on Thursday. The proposal was originally crafted to be appended to the Senate national security supplemental bill in January but was omitted due to Republican objections. Senate Republican Leader Mitch McConnell (R-KY) didn't offer much optimism for consideration. "We entered into a good faith negotiation led by Senator Lankford with the administration to try to come up with something we could agree on," he said following the regular Tuesday party lunch. "It's pretty obvious that it was not likely to pass the Senate and certainly wouldn't have passed the House."

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