Legislative Lowdown
Debt Limit Negotiations Stall as Treasury Department Begins Extraordinary Measures. On Jan. 19, the U.S. government reached its $31.4 trillion borrowing limit, which was signed into law by President Joe Biden late last year. Earlier that month, Treasury Secretary Janet Yellen wrote to congressional leadership, notifying them of the impending issue. Yellen noted that once the limit is reached, the Treasury Department will begin “certain extraordinary measures” to prevent a default on its obligations. However, the Treasury Department estimates that these measures may only carry the government through early June.
Once the federal government exhausts all available extraordinary measures, it loses its ability to fund its operations beyond incoming revenues, which only cover part of what is required. As a result, the federal government would have to temporarily default on many of its obligations, possibly including Medicare and Social Security payments, military salaries, interest on the national debt and tax refunds, among others.
At this time, raising the debt limit remains a partisan and politically charged issue. To secure the speakership, Rep. Kevin McCarthy (R-CA) made some assurances to Freedom Caucus holdouts that included changes to the House rules package, some of which will impact the negotiations around raising the debt limit. Specifically, the new House rules eliminate the “Gephardt Rule” that allowed the House to automatically send a measure extending the debt limit to the Senate when it adopts a budget resolution. Additionally, new House rules establish a “Cut-As-You-Go” (CUTGO) rule that requires offsets if bills increase mandatory spending within a five-year or 10-year budget window. In her letter to Congress, Yellen reminded leadership that increasing or suspending the debt limit does “not authorize new spending commitments or cost taxpayers money” and therefore does not run afoul of new House rules. However, House Republicans have made it clear that they view negotiations around raising the debt limit as an inflection point to secure spending cuts.
In opposing requests for spending cuts, White House Press Secretary Karine Jean-Pierre drew a line in the sand, saying that the Biden administration will seek a clean debt limit increase and will not offer concessions to Republicans. A memorandum released by the White House took a similar position, asserting that entitlement spending would not be lowered. The document also criticized Republicans for proposing bills that would further increase the deficit, such as legislation that would cut new IRS enforcement funding or extend provisions of the Tax Cuts and Jobs Act. Congressional Democrats have also argued that spending cuts should be negotiated as part of the annual budget and appropriations process, not during debt limit discussions.
On Feb. 1, Biden and McCarthy sat down for the first time to discuss the debt limit in a meeting that did not appear to yield any significant breakthroughs. However, both men reportedly left the meeting optimistic about the possibility of compromise, agreeing to continue negotiations over the coming months. In a press briefing concerning the meeting, McCarthy told reporters that he would continue to insist that the U.S. government “has a sensible, responsible ability to raise the debt ceiling, but not continue this runaway spending.”
Given this partisan gridlock, it is not likely that Congress will act on the debt limit until the threat of default looms closer, likely in late May or early June. In the interim, Biden is expected to release his fiscal year 2024 budget on March 9, which will contain proposals to reduce the deficit. This will include tax provisions that were discussed tonight in the State of the Union Address, such as a proposed increase to the stock buyback tax and a new levy on the unrealized gains of certain wealthy Americans.
Wyden Renews Scrutiny toward Oil Industry Buybacks. While Senate Finance Committee Chair Ron Wyden (D-OR) has not yet announced a formal agenda for the 118th Congress, Democrats on the tax-writing committee are expected to expand their public investigations into certain industries they have previously targeted over the last two years. This includes continued oversight regarding fossil fuel companies, pharmaceutical manufacturers and the Democrats’ view that unfair tax practices are used by insurance providers, private equity and multinational corporations across several sectors. This expanded investigative process began in late January with Wyden’s renewed inquiries into the $75 billion in public stock that the Chevron Corporation announced it will repurchase later this year.
In his press release, Wyden criticized the oil industry at large for imposing “jacked-up prices at the pump while pulling in record profits.” In conjunction with the statement, Wyden offered reform through his previously proposed Taxing Big Oil Profiteers Act, which would increase the current 1% tax imposed on stock repurchases by large corporations to 25% for companies involved in the oil or natural gas trade. The bill would also impose a 21% windfall profits tax on these companies, as well as prevent them from using the last-in, first-out (LIFO) inventory accounting method.
Several other Democrats previously expressed public support for Wyden’s oil tax bill, including Senate Majority Leader Chuck Schumer (D-NY). However, despite this renewed push for legislative action on the issue, this partisan bill does not have the support needed to receive a vote in the Senate. Regardless, some version of Wyden’s proposals to increase taxes on fossil fuel companies may be included in the Biden administration’s fiscal year 2024 budget, which National Economic Council Director Brian Deese recently announced would be released on March 9.
Lawmakers Ask TIGTA to Investigate Meta Data Sharing. Last week, Reps. Adam Schiff (D-CA), Judy Chu (D-CA) and Raja Krishnamoorthi (D-IL) sent a letter to J. Russell George, the Treasury Inspector General for Tax Administration (TIGTA), requesting that the oversight agency investigate certain data-sharing practices of tax-filing software companies. In their letter, the Democratic lawmakers cited an article from The Markup, which claimed that companies, including TaxAct, TaxSlayer and H&R Block, had been sending personal taxpayer information to Meta. The software providers allegedly harvested this data through a code called the “Meta Pixel,” which retained identifying details on filed tax returns, including users’ income, filing status and refund amounts, among other data points. This information was then allegedly transferred to Meta for use in advertising algorithms on platforms like Facebook.
The letter asks that TIGTA investigate the malicious practice to ensure that private companies cannot illegally share or profit from harvested taxpayer data in the future. Specifically, the letter posed six questions to TIGTA, including requests for estimates on the amount of data transmitted with Meta through e-filing websites, as well as specific questions as to whether Tax Slayer, an IRS-recognized Free File platform, was one of the software packages that had been illegally sharing information with Meta. TIGTA will likely issue a report responding to these questions in the coming months.
This most recent letter follows a similar request for information from eight lawmakers, including Senate Finance Committee Chair Ron Wyden (D-OR) and Sen. Elizabeth Warren (D-MA), that was sent last December directly to the CEOs of Google, H&R Block, Intuit, Meta, TaxAct and TaxSlayer. These letters outlined accusations that these companies mishandled sensitive taxpayer information, posing similar questions regarding the scope of the potential scheme. To date, these companies have not issued public responses to the initial requests for information. This congressional criticism comes as tax-filing software companies like Intuit continue to face myriad class-action lawsuits from customers claiming they were tricked into paying filing fees when they were eligible for free filing options.
Tax Worldview
Guidance on GILTI Treatment Under Pillar Two. On Feb. 2, the Organisation for Economic Co-operation and Development (OECD) released administrative guidance relating to the Pillar Two global minimum tax. The guidance includes several technical clarifications relevant to the United States. In particular, the guidance addresses the U.S. Global Intangible Low-Taxed Income (GILTI) rules, confirming that the U.S. tax system will be treated as a qualifying Controlled Foreign Corporation (CFC) Regime under the global agreement. Furthermore, the document provides guidance on a transitional allocation scheme for a Blended CFC Tax Regime, such as GILTI. For purposes of Pillar Two, these temporary rules will allow U.S. companies to assign portions of their GILTI tax payments to lower-taxed jurisdictions in which they operate, based on the amount of income derived from those jurisdictions.
The transitional rules apply through 2025—and no longer than June 30, 2027, for certain fiscal year companies. These transitional rules for Blended CFC Tax Regimes are intended to sunset in the same time frame as the expiring provisions in the Tax Cuts and Jobs Act. As a result, the transitional rules are expected to leverage those expiring provisions and create further incentive for the United States to modify GILTI by aligning it with the requirements of the qualified Income Inclusion Rule (IIR) Regime under Pillar Two. However, the OECD also notes in the guidance that it is leaving the door open to an extended transition rule and may assess whether to “allow a special allocation methodology for Blended CFC Tax Regimes” on a permanent basis.
Following the announcement, the Treasury Department released a statement applauding the OECD for its progress in advancing the implementation of the global minimum tax. The Treasury Department also noted that the Pillar Two guidance confirms that certain U.S. tax credits will receive favorable treatment under Pillar Two, even though they are not refundable under the U.S. federal tax system. This category of OECD-designated “Qualified Flow-through Tax Benefits” applies to the Low-Income Housing Tax Credit (LIHTC), as well as many of the green energy tax credits that were enacted or expanded by the Inflation Reduction Act.
The OECD guidance comes in the wake of South Korea’s adoption of Pillar Two and the European Council’s preliminary agreement in December 2022 to move forward on the global minimum-tax regime. Each European Union country has until the end of 2023 to modify its national laws to comply with the agreement. Other nations, including the United Kingdom, Australia and Japan, have also started processes relating to the adoption of Pillar Two.
1111 Constitution Avenue
SECURE 2.0 Glitch. Late last month, reports began to arise concerning a significant technical glitch in SECURE 2.0, the retirement reform bill passed late last year as part of the recent Consolidated Appropriations Act of 2023. First reported by the National Association of Plan Advisors on Jan. 24, this error will inadvertently eliminate pre-tax catch-up contributions beginning in 2024. Specifically, a subparagraph meant to be included in SECURE 2.0 would have allowed taxpayers to increase their pre-tax deferral limits by the amount of any allowable catch-up contributions. However, because this section was ultimately left out of the enacted bill, the law effectively eliminates the ability for a taxpayer to make any pre-tax catch-up contributions to their retirement accounts.
Since SECURE 2.0 was supported by a bipartisan group of lawmakers, Congress will likely make technical corrections to this provision before 2024. If no legislative vehicle appears before this time, the Treasury Department may have some regulatory authority to advise taxpayers to ignore this error in the interim, although it is unclear whether the agency has the power to unilaterally correct the glitch.
As for other retirement guidance, on Jan. 26, William Evans, an attorney advisor in the Benefits Tax Counsel’s Office of the Treasury Department, confirmed that several of the ongoing regulatory projects related to the 2019 SECURE Act are ready for publication. However, Evans noted that because of the passage of SECURE 2.0, the Treasury Department might delay the issuance of certain notices that may have already been rendered outdated. Evans speculated that these delayed projects could instead be combined with future guidance on SECURE 2.0 to expedite the rollout of the combined regulatory agenda.
At a Glance
- Finalized Senate Finance Committee Roster. On Feb. 1, Senate Republican Leader Mitch McConnell (R-KY) officially announced the Republican Conference Committee assignments for the 118th Congress. Included in this list were the picks to fill the three vacant Senate Finance Committee positions: Thom Tillis (R-NC), Ron Johnson (R-WI) and Marsha Blackburn (R-TN). These three additions will join Ranking Member Mike Crapo (R-ID), as well as nine other returning committee members. On the Democratic side, all 14 members of the tax-writing committee in the 117th Congress will return under the leadership of Chair Ron Wyden (D-OR).
- GOP Announces New IRS Whistleblower Hotline. On Jan. 25, Ways and Means Committee Chair Jason Smith (R-MO) announced the establishment of a dedicated hotline to assist IRS personnel who wish to submit information confidentially regarding any waste, fraud, abuse or general mishandling of taxpayer information at the agency. This announcement was accompanied by a letter to Acting Commissioner O’Donnell and all IRS employees, which provided the link to the new site and described examples of the type of information the committee hoped to uncover. In addition to an increased focus on potential inadequacies in agency operations, Smith has signaled that he intends to focus on the IRS’ shortcomings in taxpayer service interactions with individuals and small businesses.
- Treasury Receives More Pushback over Proposed FTC Regulations. Following a two-month comment period, responses to the Treasury Department’s proposed guidance related to the Foreign Tax Credit (FTC) were due on Jan. 23. This round of public feedback followed several earlier requests for information on the proposed FTC rules that were initially proposed in 2021. In this updated proposal, the scope of the FTC regulations was significantly narrowed to limit the possibility of double taxing certain multinational corporations. However, several interest groups, including the Business Roundtable, offered new critiques of the modified rules, suggesting changes that they believe would be needed to avoid harming the competitiveness of U.S. companies operating abroad.
- Manchin Endorses Payroll Tax Cap Increase. Last month, Sen. Joe Manchin (D-WV) was asked in an interview what should be done to protect the long-term solvency of Social Security. Rather than cutting benefits or raising the benefit eligibility age, Manchin said the “easiest” thing to do would be to increase the cap on income subject to the Social Security payroll tax. In response to Manchin’s comments, Senate Health, Education, Labor and Pensions Committee Chair Bernie Sanders (I-VT) said he would reintroduce his proposal to raise the wage caps for payroll taxes. Sanders’ proposal, the Social Security Expansion Act, would impose the payroll tax on all income, including capital gains, above $250,000.
Brownstein Bookshelf
- Treasury Expands Clean Vehicle Tax Credit Applicability. On Feb. 3, the IRS and Treasury Department published Notice 2023-16 to provide additional guidance for the Section 30D Clean Vehicle Tax Credit. The proposed regulations modify the expected vehicle classification standard established by an earlier notice, increasing the number of vehicle models that will qualify for the credit.
- Annual Taxpayer Advocate Report. Last month, National Taxpayer Advocate Erin Collins provided her annual report to Congress on the current landscape of the U.S. tax system, as well as recommendations for legislation to improve the filing system.
- NAM Letter on Business Tax Extenders. On Jan. 30, the National Association of Manufacturers (NAM) sent a letter to the chairs and ranking members of the House Ways and Means and Senate Finance committees regarding three tax provisions NAM seeks to reinstate or extend to incentivize U.S. manufacturing.
Hearings and Events
- House Ways and Means Committee
On Monday, the full Ways and Means Committee held a field hearing entitled “State of the American Economy: Appalachia,” during which the following witnesses testified:
On Wednesday, the full Ways and Means Committee will hold a hearing entitled “The Greatest Theft of Taxpayer Dollars: Unchecked Unemployment Fraud,” during which the following witnesses will testify:
Senate Finance Committee
The committee has no upcoming hearings scheduled for this week.
Administration
Tuesday, Feb. 7
Internal Revenue Service
Practical Considerations - Foreign Tax Credit
President Joe Biden
State of the Union 2023
Thursday, Feb. 9
Small Business Administration
Small Business Tax Considerations
Private Sector
Wednesday, Feb. 8
Brookings Institution
Jared Bernstein on the U.S. Economy: Where it’s Been and Where it’s Going
Center for American Progress
State and Local Leaders Summit
Peterson Institute for International Economics
Lessons for Systemic Liquidity Risk From Recent Crises
Thursday, Feb. 9
American Bar Association
2023 Midyear Tax Meeting
National Bureau of Economic Research
Economic Analysis of Regulation, Spring 2023
Friday, Feb. 10
The Cato Institute
State Policy Leadership Forum with Special Guest Gov. Kim Reynolds (R-IA)
- Tom Plaugher, Vice President of Operations, Allegheny Wood Products
- Ashley Bachman, Owner/Operator, Cheetah B’s Restaurant
- Wiley McDade, Co-owner, Devil’s Due Distillery
- Jamie Ward, Itmann Prep Plant Manager, CONSOL Energy Inc.
- Gene Dodaro, Comptroller General, Government Accountability Office (GAO)
- Larry Turner, Inspector General, Department of Labor Office of the Inspector General (DOL-OIG)
- Michael Horowitz, Chair, Pandemic Response Accountability Committee (PRAC)