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July 10, 2024

What to expect in Washington (July 10)

The House Ways & Means Committee July 9 approved along party lines bills related to campus protests (H.R. 8913, H.R. 8914) and 529 education plans (H.R. 8915), and Rep. Carol Miller's (R-WV) May 16 Congressional Review Act (CRA) Resolution (H. J. Res. 148) that disapproves of Treasury's May 3 Clean Vehicle Credit rulemaking (TD 9995), which is seen as having a good chance of passing Congress.

Backers of the EV CRA resolution say that while the Inflation Reduction Act (IRA) states that beginning in 2025, any electric vehicles with batteries containing any critical minerals or components from a foreign adversary are ineligible for tax credits under IRC sections 30D and 25E, the final rule released by the Biden administration allows foreign materials for eligible EV manufacturing. The resolution would force the Administration to re-write the rule in a different manner as to exclude adversaries from receiving US tax credits. It passed the Committee 25-14 along party lines, though it does have an off-Committee Democratic sponsor, Rep. Jared Golden (D-ME), and Senator Joe Manchin (D-WV) introduced the Senate version.

If the CRA resolution passes the House, the Senate could be compelled to take it up even without the support of Democratic leadership, and all votes under the CRA are simple majority votes, not the filibuster-proof 60-vote threshold. With Senators Manchin and Sherrod Brown (D-OH) in favor, it would be expected to pass and be sent to the President and likely vetoed. "Depending on how the congressional calendar unfolds, Senate supporters of the effort likely have until sometime in September to call up the resolution, according to rules for fast-tracking CRA resolutions," Punchbowl News reported. The Senate must act on a disapproval resolution during a 60-days-of-Senate-session period, which begins on the date the rule has been submitted to Congress and published in the Federal Register, according to the Congressional Research Service.

The Education and Workforce Freedom Act (H.R. 8915), to allow tax-exempt distributions from 529 plans to be used for additional educational expenses in connection with attendance at K-12 school (including homeschool) and for 529s to be used to pay for expenses associated with obtaining or maintaining recognized postsecondary credentials and licenses, passed the Ways & Means Committee 23-13.

The Protecting American Students Act (H.R. 8913), which intends to incentivize universities to either enroll more American students or spend more of their endowment funds on those students to avoid being subject to the Endowment Tax, passed 24-13. The University Accountability Act (H.R. 8914), to levy a financial penalty against schools that have a civil judgment entered against them by a federal court for violating a student's civil rights, passed 24-12.

Senate Budget hearing — The July 9 Senate Budget Committee hearing on the Updated Budget & Economic Outlook with Congressional Budget Office (CBO) Director Phillip Swagel focused on whether spending supported by Democrats or tax cuts enacted by Republicans bear the blame for rising deficits and debt, and the related questions of whether the deficit should be reduced by cutting spending or increasing taxes. This debate is being amplified ahead of the 2025 tax cliff of TCJA individual and pass-through expirations.

Chairman Sheldon Whitehouse (D-RI) blamed a significant amount of the deeper deficit and debt on the last fiscal cliff, saying "you can ascribe an enormous amount of our problem" to the extension of the Bush tax cuts in 2012. In his opening statement, he said, "The Bush and Trump tax cuts — skewed to the wealthy and big corporations — have added another $10 trillion to the national debt. If not for those tax cuts, the debt-to-GDP ratio — our best fiscal safety metric — would be declining in perpetuity." Whitehouse asked about the Republican argument that economic growth resulting from the TCJA meant it did not need to be fully offset. Swagel said, "By far, it did not pay for itself, and the same would apply to the extension of the 2017 Act."

Ranking Member Chuck Grassley (R-IA) noted his history of going after "tax loopholes and wasteful carveouts" as a Finance Committee Chair, and said he is open to reviewing tax subsidies, including those in the Inflation Reduction Act (IRA). "Ending the law's subsidies for luxury EVs and other regressive giveaways that have exploded in cost could net hundreds of billions in savings," he said.

Swagel testified regarding the June 18 updated CBO projections of a $1.9 trillion federal budget deficit in fiscal year 2024; cumulative 2025 — 2034 deficit $2.1 trillion larger than previously projected; and debt held by the public rising from 99% of GDP this year to 122%, or $50.7 trillion, in 2034.

Senate Appropriations Committee Chair Patty Murray (D-WA) said at the hearing that while Republicans blame spending, they don't have the same concerns about the effects of taxes on the deficit. She said, "the single biggest driver of our national debt since 2001 has been Republican tax cuts" and at the top of their agenda in 2025 is an extension of TCJA provisions. Conversely, Senator Roger Marshall (R-KS) said by their comments "Democrats have promised they will raise taxes," when the problem is, actually, spending.

Appropriations — Chair Murray raised the issue of raising both defense and nondefense discretionary spending above Fiscal Responsibility Act (FRA) levels. CQ reported July 8 that Senate appropriators have tentatively agreed to add $34.5 billion in emergency spending above the fiscal 2025 budget caps, $21 billion of it for defense. On Thursday, July 11, the Committee will hold a markup of the MilCon-VA, Agriculture-FDA, and Legislative Branch bills, as well as Fiscal Year 2025 Subcommittee Allocations.

Yellen hearing — During the House Financial Services Committee hearing on the State of the International Financial System, Treasury Secretary Janet Yellen was in lockstep with the Senate Budget Democrats on the deficit impact of the TCJA. She said, "it was a tax cut that had a very large impact on the deficit and the national debt. So, it was costly. It was regressive. It did not pay for itself. And in a way it concealed its true costs by including delayed raisers, phase-outs, and sunsets, some of which Congress will have to deal with next year. We did not see an investment boom that was promised by the Act … "

Rep. Brad Sherman (D-CA) brought up an international tax issue (for which Sec. Yellen didn't offer an answer), saying: "India has cut its corporate tax rate from 40% to 22%, but they have excluded branches of foreign companies. So many U.S. companies can just form a subsidiary and take advantage of that 22 percent rate, but American financial institutions have branches - as a technical matter, they can't form a subsidiary … can I count on you to bring this up with the Indian Ministry of Finance, that American companies should have the same tax rate as Indian companies in India?"

Congress — Much of the attention on 2025 tax cliff preparations has been on Republicans, including the high-profile Ways & Means Republican tax teams and less-public Senate Finance GOP working groups. Punchbowl News July 9 reported that Ways & Means Committee Democrats met Monday night to prep for the 2025 fight over the expiring Trump tax provisions cuts with Joint Committee on Taxation Chief of Staff Tom Barthold, with the discussion touching on the distributional effects of tax provisions for 2025.

The Bloomberg Daily Tax Report (DTR) said, "JCT, which acts as Congress's official tax scorekeeper, presented data on several scenarios to Democrats at the meeting, including ones that looked at what could happen if 2017 law provisions expired or if they were to be continued, said Rep. Judy Chu (D-Calif.)."

Today (July 10), the Finance Committee is holding a hearing to consider the nominations of Jeffrey Samuel Arbeit (currently Legislation Counsel with the staff of the Joint Committee on Taxation), Benjamin A. Guider III, and Cathy Fung to be judges of the United States Tax Court. This is the second tranche of three Tax Court nominations, with the first group of nominations reported out favorably by the Finance Committee June 13 but not yet brought to votes in the Senate.

Banking — Federal Reserve Board Chairman Jerome Powell testified on monetary policy at the Senate Banking Committee yesterday (July 9), leaving the Fed's options open about when it will cut interest rates. Powell told senators he doesn't expect the next move will be a hike but declined to give any timetable for cuts: "I'm not going to be sending any signals about the timing of future actions." Market analysts have predicted the Fed will cut rates in September. "Inflation has eased notably over the past couple of years," Powell said. Recent inflation data have shown modest further progress, he said, and "more good data" indicating inflation is slowing would strengthen the Fed's confidence that inflation will decline to the Fed's target of 2%, which Powell has cited as a threshold for cutting rates. He said unexpected weakness in the labor market could also prompt a cut.

"Elevated inflation is not the only risk we face. We've seen that the labor market has cooled really significantly across so many measures," Powell said. "It's not a source of broad inflationary pressures for the economy now." Several Republicans urged Powell not to cut interest rates between now and the November election, saying that to do so would be seen as political interference and compromise the Fed's independence. Democrats got Powell to say that while the economy is slowing, the unemployment rate remains low by historical standards and the U.S. economy is the best globally.

On the status of the proposed "Basel III Endgame" bank capital rules, Powell came down squarely on the side of reproposing the capital rules with a new period for public comment but said other regulators didn't necessarily agree and the precise next steps had not been decided. "It is my view, it is the strongly held view of members of the Board, that we do need to put a revised proposal out for comment for some period … [because] when there are broad and material changes, that has been our practice. We don't see a reason to deviate from that practice," Powell said. "So that's very much what we think. And we're working through that question with the FDIC and the [Office of the Comptroller of the Currency]. We haven't reached agreement on that, but I'm very hopeful that we will." Reuters reported in June that banking regulators were split on how to proceed with the rule, with the Fed open to a re-proposal while the FDIC and OCC opposed it, seeing it as an unnecessary step that could delay the project with a presidential election months away. Powell said he believes the reproposed rule would be published with a Quantitative Impact Survey about the rule's changes, as well as "the effects that the QIS suggests that the changes would have. We'll put all that out for comment again for a period of time. And then, having had yet another round of comment, we can then move toward finalizing." Powell said the comment period "would be meaningful. It might be 60 days. It doesn't need to be a long one."

The Fed chair got into a testy exchange with Sen. Elizabeth Warren (D-MA) over bank regulators' inability to adopt a required Dodd-Frank "Section 956" rule on incentive-based compensation after 14 years of trying. The rule must be jointly adopted by several regulators to come into effect, but the Fed recently declined to sign on to a 956 incentive-comp proposal approved by both the FDIC and the OCC. "I understand why the 10 biggest banks in the country like your approach; you let them do whatever they want," Warren said. "But you don't work for the giant banks, you work for the American people." Powell later told Sen. Chris Van Hollen (D-MD) the Fed had issued "quite detailed" guidance on compensation practices in 2010 and that bank supervisors monitor such compensation. This approach "seems to have largely worked, certainly as it relates to the large firms," he said.

Chairman Powell is scheduled to testify before the House Financial Services Committee today, July 10.

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Washington Council Ernst & Young