Last Week (May 5-9)

Budget reconciliation: Starting on Tuesday, May 13 at 2 p.m., the House Ways and Means Committee and the Energy and Commerce Committee will hold their markups of key portions of a budget reconciliation bill to extend Tax Cuts & Jobs Act (TCJA) provisions expiring at the end of 2025 and make mandatory spending cuts. A preliminary version of Chairman Jason Smith’s (R-MO) mark of the Ways and Means portion was released May 9 and mostly addresses TCJA extensions, with other provisions and revenue offsets likely to be detailed in a substitute amendment to be released before the markup.

The preliminary mark addresses the following tax provisions:
 

• Individual rates (10%, 12%, 22%, 24%, 32%, 35%, 37%) made permanent (with inflation relief for rates below the 37% rate)
   
• Standard deduction extended past 2025 and increased for years 2025 - 2028
   
• Personal exemptions reduction to $0, effectively suspending the provision, is made effective after 2025
   
• Child tax credit increased further to $2,500 for 2025 - 2028 and subject to an added Social Security number requirement, and makes permanent the maximum amount of the additional child tax credit per qualifying child of $1,400 adjusted for inflation ($1,700 in 2025)
   
• 199A pass-through deduction made permanent, increased to 22%, and made applicable to certain interest dividends of qualified business development companies
   
• Estate tax exemption permanently set at $15 million (inflation adjusted)
   
• AMT exemption amounts and phase-out thresholds extended past 2025
   
• $750,000 ($375,000 for married filing separately) limitation on home mortgage acquisition indebtedness is made permanent, and the exclusion of interest on home equity indebtedness from the definition of qualified residence interest made permanent
   
• Personal casualty loss limitation made permanent
   
• Repeal of miscellaneous itemized deductions made permanent
   
• Permanent repeal of Pease limitation
   
• Termination of the exclusion for qualified bicycle commuting reimbursement after 2025
   
• Permanent repeal of the deduction for moving expenses, except for a member of the Armed Forces
   
• Wagering losses deduction clarification to include deductible expenses incurred in carrying on the gambling activity extended beyond 2025
   
• Makes permanent certain provisions related to ABLE accounts and eligibility for the Saver’s Credit
   
• Restores the exclusion from an individual’s gross income for an otherwise includible amount from the discharge of a qualifying loan on account of a student’s death or total and permanent disability
   
• Makes permanent the current rates on global intangible low-taxed income (GILTI) of a 50% deduction (10.5% rate), including the corresponding section 78 gross-up amount, and foreign-derived intangible income (FDII) of a 37.5% deduction (13.125% rate)
   
• Makes permanent the current rates for the base erosion and anti-abuse tax (BEAT) of 10%, or 11% for banks/dealers, and repeals the post-2025 change that would reduce regular tax liability (and increase the base erosion minimum tax amount) by the taxpayer’s income tax credits for the taxable year
   

The markup notice and preliminary bill text are available here; the Joint Committee on Taxation description (JCX-18-25) is available here

Outlook: Issues remain unresolved even with markups on the schedule, and expectations for the size of the bill are being scaled back, reflecting the long-running dynamic among Republicans that some conservatives want deep spending cuts in exchange for tax cut extensions, while more moderate members are wary of such spending cuts, especially if they reduce Medicaid benefits. Press reports said members would work through the weekend to nail down details before release of the full text of the Ways and Means bill prior to the markup. Deficit reduction from House committees totaling $2 trillion is required for a full $4.5 trillion deficit increase for tax cuts in Ways and Means under the budget resolution. That is reduced to $4 trillion if only the $1.5 trillion savings floor is met. The focus is now on a package at the bottom end of that range, given the difficulty Republicans are having in agreeing to a deeper level of spending cuts. The bill will rely exclusively on GOP votes, and only three votes can be lost in the 220-213 House. House Speaker Mike Johnson (R-LA) told members May 7 that leaders are targeting a smaller package of $1.5 trillion in spending cuts for $4 trillion in tax cuts, which followed House Budget Committee Chairman Jodey Arrington (R-TX) saying May 8 that tax cut plans may need to be scaled back without the requisite amount of savings, and therefore some policies may need to be temporary. Chairman Smith met with President Trump May 9 to discuss a pared-back package that still delivers on GOP priorities.

“Fiscal hawks” have been emphasizing that they won’t back a bill without sufficient savings. More than 30 members of the House Republican Conference, led by Ways and Means member Lloyd Smucker (R-PA), said in a May 7 letter to leadership that the reconciliation bill “must include at least $2 trillion in verifiable savings either through spending reductions or scaling back the size of the tax package” or the Ways and Means instruction “must be lowered dollar-for-dollar to keep the reconciliation bill within the agreed limits.” A main lever for reducing the cost of a tax package is the duration of its provisions. A May 7 Politico story cited Ways and Means member Ron Estes (R-KS) as saying Republicans could end up with a greater number of temporary tax policies, while making permanent provisions for “tax breaks for things like business research and investment expenses.” Estes said, “At the end of the day, I believe we’ll have some provisions that are permanent and a bunch that will be temporary — you know, four years, six years, eight years.”

SALT: Republicans from high-tax Democratic states have been seeking relief from the $10,000 state and local tax (SALT) deduction cap since it was enacted in the TCJA, and say they are serious about not letting a tax bill pass without significant change to the provision. There was some discussion May 8 of increasing the cap to $30,000, which Rep. Nick LaLota (R-NY) said wouldn’t pass the House. He and some other members issued a more forceful rejection of that number in a later statement, but Rep. Nicole Malliotakis (R-NY), who had suggested an income threshold to steer benefits toward middle-income taxpayers, came out in support of a $30,000 cap. LaLota has said Republican leaders won’t offer up a number for the cap increase, and there is some difference of opinion over who should be making the opening bid. Punchbowl News reported May 7 that Chairman Smith told members concerned about the issue that it isn’t his job to propose a solution. It has also been noted that Ways and Means can get through its markup without a SALT cap deal, but if it is not the issue will need to be resolved by an amendment in the Rules Committee or on the floor.

Add-ons: Late entries from President Trump were complicating the task of House leaders nailing down a tax package to take into the markup. Bloomberg reported Ways and Means member Kevin Hern (R-OK) as saying that, in addition to the SALT cap, there is no resolution yet on the top individual tax rate and carried interest, both of which President Trump reportedly pushed Speaker Johnson to include on Wednesday. The President previously said he was wary of the political consequences of increasing the top rate. He is now proposing a 39.6% tax bracket for individuals earning $2.5 million or more, and $5 million for couples. Senate Finance Committee Chairman Mike Crapo (R-ID) said on the Hugh Hewitt show that he is not excited by the proposal, but other members are, and it may be under consideration given the President’s support. The President posted on social media May 9, of a tax increase on high-income taxpayers, “Republicans should probably not do it, but I’m OK if they do!!!”

Senate perspective: Whatever may eventually pass the House is likely to be modified in the Senate, raising questions about how differences will be resolved and whether House members could be voting on some policies that won’t ultimately be enacted. Senate Majority Leader John Thune (R-SD) said on Fox Business on Monday that “the Speaker has a lot of different people who have different equities in this, and then we have the same thing in the Senate.” He further said of the range of opinions in his chamber, “We’ve got people who want more spending cuts, people who want slightly different things when it comes to taxes… [I]t’s a chess match of some sort, but we will get this done. And I think in the end, hopefully it will be by the middle of the summer, because I think… businesses [are] looking for economic certainty, and we want to give them that…” A May 5 Semafor story cited Senator Bernie Moreno (R-OH) as calling the emerging House bill a “sandstorm of bad ideas,” and saying Congress should focus on permanent extensions of the 2017 tax cuts, restoration of R&D expensing, and President Trump’s tax proposals for tips, overtime and Social Security, rather than the broader range of proposals being considered in the House. On process: “The House is planning, for now at least, to send its legislation through congressional committees. The Senate has no current plans to do that; they’ll assemble their own bill or tweak whatever the House sends over. That could lead to a leadership-negotiated Senate bill that amends the House’s work and tees up a final deal. ‘There could be a world in which the House passes their bill, and then, you know, we’re here,’ said Senator John Cornyn, R-Texas. He said one possibility is to ‘tweak it, and then send it back to them, and then they pass it.’”

International tax: Punchbowl News reported May 5 that tax proposals for the reconciliation package advocated by the Trump administration last week included a lower tax rate for Foreign Derived Intangible Income (FDII). The current FDII tax rate of 13.125% is slated to increase to above 16% if Congress does nothing on the issue.

Senator Thom Tillis (R-NC) May 6 introduced the International Competition for American Jobs Act (S. 1605), previously sponsored by former Senator Rob Portman (R-OH), which includes provisions to make permanent the CFC look-through rule that expires at the end of 2025; maintain the 37.5% deduction (13.125% rate) for FDII, 50% deduction (10.5% rate) for Global Intangible Low-Taxed Income (GILTI) and 10% rate for the Base Erosion and Anti-Abuse Tax (BEAT); make various changes to those provisions and foreign tax credit limitation baskets; eliminate downward attribution from foreign persons to U.S. entities for CFC purposes; and repeal the foreign tax credit haircut for GILTI.

Global tax: The Trump administration Treasury Department continues to argue that, instead of requiring changes to bring GILTI into compliance with the Model Rules, the US tax system, including the US Global Intangible Low-Taxed Income (GILTI) regime, Subpart F and current taxation of foreign branches of US MNEs, should operate as a parallel system alongside Pillar 2 and should not be integrated into Pillar Two. The Bloomberg Daily Tax Report cited Deputy Assistant Secretary for Tax Policy Kevin Salinger as saying at an event sponsored by the National Tax Association that the United States doesn’t want its tax system to overlap with the 15% global minimum tax. “We support the stable international tax framework, where the US tax system and Pillar Two can co- exist but not overlap,” he said. At the American Bar Association meeting in Washington, Deputy Assistant Secretary for International Tax Affairs Rebecca Burch said Treasury is currently committed to multilateral process with the OECD by which US tax sovereignty must be respected and a path forward on Pillar 2 must neutralize its effects on US companies, meaning the US system “stands side by side” with the Pillar 2 system. If the US does nothing, US MNCs will be subject to US tax rules and Pillar 2, that result is unacceptable, and that’s the message delivered at the Cape Town meeting of the Inclusive Framework last month.

Bill intros: On May 5, Ways and Means member Claudia Tenney (R-NY) introduced the Building Advanced Semiconductors Investment Credit (BASIC) Act (H.R. 3204) to increase the advanced manufacturing investment credit from 25% to 35% and extend its availability through December 31, 2030.

On May 6, Senator Roger Marshall (R-KS) introduced the Overtime Wages Tax Relief Act (S. 1606), to address President Trump’s proposal by providing a tax deduction for overtime wages – up to $10,000 for individuals and $20,000 for married couples – with a phase-out beginning when income reaches $100,000 for individuals or $200,000 for married couples and reduced by $50 for every $1,000 in income above the threshold, similar to the Child Tax Credit. It defines overtime to include workers such as law enforcement officers, nurses, trade workers and factory employees.

On May 7, Senate Finance Committee members Todd Young (R-IN) and Maggie Hassan (D-NH) introduced the American Innovation and Jobs Act (S. 1639), to restore R&D expensing by repealing the change made by the TCJA to section 174 and expanding the R&D credit as it applies to startups.

Finance Committee members Marsha Blackburn (R-TN), Michael Bennet (D-CO) and Thom Tillis (R-NC) introduced the Strengthening Essential Manufacturing and Industrial (SEMI) Investment Act (S. 1642), to expand the Section 48D advanced manufacturing investment credit to include upstream materials suppliers.

Senator Bernie Moreno (R-OH) introduced S. 1653, to allow a deduction for qualified automobile interest.

On May 8, Senator John Barrasso (R-WY) introduced the Growing America’s Small Businesses and Manufacturing Act (S. 1688), to permanently extend the allowance for depreciation, amortization, or depletion for purposes of determining the income limitation on the deduction for business interest. “The bill revises the limitation from 30% of a business’s Earnings Before Interest and Taxes (EBIT), back to 30% of Earnings Before Interest, Taxes, Depreciation, Amortization, and depletion (EBITDA)” and expands Section 179 small business expensing, said a news release.

Senator Young introduced S. 1686, to establish a tax credit for neighborhood revitalization, and S. 1687, to provide an exception to the percentage of completion method of accounting for certain residential construction contracts. The Neighborhood Homes Investment Act (NHIA) creates a federal tax credit that covers the cost between building or renovating a home in these areas and the price at which they can be sold.

This Week (May 12-16)

Congress: The House and Senate are in session. On May 13 at 2 p.m., the House Ways and Means Committee and the Energy and Commerce Committee will hold their reconciliation markups.

On May 14 at 10 a.m., the Senate Finance Committee has set a hearing on Trade in Critical Supply Chains.