Taxation & Representation, July 26, 2022

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

Democrats Proceed on Health Care-Only Reconciliation. Senate Democrats are moving forward on efforts to pass a health care-only reconciliation bill before lawmakers leave Washington for the August recess. Last week, Democrats were forced to make a decision on whether to pursue a health care-focused reconciliation bill with Sen. Joe Manchin’s (D-WV) support prior to August recess, or wait until the fall to pursue a tax, energy and health care bill, with no guarantee of his support. President Joe Biden has since signaled his support for the narrow bill.
 
On the spending side, the bill is only expected to contain a two-year extension to the temporarily enhanced Affordable Care Act (ACA) subsidies that were originally enacted in March 2021. According to a joint cost analysis published last week by the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT), an extension of the enhanced premium credits through December 2024 would increase the deficit by a reported $50 billion. The cost analysis covers the full 10-year budget window—the two-year cost being reported may vary slightly.
 
The spending provisions in the bill will be paid for by drug pricing reform. The headline proposal allows the government to negotiate prices directly with the producers of certain single-source drugs. The section would also cap out-of-pocket costs for Part D Medicare beneficiaries and increase the value of Medicare rebates to keep pace with inflation. As reported earlier this month, the CBO anticipates that if this section was enacted as currently drafted, it would decrease the deficit by approximately $288 billion over the 10-year scoring window. However, as of last week, the “Byrd Bath” process officially commenced, potentially limiting the size and scope of several provisions in this already pared-down bill.
 
In the Senate Democrats’ initial discussions with the parliamentarian, several provisions in the drug-pricing section were identified as potential violations of the Byrd Rule because they have no direct effect on government revenues or outlays. This includes an up to 95% excise tax that would be levied against drug producers that fail to engage in price negotiations. As it is currently drafted, the CBO anticipates that producers will not risk non-compliance, thus raising no revenue for the federal government. Other potential Byrd Rule violations include a proposed penalty imposed on companies that raise prices faster than the rate of inflation. Republican senators also completed their first round of discussions with the parliamentarian late last week. 
 
Of note, on July 26, Senate Finance Committee Chair Ron Wyden (D-OR) announced that Democrats may look to add additional funding to the budget reconciliation bill for the Internal Revenue Service (IRS). According to Wyden, providing the IRS with an additional $80 billion would raise approximately $120 billion in net revenue, which would help offset the costs of extending ACA premiums for additional years or paying for more COVID-19 vaccines. Right now, the bill only includes a two-year extension of the ACA subsidies, which means they will expire in 2024—an election year. Both Sen. Kyrsten Sinema (D-AZ) and Manchin will be up for re-election in 2024, so it is unclear if they will support additional funding for the expanded ACA subsidies when this proposed extension expires. However, Manchin originally signaled support for only a two-year extension. Moreover, if adding IRS funding to the narrow package violates Manchin’s stipulations of a health care-only reconciliation bill or jeopardizes support from any other Democratic senators, it will not be included in the bill.
 
Senate Democrats will look to pass this health care-only package through the chamber before recess begins on Aug. 5. Before final floor consideration, the Senate process allows time for members to introduce an unlimited number of amendments for consideration. In this so-called “vote-a-rama” process, some progressive Democrats may propose amendments to expend excess revenue on additional health care proposals including vaccine development funding or a greater extension to expanded ACA subsidies. Senate Republicans will likely introduce spending provisions to force moderate Democrats to take tough votes on their legislative priorities.  
 
The House of Representatives begins its August recess on July 29, but if the Senate passes the reconciliation bill in the next few weeks, House Speaker Nancy Pelosi (D-CA) will likely call her members back for a special session in early-to-mid August to consider the bill.

Legislative Lowdown

“CHIPS Plus” Update. An expanded version of the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act cleared a major procedural vote in the Senate with a filibuster-proof 64-34 majority last week. Earlier today, the Senate voted 64-32 to invoke cloture, ending debate over the bill. A final floor vote in the Senate is expected later this week. However, this process could be delayed if a significant number of senators remain sidelined due to COVID-19 or other medical complications.
 
The bill is much narrower in scope than the proposed bipartisan innovation acts that were being negotiated through a large conference committee.
 
The first section of the Senate version of this so-called “CHIPS-plus” bill includes nearly $53 billion in mandatory spending for semiconductor manufacturing and research along with $2 billion in funding to support the deployment of 5G wireless infrastructure. This section of the bill also contains a direct pay tax credit worth up to 25% of a taxpayer’s investment in new semiconductor manufacturing property or related tooling equipment for which construction commences before 2027.
 
Last week, Senate Majority Leader Chuck Schumer (D-NY) filed an amendment to incorporate a second bill section containing approximately 1,000 pages of new funding allocations and expansions for science, education and research programs operated by the departments of Energy and Commerce, National Institute of Standards and Technology, National Science Foundation and National Aeronautics and Space Administration. These provisions would authorize approximately $52 billion in additional, above-baseline funding for these agencies over the next five years. The decision to include funding for a broader range of federal scientific initiatives came after several senators from both parties raised concerns over the original bill’s exclusive focus on the semiconductor industry. 
 
While members are generally optimistic about the final passage of this bill, Sen. John Thune (R-SD) has cautioned that some opponents of the bill, most of whom are Republican, might try to delay consideration of the bill until after the August recess. Sen. Todd Young (R-IN), one of 16 Republicans who initially voted in favor of the bill, said that he is expecting the bill to pass the Senate by the end of this week. On the other hand, Sen. Ron Johnson (R-WI) called the semiconductor manufacturing incentives in the bill “corporate welfare” and said he might have objected on a procedural level if he did not think it was futile. Sen. Pat Toomey (R-PA) said he had not decided on whether to object to a time agreement.
 
House Speaker Nancy Pelosi (D-CA) sent a letter to House members praising the Senate-passed CHIPS package and said the House of Representatives may act before members leave for recess at the end of this week.
 
Year-End Tax Extenders Package Preview. With consideration of non-health care provisions currently on the legislative back burner, it is likely that efforts to reform the tax code will not resume until consideration of a year-end tax package begins. Traditionally, proposals included in these year-end packages are short-term extensions to expiring tax incentives and technical corrections to flawed or misinterpreted provisions. In recent years, Congress has opted to retroactively reinstate expired provisions, allowing taxpayers to amend previous filings.
 
Any potential tax extender legislation in this Congress would likely develop as a traditional revenue bill—not as a reconciliation bill. This means that passage of the tax bill would require support from a bipartisan group of at least 60 senators.
 
In the upcoming extenders discussion, there will likely be a debate over changes to several business incentives. Before 2022, the deduction for net business interest expenses was limited to a maximum of 30% of a taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA). This year, the provision reverted to only allowing taxpayers to deduct net business interest expenses as a percent of their earnings before interest and taxes (EBIT)—not taking into account depreciation or amortization. Republican lawmakers will likely insist on a retroactive extension of previous law to avoid the decline in investment that could result from the shift to EBIT. Also of note, beginning in 2023, the current 100% bonus depreciation on certain types of fixed assets will begin to decrease by 20% annually until 2027. Republicans may request a delay on this phase-out process to incentivize businesses to continue purchasing tax-favorable assets.  
 
On the opposite end of the aisle, Democrats are likely to insist on extensions to several tax incentives. This includes a tranche of expired green-energy tax credits for biofuel, alternative fuel, alternative fuel refueling property, qualified fuel cell motor vehicles, nonbusiness energy property, two-wheeled plug-in electric vehicles and the construction of new energy-efficient residential property, among other provisions. Each of these credits was targeted for long-term extension through reconciliation, but Democrats will likely be required to settle for short-term (likely two-year) extensions to these incentives. Though unlikely to garner Republican approval, Democrats may also push for an extension of the expanded, refundable Child Tax Credit (CTC) that expired at the end of 2021. Similarly, there may be an effort to retroactively reinstate the Employee Retention Tax Credit (ERTC), though it will likely lack sufficient support for inclusion.
 
There are also a handful of widely supported tax proposals that will almost certainly receive bipartisan consideration. These include a modification that would allow businesses to continue to immediately deduct research & development (R&D) costs. If this proposal is not adopted before the end of this tax year, taxpayers will be required to amortize R&D expenses over five years. While not a tax extender, lawmakers have suggested that there may be bipartisan support for new or expanded energy incentives, including a novel tax credit for the production of hydrogen or an expansion of the credit for carbon sequestration and utilization.   
 
Since the package will likely develop in the lame-duck session, the size and scope of the year-end tax extenders package will hinge on the results of the midterm elections. If Republicans win by a significant margin in both the House and Senate, current Republican lawmakers will be less willing to engage in the tax-extenders process for this fiscal year. If the election results are close, there will be greater incentives for both sides to deal with extenders before the end of the year.
 

PROPOSALS FOR CONSIDERATION IN A TAX-EXTENDERS PACKAGE
 

Global Getdown

UK Presses Forward on Pillar Two. With changes to align the U.S. tax code with Pillar Two apparently on indefinite hold, the UK took another step toward embracing the global minimum tax negotiated through the Organisation for Economic Co-operation and Development (OECD). On July 20, Her Majesty’s Revenue and Customs (HMRC) released draft legislation to implement an income-inclusion rule consistent with the Pillar Two framework. The legislation would “introduce a new tax on UK parent members within a multinational enterprise group. A top-up tax will be charged on UK parent members when a subsidiary is located in a non-UK jurisdiction, and the group’s profits arising in that jurisdiction are taxed at below the minimum rate of 15%,” according to the HMRC summary.
 
The proposal also details how the UK plans to treat the controlled foreign corporation (CFC) rules of other countries—rules that many countries impose on their domestically parented companies with respect to income of their foreign subsidiaries. Importantly, the UK indicated in its response to public comments that the U.S. Global Intangible Low-Taxed Income (GILTI) rules would be respected as a CFC regime, even if the United States does not enact changes to align them with the Pillar Two requirement (changes that have been stalled in the Senate). The draft legislation also would allow up to a 15% credit for top-up taxes paid by companies to foreign jurisdictions under their CFC regimes.
 
The new UK draft legislation will be open to additional public comment through Sept. 14, 2022, and once enacted, the income-inclusion rule would be effective for “accounting periods beginning on or after 31 December 2023.” 
 
In its response to the public comments on the minimum-tax proposal, HMRC indicates that the government will consider an undertaxed profits rule (UTPR) in a subsequent phase: “[t]here will also be a later update on the timing and design of the UTPR in light of wider developments internationally.” Similarly, Her Majesty’s Treasury indicated that a qualified domestic minimum tax may be considered in the UK at a future date.
 
The UK’s action comes as the European Union (EU) proposal to implement the Pillar Two global minimum tax remains in limbo, with Hungary continuing to withhold the one vote needed for the adoption of an EU directive (the vote must be unanimous). Additionally, the draft legislation comes in the midst of the race to replace UK Prime Minister Boris Johnson. The two leading candidates are reported to have conflicting views on tax policy, with Rishi Sunak, the former chancellor of the exchequer, opposed to reducing tax (e.g., allowing the UK’s corporate rate to increase from 19% to 25% next year) while Foreign Secretary Liz Truss advocates for cutting taxes to address current economic conditions in the UK. 
 
Hungarian Officials Make the Rounds in Washington. A delegation of Hungarian officials, including Foreign Minister Péter Szijjártó and Ambassador Szabolcs Takács, met with Republicans in Congress on July 20 to discuss the OECD global minimum tax and the Treasury Department’s recent actions to terminate the 1979 U.S.-Hungarian tax treaty. Following the meeting with House Ways and Means Committee Republicans, Ranking Member Kevin Brady (R-TX) and Reps. Adrian Smith (R-NE) and Mike Kelly (R-PA) said in a statement that the Biden administration’s “heavy-handed bullying tactics to get countries to adopt the global minimum tax deal undermines tax sovereignty and would make any agreement unstable and short-lived.”
 
Treasury Secretary Janet Yellen, who led efforts to conclude the OECD two-pillar agreement for global tax reform in October of last year, has been working with congressional Democrats to enact legislation that would align the United States with the Pillar Two global minimum tax as an initial step, which has been held up with the stalled reconciliation bill. Following the meeting with the delegation, the trio of Republicans stressed their position that the U.S. “will not surrender economically to foreign countries by increasing our global minimum tax based on an agreement that is not complete, nor enforceable, nor in our interest. Congress will not ratify an agreement that cedes its constitutional tax-writing authority or fails to protect key U.S. tax incentives.”
 
The meeting comes on the heels of a June 20, 2022, letter from Smith and Kelly to Takács, recognizing Hungary’s opposition to the global minimum tax and recent effective veto of the EU Council directive for such a regime.
 
The delegation is reported to have also met with Senate Finance Committee Republicans as well as other tax and economic policy groups in Washington, D.C.
 
Clarifications to the FTC Regulations Could be on the Horizon. IRS officials commented at an industry event last week that the agency is actively working on clarifications to the controversial foreign tax credit (FTC) regulations issued in January. While aimed at the cost-recovery requirement under the new regulations, the clarifications are reportedly intended to make sure that taxpayers are not reading the requirement too narrowly. 
 
Under the regulations’ cost-recovery provision, companies must recover significant costs, including interest expenses and capital investments costs, against their income derived in a country for the tax imposed by that country to qualify for a U.S. FTC. The requirement has been criticized as overly restrictive and limiting FTCs that were previously allowed. 
 
Treasury officials indicated at the Tax Council Policy Institute symposium in May that clarifications were under consideration and could be implemented through technical changes to the new regulations, rather than through the extended process of proposing new regulations. It is unclear if the clarifications to the cost-recovery requirement will be addressed under the technical-changes approach.

At a Glance

• Appropriations Exceed Expectations. Last Wednesday, the House passed a “minibus” appropriations bill through a party-line 220-207 vote. The package contained spending bills from six House Appropriations subcommittees that would exceed the funding requests of several federal programs and agencies including the departments of Transportation and Housing and Urban Development, the Department of Agriculture and the Food and Drug Administration, the Department of Energy, the Department of the Interior and the Environmental Protection Agency, and the military construction agencies and the Department of Veterans Affairs. Also included in the bill were the proposed allocations for the financial service agencies which would provide $13.6 billion for the IRS in fiscal year 2023, an 8% increase in funding compared to the current fiscal year. 
• The Role of Tax Incentives in Affordable Housing. The Senate Finance Committee held a hearing last week to discuss the effectiveness of current incentives for affordable housing and to consider legislation to reform these tax provisions. Democrats, including Committee Chair Ron Wyden (D-OR), advocated for the expansion of current tax incentives like the Low-Income Housing Tax Credit (LIHTC) and the enactment of new incentives through bills such as the DASH Act and the bipartisan Affordable Housing Credit Improvement and Neighborhood Homes Investment Acts. Republicans generally supported efforts to expand private investment in affordable housing through programs like LIHTC, but several lawmakers, including committee Ranking Member Mike Crapo (R-ID), focused their comments on “rampant” inflation and the resulting “pressure on builders’ budgets.”
• Warren Reintroduces Free Online Tax Filing Legislation. Sen. Elizabeth Warren (D-MA) has reintroduced legislation that would require that the IRS provide its own free online tax filing services. Warren’s legislation would mandate that the IRS abolish its partnership with private online tax preparation companies. The legislation comes after years of issues with the free-file program with only 3% of taxpayers using it, despite the fact that 70% of taxpayers are eligible for the free-file program.

• Letter from Senators To Rettig Regarding IRS Processing Backlog. Sens. Sherrod Brown (D-OH) and Sheldon Whitehouse (D-RI), members of the Senate Finance Committee, led their colleagues in a letter to the IRS asking that Commissioner Charles Retting provide more information about the tax return backlog. At the end of May 2022, the IRS had a backlog of 21.3 million unprocessed returns, which is an increase of 1.3 million compared to the same time last year. Most taxpayers file their returns electronically, but there are millions of taxpayers, who are typically older, that file their returns on paper. The letter also expressed concern about the broader effect that the IRS’ backlog has on its ability to serve consumers. The letter noted some concern for the financial hardship that a delayed refund could cause for the millions still waiting to receive their check. The letter was also signed by Senate Finance Committee Chair Wyden and Sens. Mark Warner (D-VA), Warren and Robert Menendez (D-NJ).

Brownstein Bookshelf

• Budget Estimates for FY 2023 Green Book. The Joint Committee on Taxation (JCT) released a budget estimation of the tax proposals included in the Administration’s Fiscal Year 2023 Revenue Proposals. The proposals were published by the Treasury Department in March of last year and include several tax increases that would apply to both corporations and high-income individuals. If enacted in aggregate, the proposals would decrease the U.S. deficit by approximately $1.7 trillion over the coming decade.  
   
• Inflation Indexing Legislation. Last week, Sen. Chuck Grassley (R-IA) introduced legislation that would annually readjust the income phase-out thresholds and credit/deduction amounts of six tax incentives to account for inflation. In inflationary periods, the bill would effectively increase the benefits to taxpayers provided by the Child Tax Credit and Non-Child Dependent Tax Credit, the Child and Dependent Care Credit, the American Opportunity Tax Credit, the Lifetime Learning Credit, the Student Loan Interest Deduction, and the Charitable Mileage Deduction. Grassley proposes paying for these benefit expansions with a one-year extension of the $10,000 cap on the State and Local Tax (SALT) deduction.
   
• ESG Investment Regulations. In an op-ed in the Wall Street Journal, Former Secretary of Labor Alexander Acosta and American entrepreneur Vivek Ramaswamy discuss several perceived consequences of investment regulations proposed by the Department of Labor. The regulations would allow retirement-fund managers to consider a company’s environmental, social and governance (ESG) factors when investing their clients’ funds. Acosta and Ramaswamy argue that these regulations would allow institutional investors to circumvent their fiduciary duty in pursuit of personal convictions.
   
• Tax Treatment of Student Debt. Garrett Watson and Arnav Gurudatt, policy analysts at the Tax Foundation, discuss the tax implications of Biden’s proposal to cancel portions of millions of Americans’ student loan debts. The U.S. Internal Revenue Code generally considers any forgiven debts to be equivalent to additional, taxable earned income for the borrower. However, the article examines several policies that lawmakers could implement to fully exempt individuals from forgiveness taxes. Regardless of what legislative actions Congress takes, Watson and Gurudatt advocate for consistency in the taxation of forgiven loans.

The Week Ahead

Senate Banking Committee
On Tuesday, the full committee will hold a hearing entitled, “Fairness in Financial Services: Racism and Discrimination in Banking.” The following witnesses will testify:

• Steven Nesmith Esq., vice president and director/head of federal policy, Center for Responsible Lending
• Devon Westhill, president and general counsel, Center for Equal Opportunity
• Mr. Stephen Hayes, partner, Relman Colfax PLLC
• Dr. Jacob William Faber, associate professor of sociology and public service, New York University

On Thursday, the full committee will hold a hearing entitled, “Protecting Investors and Savers: Understanding Scams and Risks in Crypto and Securities Markets.” The following witnesses will testify.

• Melanie Senter Lubin, president, North American Securities Administrators Association
• Gerri Walsh, senior vice president of investor education, Financial Industry Regulatory Authority

House Financial Services Committee
On Wednesday, the full committee will hold a markup of various measures. The agenda currently includes:

• H.R. 1728, the “Strategy and Investment in Rural Housing Preservation Act of 2021.”
• H.R. 2965, the “Naomi Schwartz Safe Parking Act of 2022.”
• H.R. 4277, the “Overdraft Protection Act of 2021.”
• H.R. 4865, the “Registration for Index-Linked Annuities Act.”
• H.R. 6889, the “Credit Union Board Modernization Act.”
• H.R. 7123, the “"Studying Barriers to Housing Act.”
• H.R. 8484, the “Aligning SEC Regulations for the World Bank's International Development Association Act.”
• H.R. 8476, the “Housing Inspections Accountability Act of 2022.”
• H.R. 8485, the “Expanding Access to Credit through Consumer-Permissioned Data Act.”
• H.R. 8478, the “Credit Reporting Accuracy After a Legal Name Change Act.”
• Resolution to Reauthorize the House Financial Services Committee’s Task Force on Artificial Intelligence.
• Resolution to Reauthorize the House Financial Services Committee’s Task Force on Financial Technology.

 
Senate Finance Committee
On Thursday, the full committee will hold an open executive session to consider the nominations of Jay Curtis Shambaugh to be an under secretary of the Treasury and Rebecca Lee Haffajee to be an assistant secretary of Health and Human Services.
 
After the executive session, the full committee will hold a hearing on the nomination of Douglas J. McKalip to be Chief Agricultural Negotiator, the Office of the United States Trade Representative’s chief agricultural negotiator. The following witness will testify:

• Douglas J. McKalip, to be chief agricultural negotiator, Office of The United States Trade Representative, with the rank of ambassador

House Ways and Means Committee
On Wednesday, the full committee will hold a markup of the “Improving Seniors’ Timely Access to Care Act of 2022.”
 
Private Sector
 
American Enterprise Institute (AEI)
A Conversation with Sen. Mitt Romney (R-UT): The Future of Conservative Family Policy

• With inflation soaring, a possible recession looming and Americans dealing with political fallout from Dobbs v. Jackson Women’s Health Organization, policies aimed at helping families with children—including possible reforms to the child tax credit—are back in the forefront of the national policy discussion. Romney will outline his vision for how public policy can best support American families. Then AEI’s Robert Doar and Romney will discuss his recently proposed Family Security Act 2.0, which aims to reform existing complex federal programs into one straightforward pro-family, pro-life and pro-work benefit.