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June 21, 2024
2024-1229

What to expect in Washington (June 21)

The Congressional Budget Office (CBO) projected deficit for FY2024 grew significantly from the $1.6 trillion projected in February to $1.9 trillion in "An Update to the Budget and Economic Outlook: 2024 to 2034," increasing deficit and debt concerns ahead of the 2025 tax cliff of TCJA individual and pass-through expirations. The cumulative 2025—2034 deficit is $2.1 trillion larger than projected in February, CBO said, with the largest contributor being recently enacted legislation, including emergency supplemental appropriations that provided $95 billion for aid to Ukraine, Israel, and the Indo-Pacific region.

CBO also said debt swells from 2024 to 2034 due to higher interest costs and mandatory spending, and debt held by the public rises from 99% of GDP this year to 122%, or $50.7 trillion, in 2034. Preceding the end-of-2025 TCJA tax cliff is the expiration of the suspension of the debt limit (enacted in the June 2023 Fiscal Responsibility Act) on January 1, 2025. Extraordinary measures would be expected to put the must-act date into the second quarter of 2025, and beyond the tax season, according to some outside estimates.

The increased CBO projections make legislative action to address the debt limit more politically difficult, though the dynamics of that debate, like the tax cliff, won't be clear until after the outcome of the elections — i.e., who controls the House, Senate, and White House — are known. The Washington Post reported: "The debt is a bipartisan problem: Spending shot up under both President Biden and then-President Donald Trump. And Trump's 2017 tax cuts, the ones that are set to expire next year, added nearly $2 trillion to the existing debt, according to a nonpartisan estimate. Trump has proposed extending all of those cuts, which could add trillions more to the debt, and Biden also wants to keep the lower rates for people who earn less than $400,000, as well as new social spending paid for by allowing some of the tax cuts to expire."

Punchbowl News said of the TCJA expirations, "with a nearly $2 trillion annual deficit — and potentially much higher as Medicare and other mandatory spending costs rise — how can Republicans significantly reduce the revenue coming into federal coffers without worsening the deficit picture? Especially when they're pushing for more spending on national defense, border security and veterans' programs."

Tax — Meanwhile, Senator Elizabeth Warren (D-MA) continues to call for tax increases beyond just letting TCJA provisions expire for those with income over $400,000. She said during a June 17 speech: "The 2025 tax fight will create a huge opportunity to break with decades of tax-cutting political orthodoxy and reshape the tax code to reflect our nation's values by raising taxes on the wealthy … Next year, we must raise taxes on giant corporations and billionaires. But let's be crystal clear: if Democrats take the coward's way out and sign our names to a half-baked deal that lets the wealthy off the hook, it will be a huge failure … "

In a Bloomberg Daily Tax Report (DTR) story about the Senate Finance Democrats' June 20 meeting to discuss the end-of-2025 tax cliff, Chairman Ron Wyden (D-OR) said he was struck by members' commitment to raising taxes on the wealthiest Americans and companies. In addition to Senator Warren, other Democrats suggested the 2025 tax cliff demands consideration of the tax system as a whole, not just expiring provisions. "The main goal here is this can't just be a debate about the 2017 tax cuts," Sen. Mark Warner (D-Va.) said. "This is going to be Tax Armageddon. It's time to suit up."

There continues to be a focus on the corporate rate — which doesn't expire at the end of 2025 like individual and pass-through provisions, but there is already discussion about how to pay for the extensions — and Republicans aren't unified against an increase as they have been in the past. A June 18 Politico story: "'There's a bubbling-up concern that we should not be doing the bidding of corporate America,' said Rep. Chip Roy (R-Texas), who says he'd consider kicking the corporate rate up to 25 percent if it means being able to extend breaks for individuals and small businesses. 'I'd like to see corporations getting with the program and saving America, instead of just looking at their bottom line.'" Other Republicans were cited as being satisfied with the 21% rate, despite former President Trump's call for an even 20% rate.

2024 tax bill — Asked following the Democratic luncheon June 18 whether it is too late to pass the House-passed Tax Relief for American Families and Workers Act (H.R. 7024) that would expand the Child Tax Credit, address the TCJA pre-cliffs on IRC Section 174 5-year R&D amortization, 163(j) interest deductibility, and bonus depreciation, and more, Senate Majority Leader Chuck Schumer (D-NY) said: "Look, as you know, I supported it the minute it was announced. I think it's a good bill. I was very proud that I pushed hard and got into the bill the low-income housing tax credit (LIHTC) — near and dear to me, very important to my state — and I'm currently working with Chairman Wyden to try and get something done. It's not dead."

The DTR report on the Finance Democrats meeting cited members as not wanting to lose sight of trying to get the bill done over a multitude of Republican objections. "Sen. Sherrod Brown (D-Ohio) said he wants to start with getting the bipartisan tax bill passed. Sen. Maria Cantwell (D-Wash.) also emphasized that she wants the low-income housing tax credit to take precedence this Congress. 'We're going to continue to make it a priority until it gets done.'"

Government funding — Senate Appropriations Committee Chair Patty Murray (D-WA) said in a June 18 floor speech that FY2025 Fiscal Responsibility Act spending caps "mean just a 1% increase for nondefense and defense alike," which "does not begin to keep pace with inflation, or other rising expenses." She ticked down programs that would be cut or underfunded by the small increase and said, "We authorized some truly transformative programs and funding levels in the bipartisan CHIPS and Science Act, but that doesn't matter if we don't also provide bipartisan investments that live up to our ambitions. The FRA has already forced us to fall short, and without more nondefense funding, it will force us to fall behind" other nations.

The Hill Newspaper reported that Murray and Vice Chair Susan Collins (R-ME) said they hope to announce a Senate deal on discretionary spending top lines. In the FY2024 appropriations cycle, Senators Murray and Collins reached agreement, including some additions above the FRA limits, then eventually produced a compromise with the Republican-led House that resulted in a two-part funding package in March.

Senator Murray also said, "I will not let us boost defense alone while leaving families and our country's future in the dust." Republicans traditionally prioritize defense spending, Democrats prioritize nondefense spending, and the levels of each have long been disputed, but both parties' shared interest in securing priority funding helps get appropriations bills done. The FRA set spending levels for FY2024 and a 1% increase in FY 2025, to $895.212 billion defense and $710.688 billion nondefense.

Energy tax — The IRS June 18 issued final regulations regarding the prevailing wage and registered apprenticeship requirements under the Inflation Reduction Act (IRA) that generally afford an increased credit of five times the base incentive. "Through the final rules we're releasing today, we're providing employers and workers with more clarity such as on what's required for recordkeeping, and we're incentivizing employers to adopt worker-centric practices like project labor agreements," Treasury Secretary Janet Yellen said in a Bloomberg Tax report.

Separately, President Biden tweeted June 18: "The future of electric vehicles will be made in America by union workers."

Partnerships — On June 17, Treasury and IRS announced a new regulatory initiative, part of a multi-stage effort to "stop large, complex partnerships from using opaque business structures to inflate tax deductions and avoid taxes," focused on partnership basis shifting transactions in which a single business that operates through related parties "enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability."

"The proposals attack a technique known as basis shifting among related parties, where partnerships that share common ownership move tax basis from assets that can't be depreciated — like stock and land — to assets such as equipment that can generate depreciation deductions. Sometimes, officials said, businesses repeatedly depreciate the same asset," said the June 18 Wall Street Journal. "The Treasury Department and Internal Revenue Service said Monday that taxpayers must begin disclosing such transactions to the government. The administration also will soon issue formal rules designed to restrict the practice … "

"I've been urging stronger enforcement among large partnerships for years, and thanks to Democrats passing the Inflation Reduction Act, the IRS now has additional resources to put into this difficult work," Senate Finance Chairman Wyden said. "I'm also continuing to develop my proposal to reform the rules on partnerships because today those rules allow the wealthiest individuals and most profitable corporations to decide when, and whether, to pay taxes at all."

SCOTUS — In Moore v. United States, which could have had ramifications for a wealth tax and the tax code overall, the Supreme Court June 20 held 7-2 that the TCJA mandatory repatriation tax does not exceed Congress's constitutional authority. The taxpayer argued the transition tax under Section 965 violates the Constitution's Apportionment Clause and the Due Process Clause of the Fifth Amendment because it was a direct tax on unrealized income. The majority declined to rule whether realization is a constitutional requirement of an income tax, but held that Congress may attribute a business entity's realized and undistributed income to the shareholders or partners of that entity. In doing so, it emphasized that its holding "applies when Congress treats the entity as a pass-through."

Global tax — An EY Tax Alert, "OECD/G20 Inclusive Framework releases documents on Pillar One Amount B and Pillar Two," is available here.

Congress — The Senate is now out until July 8. The House is back next week before a recess the week of Independence Day.

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Washington Council Ernst & Young