This Week (May 19-23)

Congress: The House and Senate are in session prior to the scheduled Memorial Day recess the following week. The House Budget Committee meets in relation to the reconciliation bill at 10 p.m. on Sunday. Changes may be made at the Budget markup or as the bill proceeds to the Rules Committee and the House floor, as time grows short to meet their self-imposed Memorial Day deadline for passage.

The Senate Finance Committee has set a hearing for Tuesday, May 20 at 10 a.m. on the nomination of former Rep. Billy Long (R-MO) to be IRS Commissioner.

Last Week (May 12-16)

Reconciliation tax bill: The House Ways and Means Committee took two big steps toward advancing a GOP-only budget reconciliation bill with extensions of Tax Cuts & Jobs Act (TCJA) provisions expiring at the end of 2025 as the centerpiece, releasing their full legislation with additional tax provisions beyond TCJA extensions and including revenue offsets on May 12 and passing it on May 14 after an all-night markup. The most controversial spending cuts to partially offset the tax cut extensions, addressing Medicaid, were passed by the Energy and Commerce Committee, also on May 14 after an overnight markup. But the momentum coming out of those markups stalled as four members of the House Budget Committee — Reps. Chip Roy (R-TX), Ralph Norman (R-SC), Andrew Clyde (R-GA) and Josh Brecheen (R-OK) — voted against approving the bill assembling the recommendations of 11 committees on May 16. (Rep. Lloyd Smucker, R-PA, also voted 'no,' but for procedural reasons, so that the bill may be reconsidered later.) The holdup occurred even after President Trump implored members with concerns to stand down, saying on social media May 16, "Republicans MUST UNITE behind, 'THE ONE, BIG BEAUTIFUL BILL!' [to] cut Taxes for ALL Americans … " The primary changes being sought by the group include additional Medicaid changes, moving up the Medicaid work requirements start date, and accelerating the Ways and Means bill's changes to Inflation Reduction Act (IRA) energy tax credits. The Budget Committee is slated to reconvene at 10 p.m. on Sunday to discuss possible changes.

Some of the broad categories of the Ways and Means-authored tax portion of the bill are:

• TCJA extensions consistent with the preliminary language released last Friday, though the Section 199A deduction was increased further to 23% and, in place of the Pease limitation, there was the addition of a limitation on the tax benefit of itemized deductions of 35% that would generally affect only taxpayers in the top income tax bracket of 37%, plus other changes
• Extension of TCJA pre-cliffs on bonus depreciation, Section 163(j) interest deductibility, and Section 174 R&D expensing, which are generally extended 2025—2029
• Provisions reflecting President Trump's proposals on no tax on tips, no tax on overtime, no tax on car loan interest, a special higher deduction for seniors, and accelerated depreciation for factories, plus MAGA accounts for children
• Revenue offsets addressing issues including sports team amortization, higher education endowment taxes, private foundation taxes, unrelated business income, an executive compensation aggregation rule, immigration issues including an excise tax on remittances from illegal immigrants in the US to foreign persons, fraud, waste, and abuse provisions for health care and COVID programs, earned income tax credit reforms, etc.
• A robust package of Inflation Reduction Act (IRA) energy tax credit rollbacks
• A new Section 899 retaliatory tax plan, combining and modifying two prior Ways and Means bills on global tax retaliation
• Changes to family-based tax credits and savings accounts for education and health care

As a general matter, a fair amount of the revenue offsets contemplated for businesses were omitted from the plan in favor of tax increases elsewhere. Carried interest is not addressed despite President Trump's reported push for the issue to be included. Changes to the package overall could be expected as the bill moves to Rules Committee and then to the House floor, then certainly when considered by the Senate, so it is possible that additional tax provisions could be added in or changed. The state and local tax (SALT) deduction cap could change, for example, in order to ensure the votes for House passage. A Wall Street Journal (WSJ) analysis noted that some of President Trump's tax proposals, like an exemption for auto loan interest, were included in the Ways and Means bill, while others weren't. "In extending those parts of the bill scheduled to expire at the end of this year, Republicans made some MAGA-flavored changes. In 2017, they got rid of a costly and inefficient deduction for domestic production. Trump wanted a variant back: a reduced corporate tax rate on domestic manufacturing," the story said. "He didn't get that, but House Republicans did revive a pro-growth provision allowing immediate write-off of new equipment purchases and expanded it to new factories."

No Republican amendments were considered by Ways and Means during the 17-hour Ways and Means markup that began the afternoon of May 13, and no Democratic amendments were approved. Democrats are effectively shut out of the process — the bill can pass with Republican votes only in the House and Senate — and their amendments reflected the Democratic tax playbook of the past 15 years or more, daring Republicans to oppose tax cuts for an escalating level of income, up to billionaires, and to change carried interest. The revised Joint Committee on Taxation revenue estimate said the bill costs $3.8 trillion.

International: The Ways and Means bill 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); and 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 new Section 899 would increase various tax rates, including the rate of withholding, by as much as 20 percentage points above the statutory rate, on foreign persons tax resident in, or controlled by, foreign persons that are tax residents of discriminatory foreign countries. Proposed IRC Section 899 would potentially result in a higher BEAT for some taxpayers.

Energy tax: The IRA energy tax credit changes in the Ways and Means bill are concerning to Republicans in both directions: some think they are not sufficient while others view them as too severe. Rep. Roy has criticized the IRA cuts for not taking effect soon enough, though it's unclear how any changes to appease conservatives will be met by members who defend IRA credits. In a May 14 letter, members with concerns with the cuts under the bill called for ensuring "certainty for current and future energy investments to meet the nation's growing power demand and protect our constituents from higher energy costs." The letter said:

• the Foreign Entity of Concern (FEOC) provisions are overly prescriptive and risk undermining competitiveness
• the current "placed in service" standard should be replaced it with a "start construction" standard
• the transferability of energy tax credits should remain available throughout the entire phase-out period

The letter was led by Rep. Jen Kiggans (R-VA), who recently introduced a bill addressing the phase-out of wind and solar tax credits and FEOC prohibitions, and signed by 13 other Republicans: Reps. Andrew Garbarino (R-NY), Mark Amodei (R-NV), Don Bacon (R-NE), Rob Bresnahan (R-PA), Juan Ciscomani (R-AZ), Gabe Evans (R-CO), Jeff Hurd (R-CO), Dave Joyce (R-OH), Young Kim (R-CA), Nick LaLota (R-NY), Mike Lawler (R-NY), Dan Newhouse (R-WA), and David Valadao (R-CA). In a Bloomberg Government report, Rep. Garbarino "said he has concerns about how the bill would treat incentives for nuclear energy as well as new restrictive prohibitions on foreign entities … 'There is a lot of stuff that is going to be fixed.'"

A story in the WSJ said, "Rep. Juan Ciscomani (R., Ariz.) and some other Republicans were … frustrated about the planned phaseout of tax credits for producing solar- and wind-energy parts, battery components and inverters." There are also concerns with the depth of IRA energy tax credit cuts among Senate Republicans. Politico May 13 reported Senator Kevin Cramer (R-ND) as saying the House proposal "to phase out technology-neutral clean electricity tax credits beginning in 2029 would kneecap newer technologies that Republicans favor like advanced nuclear reactors and geothermal that are not ready to be deployed at large scale. 'They definitely need more time than that,' Cramer said. 'It's too short for truly new technologies. We'll have to change that. I don't think it's fair to treat an emerging technology the same as a 30-year-old technology.'"

An EY Alert, "Proposed tax bill would phase out or repeal many energy credits in Inflation Reduction Act," is available here.

SALT: The Medicaid and IRA issues are the focus of Budget Committee conservatives. But before bringing the bill to the floor, leaders will have to assuage Republicans from high-tax Democratic states — including Reps. Nick LaLota (R-NY), Elise Stefanik (R-NY), Mike Lawler (R-NY), Andrew Garbarino (R-NY), Tom Kean (R-NJ), and Young Kim (R-CA) — who have been seeking relief from the $10,000 state and local tax (SALT) deduction cap, and say they are serious about not letting a tax bill pass without significant change to the provision. With the 220-213 majority, House Republicans can only lose the votes of three members to pass the GOP-only reconciliation bill, and multiple factions of members will need to be appeased. The Ways and Means bill included an increase in the state and local tax (SALT) deduction cap to $30,000 that is reduced for income above $400,000, though there was the understanding that the issue would continue to be deliberated. Press reports on May 16 suggested a $40,000 cap was under consideration. Rep. LaLota was quoted in the NYT as suggesting that the $3.8 trillion estimated cost of the Ways and Means bill — which is below the $4 trillion Republicans were thought to be aiming for and well below the $4.5 trillion maximum allowed for under the budget if spending cut targets were met — could allow for a more generous SALT cap. "We were pleased to see the reporting on the current Ways and Means bill, and they have a couple hundred billion dollars in room," he said. On Fox News May 15, House Ways and Means Committee Chairman Jason Smith (R-MO) defended tax bill as written and said: "SALT is definitely getting a lot of attention, but we have known all along, when you have razor-thin majorities both in the House and the Senate, that we were going to just have to thread a very careful needle and balance it. I would say SALT is one of those items that we have to thread. Also, a lot of the green credits, repealing them from the IRA is another one. And then you can look at Medicaid cuts — Medicaid reforms, I should say. These are all things that we're right in the middle. And what we passed out of the House Ways and Means Committee yesterday, I believe, is a good balance, threads that needle." Press reports have suggested some members representing states where SALT isn't an issue, including Ways and Means members, are tiring of the issue and wary of more relief. "If you go north of [$30,000], you're talking about people that make between like $200,000 and $2 million," said Rep. Greg Steube (R., Fla.) in the WSJ. "And it's really hard for a Floridian, who has no income tax, to go back to his district and say we're subsidizing bad decisions in New York, California and New Jersey."

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. Senators are increasingly raising concerns about the House legislation, and some have previously said the reconciliation effort in general should stick to TCJA provisions and little else, on tax and otherwise. "It's not beautiful yet," said Sen. Lisa Murkowski (R., Alaska) of the legislation in the WSJ, referring to the "one big, beautiful bill" moniker adopted by President Trump and House Republicans. Asked about member concerns over Medicaid, energy provisions, and deficit reduction with regard to the House legislation, Senate Majority Leader John Thune (R-SD) said following the regular Tuesday party lunches, "When it comes over here, we will be prepared for various contingencies, obviously one of which could be taking up the House bill and then offering a Senate substitute, but we'll see what ultimately they're able to get done. But I feel very good about where we are, where they are, and where, ultimately, we are going to be on that bill as well." Senator Steve Daines (R-MT) said in remarks to the Tax Council Policy Institute conference that pro-growth provisions in the Ways and Means bill, focusing on the pre-cliff extenders, should be made permanent rather than only extended on a temporary basis.