Legislative Lowdown
Last-Minute Attempt to Revive Permitting Legislation. According to sources familiar with the matter, several moderate lawmakers from both parties are pushing to include energy-permitting reform language in the upcoming National Defense Authorization Act (NDAA). The NDAA is a must-pass authorization bill that often acts as a vehicle for unrelated legislative riders.
The most recent attempt to pass permitting reform ultimately failed last September when Sen. Joe Manchin (D-WV) pulled his bill from the riding with the continuing resolution after it became apparent that it did not have sufficient support to pass in Congress. Notably, both President Joe Biden and Senate Majority Leader Chuck Schumer (D-NY) promised Manchin that permitting reform legislation would receive congressional consideration before the end of 2022. Earlier today, the Biden administration announced its support for the inclusion of permitting legislation in the NDAA.
Manchin’s previous reform bill aimed to address significant project delays posed by the federal environmental-permitting process. Fixing the permitting process has garnered considerable attention on both sides of the aisle, as both traditional energy and renewable projects consistently faced significant delays. If a deal is reached to put permitting reform in the NDAA, it is likely to be a bipartisan compromise between Manchin’s bill and an alternative proposal introduced by Sen. Shelley Moore Capito (R-WV), the ranking member of the Senate Environment and Public Works Committee.
Earlier today, Senate Republican Leader Mitch McConnell (R-KY) added his commentary on the current status of the permitting reform effort as well as other items that Democrats are attempting to include in the NDAA. He classified the efforts as “a grab bag of miscellaneous pet priorities.” In opposition to McConnell’s critical sentiment, Rep. Bruce Westerman (R-AR), the likely future chair of the House Natural Resources Committee, said that he was not fully opposed to the inclusion of permitting reforming in the NDAA.
However, this late in the NDAA process, it is unlikely that such a controversial proposal could garner the bipartisan support needed to pass both chambers. Several House progressives, including Reps. Raúl Grijalva (D-AZ) and Ro Khanna (D-CA) have already announced their intention to vote against the NDAA if any type of permitting reform were included
Tax Worldview
U.S. Battles with EU, Foreign Auto Manufacturers over New EV Tax Credit. Last Wednesday, French President Emmanuel Macron publicly criticized aspects of the Inflation Reduction Act (IRA) tax credits while on a diplomatic visit to Washington, D.C. In his remarks, Macron expressed concern over language in several new IRA provisions that imposes strict U.S. material-sourcing and manufacturing requirements for taxpayers to receive the full credit amount. Notably, Macron warned that these restrictions would significantly disadvantage European electric vehicle (EV) manufacturers.
Under the new law, foreign auto companies could be excluded from part of the $7,500 Clean Vehicle Credit if their cars were not assembled in North America.
Last week, German Economy Minister Robert Habeck threatened to work with other European Union (EU) countries to provide local manufacturing subsidies as retaliation if the United States did not ease current restrictions. Following this announcement, Thierry Breton, the EU commissioner for the internal market, boycotted an EU-U.S. Trade and Tech Council meeting on Dec. 5 in protest against the U.S. EV incentives. Macron has since expressed support for potential “Buy European” EU tax incentives, while other leaders have threatened to bring the issue before the World Trade Organization.
With pressure mounting against the United States to remove some of the restrictions on the EV credit, President Joe Biden announced that the IRA was “never intended to exclude folks who were cooperating with [the United States].” Though Biden refused to admit there were “mistakes” in the bill, he opened the door to the possibility of allowing future tweaks to the legislation to “make it easier for European countries to participate” in the U.S. EV market.
While Biden mentioned that lawmakers may confront perceived issues with the IRA credit, White House Press Secretary Karine Jean-Pierre subsequently walked back his statement, telling reporters that the United States was “not going to be addressing any glitches.” Macron countered last Sunday night by rebuking Jean-Pierre on CBS’s “60 Minutes,” asserting that he and Biden had agreed to “fix” the EV issues.
Regardless of Macron’s optimism, it seems unlikely that Congress would agree to modify the current EV tax credit in the near term. In fact, congressional Democrats were unequivocal in rejecting any legislative changes to the IRA EV content changes, with the chair of the Senate Finance Committee, Ron Wyden (D-OR), saying, “I’m not reopening this law. We’re not going to reopen the text of it.” He was joined by Sen. Debbie Stabenow (D-MI) who voiced her opposition to reopening any new law and reiterated that the purpose of the IRA provisions was to encourage overseas plants to be moved to the United States and create American jobs.
Without a legislative solution, a regulatory fix would be needed. However, when Korean companies raised an issue with the credit last month, Treasury Secretary Janet Yellen said it was unlikely that her agency would step in to provide relief through favorable guidance for foreign auto manufacturers.
1111 Constitution Avenue
Treasury and IRS Release Initial Guidance on Energy Tax Credits. On Nov. 30, the Treasury Department and the IRS released Notice 2022-61, following a brief stakeholder comment period that ended last month. The notice provides initial guidance on the prevailing-wage and apprenticeship requirements taxpayers must satisfy to qualify for increased energy credits or deduction amounts enacted in the Inflation Reduction Act (IRA).
Under the statute, prevailing-wage and apprenticeship requirements apply to qualifying facilities that begin construction 60 days or more after the Treasury Department and IRS publish guidance. This notice starts the clock on the statutory 60-day period, meaning the requirements will be in effect for facilities that begin construction on or after Jan. 29, 2023. For facilities, the construction of which begins before that date, the increased credit amount applies without regard to these labor requirements. The notice provides that taxpayers can satisfy the IRA’s prevailing-wage rate provisions by paying all laborers and mechanics (including contractors and subcontractors) performing construction, alteration or repair at a facility at least the prevailing wage.
The notice also provides further detail on definitions of key terms, including: “employ,” “wage” and “wages,” “laborer or mechanic,” “construction, alteration or repair,” “prevailing wage,” and “prevailing wage determination.” The additional definitions are important as some DOL references have different meanings in the tax context.
The notice also affirms the use of longstanding standards for establishing the date on which construction begins for purposes of claiming relevant IRA incentives. Taxpayers may use either of two methods to establish the date of beginning of construction by: (a) starting physical work of a significant nature (Physical Work Test), or (b) having paid or incurred 5% or more of the total cost of the facility (Five Percent Safe Harbor). The notice also applies a continuity standard for both tests, requiring taxpayers to demonstrate either continuous construction or continuous efforts for the beginning-of-construction standard to be satisfied.
For Brownstein’s initial analysis of this tax guidance, click here.
Timeline on Treasury Guidance for Corporate Minimum Tax. While the Treasury Department recently released the first tranche of guidance related to the new green-energy tax credits, there has still been almost no information regarding the implementation of the novel corporate minimum tax. The tax was one of the primary revenue raisers enacted through the IRA and is set to act as a backstop to ensure large U.S. corporations pay tax equal to at least 15% of their book income beginning in 2023.
Though the levy only applies to companies with annual financial statement revenue in excess of $1 billion, there have been several questions regarding the metric used to determine a company’s total income. Specifically, concerns have been raised over what revenue is counted toward reaching the threshold for the tax to apply. For example, it is unclear whether the new tax applies to unrealized gains that can arise for businesses that hold positions in debt, equity and derivatives in certain cases. Similarly, the IRA allows companies to transfer the new green-energy tax credit. However, it is still unclear if the earnings from the sale of these new credits will be included in a company’s book revenue for purposes of the minimum tax.
There have also been questions regarding when a corporation would no longer be required to pay the tax in years that the company’s adjusted financial statement net income drops below the threshold. Other U.S.-based multinationals have also inquired whether excess foreign taxes incurred prior to the date at which a company becomes subject to the tax can be carried forward to periods when the taxpayer is subject to the new minimum tax.
As a result of the myriad uncertainties regarding the new tax, some corporations are scrambling to determine if they meet the revenue threshold and, if so, how much additional tax they may owe, especially with respect to their corporate estimated tax due in the spring for many companies. In response to stakeholder concerns, Timothy Powell, a policy advisor at the Office of Tax Policy (OTP), confirmed last week that the agency is working on releasing batches of proposed guidance as soon as they are drafted, with initial guidance potentially addressing estimated taxes and the treatment of certain mergers and acquisitions transactions under the new minimum tax.
As recently as Nov. 2, the Treasury Department admitted that they were still in the early stages, and it would likely be a few more months until a “notice of some kind” would be issued to the public. Though Powell opened the door for the possibility of guidance in late 2022 concerning the minimum tax, he said that guidance concerning the green-energy credits was still the top priority for regulation writers in the Treasury Department’s Office of Tax Policy. In recent months, Treasury Secretary Janet Yellen has publicly rejected stakeholder requests to delay the effective date of the new minimum tax until 2024
At a Glance
- Retirement Legislation Continues on Track. Negotiators continue to make progress on reaching an agreement on comprehensive retirement legislation, the so-called “SECURE 2.0.” Several individuals familiar with the matter say lawmakers from the four congressional committees of jurisdiction are close to reaching a final deal, increasing the chances for final passage before the 118th Congress. Despite progress on a retirement bill, the outlook for other significant lame-duck tax legislation remains dim, as both parties continue to resist compromise on their tax priorities, and little progress has been made on the underlying appropriations legislation that is critical for any tax package to ride. For more on Brownstein’s coverage of the lame-duck tax agenda, click here.
- Global Minimum Tax Pulled from EU Finance Docket. Earlier today, finance ministers for the European Union (EU) postponed a planned discussion over the adoption of the 15% global minimum tax negotiated through the Organisation for Economic Co-operation and Development (OECD). A spokesperson for the EU council said this action was a response to ongoing resistance from Hungary over portions of the OECD deal.
- Mortgage Insurers Request Permanent Deduction. In a letter on Nov. 18, a coalition of housing organizations asked the Senate Finance Committee to make the mortgage insurance premium tax deduction permanent, as well as increase the deduction’s current income phaseout. The group consisted of members from the American Bankers Association, Mortgage Bankers Association, National Association of Home Builders and National Association of Realtors, among others. Housing issues are likely to be a priority on the tax agenda in the 118th Congress, with organizations also recently urging lawmakers to extend expiring provisions of the current Low-Income Housing Tax Credit (LIHTC).
- TIGTA Clears IRS of Wrongdoing in Comey Audit. Last week, the Treasury Inspector General for Tax Administration (TIGTA) officially absolved the IRS of potential misconduct in the auditing of former FBI Director James Comey and his deputy, Andrew McCabe. A bipartisan group of lawmakers and former IRS Commissioner Chuck Rettig had previously raised concerns over the auditing of both men, with critics speculating that the IRS may have taken action as retaliation against the former rivals of President Donald Trump.
- IRS Fails to Deter ‘Line-Jumping’ Platforms. Last October, the IRS commenced a pilot program to limit the use of auto-dialing systems that had plagued the agency’s helpline. These auto-dialers allowed organizations to skip the IRS helpline queue by putting hundreds of fake users in the system. These robotic callers would then act as placeholders for clients that sought an advantage in the queue for reaching an IRS representative. After two months, the IRS admitted that they had seen some success but had not entirely deterred the use of these auto-dialing companies.
Brownstein Bookshelf
- Implications of TCJA Permanence. The Brookings Institute Tax Policy Center released an article on Nov. 30 analyzing the budgetary and distributional effects of proposals to make permanent several tax credits enacted through the 2017 Tax Cuts and Jobs Act (TCJA).
- Proposed Easement Regulations. Earlier today, the Treasury Department and IRS published proposed regulations concerning the disclosure regime for syndicated easements.
- Stakeholder Comments on Latest IRS Energy Notices. On Dec. 3, the comment window ended for the initial round of comments related to the new clean hydrogen and clean fuels tax credits. This is the most recent of three rounds of stakeholder comment periods on energy provisions enacted through the IRA. These notices have generated incredibly high levels of public response, with this notice alone ultimately receiving over 15,000 comments.
Regulation Station
House Ways and Means Committee
The committee has no upcoming hearings scheduled for this week.
Senate Finance Committee
The committee has no upcoming hearings scheduled for this week.
House Financial Services Committee
On Tuesday, the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets held a hearing entitled “E, S, G and W: Examining Private Sector Disclosure of Workforce Management, Investment, and Diversity Data,” during which the following witnesses testified:
- Cambria Allen-Ratzlaff, Managing Director and Head of Investor Strategies, JUST Capital
- Colleen Honigsberg, Ph.D. in Accounting and Professor of Law, Stanford Law School
- Shivaram Rajgopal, Ph.D. in Accounting and Professor of Accounting and Auditing, Columbia Business School
- Fran Seegull, President, U.S. Impact Investing Alliance
- Andy Vollmer, Senior Affiliated Scholar, Mercatus Center at George Mason University
Administration
Tuesday, Dec. 6
Small Business Administration
Get Ready for Your 2022 Taxes
Thursday, Dec. 8
Small Business Administration
SBA & IRS – Employment Retention Credit
Private Sector
Tuesday, Dec. 6
The Atlantic Council
Mobilizing Opportunity in Central and Eastern Europe’s Digital Economy
American Bar Association
Technological Advancements in Tax Practice and the Impact of the Inflation Reduction Act on the IRS’s Capabilities and Service
The Heritage Foundation
Lessons for America from Europe’s Green Energy Disaster
Monday, Dec. 12
The Urban Institute
Developing Local Community and Economic Development Ecosystems: What Does It Take