Legislative Lowdown
Tax Bill Update – Package Remains in Limbo: Almost two months after the Tax Relief for American Families and Workers Act (H.R. 7024) passed the House with an overwhelming 357-70 vote, committee leaders are still considering the process for advancing the bill with or without amendments. Senate Finance Committee Ranking Member Mike Crapo (R-ID) has laid out some of issues in the bill but suggested others may still be identified, while noting there is no proposed timeline for wrapping up negotiations. Chairman Ron Wyden (D-OR) has maintained that Republicans’ demands are an “amorphous smorgasbord” of proposals and is reportedly waiting for a clear list of Republicans’ priorities. With the current stalemate within Finance Committee leadership, eyes will be on Senate Majority Leader Chuck Schumer (D-NY), who has reportedly expressed interest in moving the bill forward with or without amendments and may choose to bring the package, as it currently stands, before the Senate to force a conclusion to the ongoing amendment debate.
Government Funding Update – First Appropriations Package Will Fund Certain Departments and Agencies Through Sept. 30: On March 9, President Biden signed a $459 billion six-bill package funding major areas of the government (Military Construction-VA, Agriculture-FDA, Commerce-Justice-Science, Transportation-HUD, Interior-Environment and Energy-Water) for the remainder of fiscal year (FY) 2024. The bill received bipartisan approval in both chambers of Congress, with the House passing the bill under suspension of the rules in a 339-85 vote on March 6, and the Senate following with a 75-22 vote on March 8.
Notably, the package did not include any cuts to Internal Revenue Service (IRS) funding provided by the Inflation Reduction Act (IRA, Pub. L. 117-169), with a proposed $47 billion in cuts in the Transportation-HUD and Commerce-Justice-Science bills stripped from the final version of the appropriations package. Language relating to an IRA-IRS rescission of $9.8 billion also was removed from the Labor-HHS appropriations bill. The only remaining vehicle for IRA-IRS funding cuts is the Financial Services-General Government Bill, which is expected to include the $20 billion rescission informally agreed to by President Biden and then-House Speaker Kevin McCarthy (R-CA). That handshake agreement was slated to take place over two fiscal years, before the subsequent agreement between current House Speaker Mike Johnson (R-LA) and Senate Majority Leader Chuck Schumer (D-NY) accelerated it to a one-year rescission.
The deadline for the final tranche of FY 2024 bills is set to expire on March 22, and appropriators have yet to come to an agreement on the package, which includes funding for the Treasury Department and IRS. The Financial Services-General Government bill is not only expected to contain the $20 billion IRA-IRS funding rescission, but it will detail any cuts to the IRS’s annual operating budget.
While Congress struggles to complete full funding for the current fiscal year, the House Budget Committee marked up its FY 2025 Budget Resolution, aiming to bring the federal budget into balance by reducing baseline deficits by $14.1 trillion over the next decade.
Biden Discusses Tax Policy in State of the Union Address: President Joe Biden delivered his third State of the Union address on March 7, emphasizing the tax policy priorities that will continue to take center stage in his ongoing presidential campaign. Similar to last year’s address, Biden devoted a portion of his speech to highlighting the tax legislation signed into law during the first three years of his term—contrasting it with the Republicans’ 2017 Tax Cuts and Jobs Act (TCJA).
Beyond calling attention to his previous legislative achievements, Biden offered insight into his priorities for tax reform if elected to a second term. Most of the tax proposals are the same or similar to previous Biden administration budget proposals or early versions of the Build Back Better package. Nonetheless, tax-policy recommendations failed to garner sufficient support from Democratic lawmakers when the party held narrow majorities in both the House and Senate during the 117th Congress, and they were rejected outright by Republicans when the GOP took control of the House for the 118th Congress. One new proposal offered during the State of the Union would increase the 15% Corporate Alternative Minimum Tax (CAMT) enacted as part of the Inflation Reduction Act to 21%.
Following the president’s State of the Union address, the White House released its fiscal year (FY) 2025 budget request to Congress (“Budget”). The Budget and the Treasury Department’s General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals (“Green Book”) provide more details on the tax proposals discussed during the State of the Union. In addition to the proposed increase to the CAMT, the Budget reproposes that Congress increase the current corporate income tax rate from 21% to 28%, a change estimated to increase tax revenues by $1.3 trillion over the next decade. The Budget also includes a proposal carried over from last year’s request to raise the current 1% excise tax on corporate stock buybacks to 4%, and it would tighten rules on excess employee remuneration and reform excess business loss limitations.
With respect to individual taxation, the Budget proposes several tax hikes for high-income taxpayers, including an increase in the top marginal income tax rate to 39.6%. The Budget also includes the “Billionaire’s Tax” previewed last week in Biden’s State of the Union address, which mirrors a similar provision in his FY 2024 budget that would impose a 25% minimum tax on all realized and unrealized gains of taxpayers with wealth that exceeds a certain threshold. Similarly, the Budget includes a proposal to raise the current Net Investment Income Tax (NIIT) rate from 3.8% to 5% for individuals with over $400,000 in annual income and expand the scope of the NIIT to apply to active passthrough income. Biden said these changes will be used to support the Hospital Insurance Trust Fund, which is expected to be depleted before 2032.
Biden is proposing reforms concerning capital gains to align the taxation of investment gains more closely with income taxes. In addition, the Budget proposes to modify rules related to retirement plans to limit the use of certain types of tax-favorable accounts. Similarly, the Budget would modify estate, gift and generation-skipping transfer tax rules; revise rules applicable to certain trusts; and limit the use of valuation discounts for certain closely held property.
In the international tax space, Biden is once again pushing for Congress to align the Global Intangible Low-Taxed Income (GILTI) rules and adopt an Undertaxed Profits Rule consistent with the Pillar Two global minimum-tax regime negotiated through the Organisation for Economic Co-operation and Development. Additionally, the Budget proposes to repeal the current tax deduction for Foreign-Derived Intangible Income and modify tax rules for certain dual-capacity taxpayers.
The Budget includes myriad proposals, drawn from prior budgets, to repeal fossil fuel extraction and production tax provisions, including certain intangible drilling costs and percent depletion deductions. Biden also proposes to repeal certain superfund excise tax exemptions.
On the spending side, the Budget would reform Social Security to provide national paid family and medical leave for workers at a cost of $325 billion over the next decade. Moreover, the proposal would expand the current Child Tax Credit with an option for permanent refundability and for eligible taxpayers to receive the credit as a monthly payment. The proposal would also create a new Mortgage Relief Credit, expand the existing Low-Income Housing Tax Credit, and make permanent the New Markets Tax Credit, which is currently set to expire in 2025.
The Budget notes that several tax provisions enacted as part of the Republicans’ 2017 Tax Cuts and Jobs Act are set to expire after 2025, characterizing the expirations as a deliberate decision to “conceal both the true increase in the deficit ... and the true size of their tax breaks for multi-millionaires and large corporations.” Nonetheless, Biden expresses support for working with Congress to address the expiration of these provisions so that individuals making under $400,000 per year will not be subject to tax increases. The Budget itself does not appear to include any proposals to address the expiration of the business tax incentives.
To read more about what Biden said and the outlook on his announced policies, please click here. To read more about the Budget, click here.
Tax Worldview
Ways and Means Pillar One Hearing Exposes Policy Rift: On March 7, the House Ways and Means Subcommittee on Tax held a hearing titled “OECD Pillar 1: Ensuring the Biden Administration Puts Americans First.” The hearing explored the recent proliferation of digital services taxes (DSTs) pending in a number of countries, which will disproportionately increase tax burdens on U.S. multinational businesses and may lead to global tax instability if not mitigated, as the Organisation for Economic Co-operation and Development (OECD) Pillar One proposal aims to do. Committee members on both sides of the aisle agreed on the detrimental effects DSTs would have on U.S. multinationals, but were divided on whether the correct course of action is to continue negotiations with the OECD on Pillar One or to walk away from discussions altogether. Republicans on the committee, including Subcommittee Chair Mike Kelly (R-PA), asserted that the proposal was a “bad business deal” that “diminishes the economic security of the United States at a time of global instability.” They cited a Joint Committee on Taxation (JCT) report released on March 5 finding that the United States would have lost $1.4 billion in federal tax receipts in 2021 if Pillar One Amount A rules had been implemented. Democrats, including Subcommittee Ranking Member Mike Thompson (D-CA), expressed concern over JCT’s findings, and they urged the Treasury Department to stay at the negotiating table with the OECD, arguing that doing so would yield a proposal more favorable to U.S. interests that would provide global economic stability and better address transfer-pricing disputes.
1111 Constitution Avenue
Treasury Department Finalizes Direct Pay for IRA Tax Credits: On March 5, the Treasury Department finalized regulations that would expand the accessibility of energy tax credits to tax-exempt entities previously unable to utilize them. Using Direct Pay (also known as Elective Payment), state, local and tribal governments along with nonprofit organizations can elect to receive direct payment of 12 energy tax credits in lieu of a nonrefundable credit, which taxable entities would otherwise claim against their federal tax liability. The Treasury Department and the Internal Revenue Service (IRS) also issued proposed regulations to provide clarity and flexibility for qualifying entities that co-own clean energy projects to provide additional flexibility in using the elective payment option. The proposed rules would allow energy investments to be made “through a noncorporate entity, rather than requiring direct co-ownership of the property or facility by the applicable entity” and ensure that “multi-year power purchase agreements would not violate the requirements to elect out of partnership tax treatment.” The comment period on the proposed regulations will be open for 60 days.
At a Glance
IRS Submits Requests for Priority Guidance Plan Items: On March 7, the Internal Revenue Service (IRS) released Notice 2024-28, inviting stakeholders and the public to submit comments suggesting items to be included on the 2024-2025 Priority Guidance Plan (PGP). The PGP provides insight into issues the Treasury Department and the IRS have identified as important, often at the behest of taxpayers and practitioners for clarity on particular issues within the tax code, which the Treasury Department and the IRS intend to pursue during the year. The PGP is used as a workflow document to prioritize the tax issues to be addressed through regulations, revenue rulings, notices, revenue procedures and other published administrative guidance.
House Republican Lawmaker Floats Permanent SALT Cap and IRA Tax Credit Cuts as Revenue Raiser: On March 7, House Budget Committee Chair Jodey Arrington (R-TX) reportedly stated that he and other Republicans would consider making permanent a $10,000 cap on state and local tax (SALT) deductions, as well as cutting the Inflation Reduction Act (IRA) energy-tax credits as revenue raisers to combat the rising federal debt. Arrington has advocated for creating a bipartisan, bicameral commission to address the federal deficit, advancing a bill in January that would create such a commission. As part of the potential commission’s discussion, Arrington said that all revenue-raising policies would be considered, but he would prefer to “make permanent … the cap on SALT” and close IRA incentives to enacting tax increases.
Brownstein Bookshelf
National Taxpayers Union Foundation Report Advocates Strategies to Combat “Buy Borrow Die”: On March 7, Andrew Wilford of the National Taxpayers Union Foundation (NTUF) published a report titled “How Congress Can Address ‘Buy Borrow Die,’” discussing the tax-planning strategy allowing taxpayers to borrow against the value of purchased assets, then being able to pass the assets onto their heirs upon death utilizing the step-up in basis rule, thereby taxing assets at a more favorable rate. Critics of the strategy, most notably Senate Finance Committee Chair Ron Wyden (D-OR), have stated that “Buy Borrow Die” allows “billionaires across America to legally get away with paying little or nothing in taxes for years on end.” However, the report warned that eliminating the step-up in basis rule on its own or creating a wealth tax would raise other issues, instead advocating for eliminating the estate tax and indexing capital gains to inflation.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
On Feb. 12, the Senate Finance Committee held a hearing titled “American Made: Growing U.S. Manufacturing Through the Tax Code."