Russ-o-Meter
Estimates on tax policy questions
from shareholder Russ Sullivan
“RUSS, HOW LIKELY IS IT THAT WE SEE A RECONCILIATION LAW PASSED IN THIS CONGRESS?”
Tax Tidbit
Reconciliation Realignment. Late last week, citing high inflation, Sen. Joe Manchin (D-WV) announced his hesitation to move forward with a budget reconciliation package that includes climate and energy spending and changes to the tax code. Manchin said during a radio interview that he is willing to revisit an agreement on these priorities in September, if he observes favorable trends in the July Inflation Report (more details below). Manchin said that if Democratic leadership would like a deal prior to the August recess, it would have to be a health care-focused package.
In the wake of Manchin’s interview, President Joe Biden quickly issued a press release urging Senate Democrats to abandon energy provisions completely to pursue a health care-only deal before the August recess. In that statement, President Joe Biden claimed that he would supplement congressional shortfalls with “strong executive action” to address climate change. In opposition to this sentiment, Senate Finance Committee Chairman Ron Wyden (D-OR) has publicly advocated for delaying the process to allow for consideration of an energy and tax package in September.
If Democrats choose to wait until September for a broader deal, Manchin has already outlined potential energy provisions that could be included. When discussing technologies that he believes should be incentivized, Manchin said that spending would be limited to support for proven clean technologies like transmission line upgrades, hydrogen production, geothermal production, small modular nuclear reactors (SMRs) and integrated battery storage for solar and wind facilities.
On the revenue side, Manchin said that he did not support the adoption of proposals to align the United States with Pillar 2 of the Organisation for Economic Co-operation and Development (OECD) global tax-reform framework through reconciliation, claiming that he had “taken [the proposal] off the table” (more details below).
Manchin was significantly more open to consideration of some version of a 15% domestic minimum tax in a larger deal. While he claimed the tax “makes sense” in theory, he wanted to ensure American companies that were earning tax “discounts” (deductions and credits) in ways that created jobs and promoted industry growth were not negatively affected.
Below are two possible paths forward for Democrats to enact reconciliation legislation in this fiscal year.
TWO OPTIONS FOR RECONCILIATION
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Health Care Only
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Health Care, Energy and Tax Increases
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Spending/Investment Provisions**
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(1) $40 billion: Two-year extension of modified ACA subsidies.*
Total Cost: $40 billion
*For a two-year continuation of current ACA subsidy policy, the estimated cost is $100 billion; however, given reported figures, the policy included is likely to incorporate means testing or other modifications to reduce outlays.
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(1) $140 billion: Modified tax credits for solar, wind, nuclear, hydrogen, transmission, geothermal, storage, carbon sequestration and other clean energy sources;
(2) $30 billion: Modified support for green workforce;
(3) $40 billion: Extension and expansion of incentives for alternative fuel and alternative fuel property;
(4) $50 billion: Energy incentives for individuals; and
(5) $40 billion: Two-year extension of modified ACA subsidies.*
Total Cost: $300‒$500 billion
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Revenue Provisions**
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(1) $290 billion: Maximum net revenue of modified drug-pricing reform. Portions of the drug pricing plan may be subject to Byrd Rule challenges potentially reducing the overall net revenue.
Total Revenue: Up to $290 Billion
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(1) $100 billion: Modified book profits minimum tax;
(2) $120 billion: Excise tax on stock buybacks;
(3) $200 billion: Non-GILTI international tax provisions;
(4) $200 billion: Modified net investment income tax;
(5) $160 billion: Extended limitation of excess businesses losses;
(6) $130 billion: Net revenue of increased IRS funding; and
(7) $290 billion: Maximum net revenue of modified drug-pricing reform. Portions of the drug pricing plan may be subject to Byrd Rule challenges potentially reducing the overall net revenue.
Total Revenue: Up to $1.2 trillion
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Timeline
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Bill could pass Congress before the August recess—signed into law during recess.
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Manchin might begin consideration of the bill after the Aug. 10 inflation report. Bill would likely not pass until September.
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Supporters
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(1) President Biden;
(2) Sen. Tester; and
(3) Speaker Pelosi.
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(1) Chairman Wyden;
(2) Environmental Groups; and
(3) Progressive Democrats.
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Provisions Unlikely to Be Included
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(1) Any tax provisions; and
(2) Any climate-related provisions.
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(1) Direct pay tax credits;
(2) Electric vehicles tax credit; and
(3) Modifications to GILTI.
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**All figures are approximations and are rounded to the nearest $10 billion.
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Legislative Lowdown
Inflation Report. Last Wednesday, the Department of Labor (DOL) Bureau of Labor Statistics (BLS) released their much-anticipated inflation report for the month of June. The agency announced that the aggregate price of basket goods in the Consumer Price Index for All Urban Consumers (CPI-U) had risen by approximately 9.1% in comparison to June of 2021. This increase denotes the largest 12-month jump since February 1981. This number was significantly higher than both the 8.6% reported inflation for May 2022 and recent market forecasts, which had estimated the June release at sub-9%.
The CPI-U index measures a broad swath of consumer goods designed to mimic the typical spending habits of the 93% of Americans who live within a census-designated urban population center. The index is primarily compromised of items considered to be essential including food, energy, shelter and medical care services.
In the June report, the greatest driver of inflation was attributed to the 41.6% increase in energy costs, and to a lesser extent, the 10.4% rise in the food index. The most significant price spike stemmed from a nearly 60% increase in gasoline prices since June 2021. All other goods rose in price by a comparatively mild average of 5.9% in the same 12-month period.
On Monday, July 11, White House Press Secretary Karine Jean-Pierre released a preemptive statement attempting to quell any potential economic fallout over the June CPI-U report. While she conceded that the Biden administration expected the report to display “highly-elevated” index figures, she downplayed the significance of any negative outcomes, painting the report as out of date and “backward-looking.” Upon release of the report, President Joe Biden sent out an official press statement highlighting disinflation in the price of non-energy, non-food goods. Biden also used the moment to call attention to elevated profits recorded by oil companies and Democrats’ ongoing efforts to reduce prices on prescription drugs and utilities. The statement concluded with an accusation against Republicans for attempting to raise “taxes on working people, [and put] Social Security and Medicare on the chopping block.”
The June CPI-U report sparked strong reactions from several key lawmakers on both sides of the aisle. As mentioned above, Sen. Joe Manchin’s (D-WV) statement was highly cautionary, focusing on the effects of inflation on everyday consumers at gas pumps and grocery stores. He further advocated for restrained fiscal priorities, urging lawmakers to avoid policies that could “add any more fuel to this inflation fire.” Sen. Jon Tester (D-MT) echoed this sentiment in an interview with Yahoo Finance, citing his concern over the effect that any tax increases could have on several sectors of the economy. House Ways and Means Ranking Member Kevin Brady (R-TX) concurred with these concerns, blaming “reckless stimulus checks” for spurring current inflationary pressure and cautioning against further fiscal spending that could be enacted in a potential reconciliation deal.
The inflation report for July is expected to be released on Aug. 10 and could have significant ramifications on reconciliation discussions if a deal has not yet been reached with Manchin.
Congress CHIPS Away at Semiconductor Roadblocks. The Senate is expected to take up a modified version of the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act early this week. Semiconductor incentives comprised a small part of stalled efforts to legislate a bipartisan innovation and competitiveness bill through conference committee. Senate Majority Leader Chuck Schumer (D-NY) released new legislative text and a section-by-section summary of this reworked semiconductor legislation last Sunday. The CHIPS Act contains several provisions that were previously included in earlier proposals of semiconductor legislation that would appropriate a total of $52 billion in funding to establish and expand semiconductor infrastructure. This includes emergency supplemental funding for programs to modernize existing facilities, build new production sites, expand workforce training programs and catalyze investment in semiconductor research and development programs.
Notably, the proposed legislation includes a tax credit equal to 25% of the taxpayers’ investment in qualified tangible property designed for use in the production of semiconductors or semiconductor tooling equipment. This investment tax credit (ITC) was previously included in the Facilitating American-Built Semiconductors (FABS) Act, which was introduced in the Senate last year. Taxpayers can elect to receive this new 48D ITC as a direct pay credit, and it is available for facilities placed in service between Dec. 31, 2022, and Jan. 1, 2027.
Last week, Biden administration officials issued a message urging Congress to pass legislation to address the domestic semiconductor shortage. Secretary of Commerce Gina Raimondo said that several companies, including Intel, are deciding whether to invest in U.S.-based semiconductor manufacturing facilities, and their decisions rely heavily on the passage of funding for semiconductor production. Raimondo stated the importance of expanded semiconductor manufacturing investment to strengthen the domestic supply chain and ensure competitiveness with China.
Initial signals on bipartisan support appear mixed with some Republicans like Sen. John Thune (R-SD) doubting that his party will provide enough support to clear the 60-vote threshold. On the other hand, Senate Republican Whip John Cornyn (R-TX) seemed much more optimistic about ongoing CHIPS discussions, tweeting that Manchin’s recent comments on reconciliation will “green light” efforts to “shore up the dangerous vulnerability of U.S. supply chain for advanced semiconductors.”
House Democrats Rub SALT in Reconciliation Wounds. Democratic representatives from high-tax states are continuing to demand relief from modifications made to the state and local tax (SALT) by the Tax Cuts and Jobs Act (TCJA). Before 2017, taxpayers could claim an unlimited deduction on taxes paid to their state or local governments including non-federal taxes paid on property, income or sales. The Republican-authored reconciliation bill significantly limited permissible uses for the SALT deduction and capped it to allow a maximum deduction of $10,000. This change had the greatest effect on taxpayers living in states like California, New York and New Jersey that levy high state income and property taxes on their residents.
A provision to raise the cap to $80,000 was included in the larger Build Back Better Act that passed the House in November of 2021. However, that legislation was rejected by Sen. Joe Manchin (D-WV) when he announced that he did not support the House-passed bill.
Now, a coalition of Democrats led by Rep. Josh Gottheimer (D-NJ) is fighting to raise the SALT cap in the reconciliation package that Democratic leadership is hoping to pass before Congress breaks for the August recess.
In a joint statement released earlier this year, Reps. Tom Suozzi (D-NY), Mikie Sherrill (D-NJ) and Gottheimer said “SALT remains a top priority.” They added that they “support the president’s agenda, and if there are any [reconciliation] efforts that include a change in the tax code, then a SALT fix must be part of it. No SALT, no deal.”
As recently as last week, multiple House Democrats including Suozzi and Gottheimer confirmed that they still refused to support any tax legislation that did not include an increase in the SALT deduction cap.
However, their plan to uncap the SALT deduction faces major obstacles in the Senate with Manchin announcing that he is not on board. Last Wednesday, he confirmed that a potential modification to “SALT has not been in the [reconciliation] talks at all.”
NDAA Update. This week the Secure and Fair Enforcement (SAFE) Banking Act passed the House in a bipartisan manner as a part of the NDAA. This is the seventh time the proposal has passed the House.
If passed by the Senate, the SAFE Banking Act would help ease one of the largest obstacles facing the cannabis industry, which is the lack of access to banking services. Many financial institutions refuse to serve the multibillion-dollar cannabis industry because of the regulatory uncertainty created by divergent state and federal cannabis laws. The SAFE Banking Act seeks to remove ambiguities at the federal level by protecting banks and financial institutions that choose to serve cannabis-related businesses operating within their state’s legal and regulatory frameworks.
Despite being passed with bipartisan support in the House, the bill faces an uncertain future in the Senate. In 2019, when the Senate was Republican-controlled, Senate Republican Leader Mitch McConnell (R-KY) refused to bring the legislation to a floor vote in the Senate. This time around, Senate leadership is much more friendly to cannabis reform. However, there have been reports that Senate Democratic Leader Chuck Schumer (D-NY) has stated that he is not comfortable moving the SAFE Act because it is too narrow in its scope. Senate leadership will need to decide how to thread the needle between Democrats who will not pass the bill because of how narrow it is in its scope and Republicans who want to pass it as a standalone banking bill.
There are some reports that Rep. Ed Perlmutter (D-CO) has received a CBO report that shows that the SAFE Banking Act would result in cost savings for the federal government of about $500,000 over the next decade.
Global Getdown
GILTI and Other International Tax Provisions on Life Support. In the interview with West Virginia radio host Hoppy Kercheval on Friday, July 15, Sen. Joe Manchin (D-WV) announced he would not support any legislative proposals that include climate or energy provisions or raise taxes on individual Americans or corporations, although he reserved the possibility of revisiting such proposals after the July inflation data is released in mid-August.
His statement is particularly damaging to the Biden administration’s efforts to align the United States with the two-pillar global-tax agreement that Treasury Secretary Janet Yellen brokered last year through the OECD. A key component of that effort is modifications to the U.S. Global Intangible Low-Taxed Income (GILTI) rules, which would move the United States closer to the 15% global minimum tax envisioned by Pillar Two. Manchin stressed in the interview that he could not support the administration’s global minimum-tax plan at this point because he believes “the rest of the countries won’t follow, and we’ll put all of our international companies in jeopardy, which harms the American economy.”
Schumer’s decision on the path for reconciliation will be consequential to the Biden administration’s global tax-reform goals. Under the congressional budget rules, the reconciliation bill can only be used once—in this case, for health care provisions in July or a broader package that could include GILTI modifications potentially in September. The latter option comes with significant uncertainty since there currently is no agreement on the bill, a short time frame before reconciliation expires on Sept. 30, and just weeks before the midterm elections.
With Republicans seemingly united against a reconciliation bill in either form, the outlook for the international tax reforms essential to the United States’ participation in Pillar Two appears dim. Senate Finance Committee Ranking Member Mike Crapo (R-ID) commented on Friday, July 15, that he “will continue to push for additional deliberation and an opportunity to renegotiate terms of the OECD agreement with bipartisan input from congressional tax writers,” a position Republicans are likely to maintain next year if the midterm elections result in a shift in control of one or both chambers of Congress.
Yellen Holds Out Hope for the Global Tax Agreement. Representatives of the Group of 20 (G20) major economies met in Bali, Indonesia, this past weekend for the annual Finance Ministers and Central Bank Governors Summit. Attendees primarily discussed the role that the G20 countries should play in cultivating a more stable global economic system, with concerns about high inflation rates occupying much of their attention.
Surprisingly absent from the weekend’s discussions were the ongoing efforts to implement Pillars One and Two of the OECD global tax-reform framework. For her part, Treasury Secretary Yellen said that, despite opposition from Sen. Joe Manchin (D-WV), the United States is “very committed to moving ahead with [the global tax agreement].” She added that the United States should not be deterred by setbacks because if the country is late to enact the deal, U.S. companies could be subject to foreign levies through the proposed undertaxed profits rule. Despite Yellen’s optimism, Manchin continues to display significant hesitation with respect to the legislative changes necessary for the United States to align with Pillar Two before other countries have moved forward.
Beyond the narrow focus on the OECD international tax agreement, Russia remained a central topic of discussion across the two-day summit, with a majority of attendees condemning the country’s ongoing invasion of Ukraine. Serhiy Marchenko, Ukraine’s finance minister, used the event as a platform to call for expanded sanctions against a broader swath of Russian industries. Yellen used the opportunity to announce American support for several developing global aid initiatives. In multiple press conferences, Yellen reaffirmed her commitment to curbing U.S. inflation by advancing proposals to reduce the deficit and allow the U.S. government to engage in drug-pricing negotiations.
Yellen also affirmed the Biden administration’s commitment to impose a global cap on the price of Russian oil, while other finance ministers focused their statements on addressing perceived abuses in global lending practices and the treatment of debt owed by developing countries.
The G20 finance ministers will meet next in October in Washington, D.C.
At a Glance
- Crapo and Grassley Discuss Tax Increases. Following the June inflation report from the Bureau of Labor Statistics (BLS), Senate Finance Committee Ranking Member Mike Crapo (R-ID) and Sen. Chuck Grassley (R-IA) hosted a news conference to discuss the effect that proposed tax increases could have on the U.S. economy. In particular, Crapo argued that the proposed expansion of the Net Investment Income Tax (NIIT) would tax a significant contingent of small-to-medium-sized businesses.
- Wharton Budget Model Webinar. Last Friday, Kent Smetters, director of the Wharton Budget Model, hosted a virtual discussion with economists Alan Auerbach and Michelle Hanlon on the potential introduction of a minimum tax on highly profitable corporations. This so-called “book profits minimum tax” was included in the House-passed BBBA and would allow for the calculation of federal taxes using the financial statements reported by corporations to their shareholders, as opposed to traditional tax returns filed with the Internal Revenue Service (IRS). Auerbach and Hanlon agreed that a book profits tax would reduce the effectiveness of federal tax incentives, cripple the functionality of traditional accounting statements, and give rise to the development of new “shadow sets of accounting books.” Of note, reports have indicated that Sen. Joe Manchin (D-WV) relies on the Wharton Budget Model for significant guidance on fiscal policy proposals.
- IRS Implements Videoconferencing. After a recommendation from the Government Accounting Office (GAO), the IRS will test videoconference visits with paid tax preparers. The recommendation came after the IRS estimated that 23% of the payments it issued to taxpayers in FY 2021 for refundable tax credits were made in error. The total cost of this was approximately $26 billion. Prior to the COVID-19 restrictions, the IRS would offer Knock and Talk Visits (KTV) and Due Diligence Visits (DDV). From fiscal years 2017 to 2020, the IRS estimated that these visits on average protected about $118 million of tax revenue per year at an average cost of $3.3 million per year.
Brownstein Bookshelf
- AICPA Letter. Last week, the American Institute of Certified Public Accountants (AICPA) sent a letter to IRS Commissioner Charles Rettig and Treasury Assistant Secretary for Tax Policy Lily Batchelder to advocate for the implementation of improvements to the tax filing process. Included in the AICPA’s comments are general recommendations to expand direct lines of communication with filers, increase efforts to hire “surge teams” around filing season, and honor a broader range of “reasonable cause” abatement requests.
- 1,900% Excise Drug Pricing Tax. In her recent article, Erica York, senior economist and research manager for the Tax Foundation, discusses the proposed excise tax penalties that would be imposed on prescription drug producers that refuse to participate in pricing negotiations. The drug-pricing provision that was recently scored by the Joint Committee on Taxation (JCT) could impose a tax-exclusive rate of up to 1,900% on the transactions of out-of-compliance manufacturers. As York discusses, it is unclear if this provision has enough of a direct revenue effect to pass the Senate-imposed “Byrd Rule” because the JCT estimates that such a high tax rate will effectivity pressure every prescription drug producer into compliance.
Upcoming Events
Senate Banking
On Tuesday, the Subcommittee on Housing, Transportation and Community Development will hold a hearing entitled, “Opportunities and Challenges in Addressing Homelessness,” during which the following witnesses will testify:
- Ann Oliva, CEO, National Alliance to End Homelessness
- Kathryn Monet, CEO, National Coalition for Homeless Veterans
- Cathy ten Broeke, assistant commissioner and executive director, Minnesota Interagency Council on Homelessness (MICH)
- Isabel McDevitt, co-founder and board president, Work Works America
- Jamie Kirsch, board member, Journey On
On Thursday, the full committee will hold a hearing entitled, “Priced Out: The State of Housing in America,” during which the following witnesses will testify:
- Dr. Douglas Holtz-Eakin, President, American Action Forum
- Peggy Bailey, Vice President for Housing Policy, Center on Budget and Policy Priorities
House Financial Services
On Tuesday, the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets will hold a hearing entitled, “Oversight of the SEC's Division of Enforcement,” during which the following witness will testify:
- Gurbir Grewal, director, Division of Enforcement, Securities and Exchange Commission
On Wednesday, the full committee will hold a hearing entitled, “Housing in America: Oversight of the Federal Housing Finance Agency.” No witnesses are currently listed.
Senate Finance Committee
On Wednesday, the full committee will hold a hearing entitled, “The Role of Tax Incentives in Affordable Housing,” during which the following witnesses will testify:
- Andrea Bell, executive director, Oregon Housing and Community Services
- Jerry Konter, founder and president, Konter Quality Homes and Chairman of the Board, National Association of Homebuilders
- Lee E. Ohanian, Ph.D., Hoover Institute senior fellow and distinguished professor of economics, University of California, Los Angeles
- Benson “Buzz” Roberts, president and CEO, National Association of Affordable Housing Lenders
- Dana Wade, chief production officer, Real Estate Finance, Walker & Dunlop
House Ways and Means
No upcoming hearings are scheduled for this week.
Administration
Wednesday, July 20
Small Business Administration
Business Law and Related Tax Topics for Emerging Businesses
Private Sector
Brookings Institute
11th Annual Municipal Finance Conference