Tax Tidbit
118th CONGRESS TAX AGENDA
Election Results Update: With the results of the midterm election almost final, control of the House and the Senate in the 118th Congress is clear. On the House side, Republicans are poised to win the remaining two outstanding congressional races, giving the GOP a 222–213 margin. Though this Republican victory in the House was expected, it fell short of the “red wave” scenarios that had been forecasted by both the media and Republican leadership in the lead-up to the election.
On the Senate side, Democratic incumbents ultimately proved successful in Arizona, Nevada and New Hampshire. In conjunction with a victory by Sen.-elect John Fetterman to flip the seat of retiring Sen. Pat Toomey (R-PA), Democrats have retained control in the Senate with a victory of at least 50 seats. On Dec. 6, Georgia is set to hold a runoff election for the seat of incumbent Sen. Raphael Warnock (D-GA), who is running against Republican Herschel Walker. While Democrats do not need to win this seat to ensure a majority in the chamber, a victory in Georgia would allow moderate members of the party, like Sen. Joe Manchin (D-WV), to vote against some confirmations and legislation without derailing the efforts completely.
Democrats’ Transition to Regulatory Agenda: Without control of the House, the Biden administration will likely curb its legislative agenda as they turn to executive action and the regulatory process to enact meaningful change. On Nov. 4, Lily Batchelder, Treasury assistant secretary for tax policy, published the agency’s Priority Guidance Plan for the 2022-2023 tax year, previewing the administration’s tax regulatory agenda for the 118th Congress.
Included in the 205 proposed guidance objectives were projects to renew focus on limiting “aggressive” estate planning tactics as well as to clarify the taxation of digital assets, including cryptocurrency. The plan also includes a host of projects to implement the new Inflation Reduction Act (IRA) energy provisions, providing an opportunity to press the boundaries of the Treasury Department’s regulatory authority and resolve ambiguities in favor of the administration’s climate change agenda. On Oct. 14, the IRS also announced the start of 2024 as the tentative deadline to publish all final regulations concerning provisions included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was signed into law in 2020.
Of course, the Treasury Department’s ability to pursue a broader regulatory agenda may be somewhat curtailed by the fact that it must also release guidance on a host of recent legislation, including the new corporate book profits minimum regime and stock buyback excise tax, all while struggling with staff shortages. To date, the Treasury Department has released almost no information on a potential timeline for when the public may expect guidance concerning most of the IRA’s tax provisions.
Apart from the proposals expected to be considered in the upcoming lame duck (see Legislative Lowdown section below), there are a few policy objectives that a divided Congress may pursue in the new year. With a one-seat majority, Senate Majority Leader Chuck Schumer (D-NY) will seek to pass less controversial bills on a bipartisan basis, similar to what he accomplished with the CHIPS and Science Act and the Infrastructure Investment and Jobs Act (IIJA). Taking advantage of a split government, Republican leadership will be hesitant to support any legislation that may give the Biden administration an economic victory before the 2024 presidential elections. As a result, there is unlikely to be any significant bipartisan fiscal or tax legislation signed into law in the 118th Congress.
2023 House GOP Agenda: With split control of Congress, neither party can pursue partisan budget reconciliation legislation. Instead, House Republicans will pursue their tax agenda through piecemeal legislation and hearings.
House Republicans’ Commitment to America plan will likely be the foundation of the tax agenda, with a focus on tackling inflation, addressing issues with the supply chain, addressing high energy prices, helping small businesses, and creating new and bolstering existing tax incentives for hard-hit industries. In recent weeks, Republican members of Congress and their staff have suggested that the party may be less supportive of big corporations and traditional financial institutions than in the past. This shift comes as a Pew Research Center study on Nov. 17 found that public support from Republicans for large corporations, banking entities and technology companies has nearly halved over the last two years.
From an oversight perspective, the House Ways and Means Committee will likely hold hearings on various proposals to tackle these issues, potentially stitching proposals together into a package that addresses affordability and inflation. A GOP-controlled House will also focus on several specific oversight issues, many of which have already been announced by Republicans in recent weeks. This includes increased scrutiny against tax-exempt entities, such as private universities, tax practices of donor-advised funds and broad monetization allowances afforded to certain direct pay and transferable credits in the IRA. The committee will also examine the economic effects of various new policies in the IRA, from the new book-minimum tax to the domestic content and apprenticeship requirements in the energy tax provisions.
House Republicans will also focus on various proposals to recalibrate the $80 billion of new IRS funding provided in the IRA. House Republican Leader Kevin McCarthy (R-CA) has signaled that limiting the use of these funds will be an early and major priority. Besides oversight hearings related to the IRA, Republicans will also go after ESG guidance released earlier this year by the Securities and Exchange Commission (SEC). However, the House Financial Services Committee will have primary jurisdiction over this issue.
One of the biggest focal points for the committee under Republican control will be investigations into the alleged criminal tax practices of Hunter Biden and his family, as well as challenging Treasury Secretary Janet Yellen’s representation of U.S. interests in recent negotiations over the proposed global minimum tax. Leading up to the 2024 elections, this will likely increase in intensity as attempts are made to uncover more alleged abuses of power. As recently as last week, McCarthy noted that these investigations will be at the top of the priority list for the party.
2023 Senate Democratic Agenda: With only control of one chamber, Senate Democrats will likely be unable to pursue the remainder of Biden’s partisan tax objectives in the 118th Congress. Instead, the Senate Finance Committee will primarily focus on investigations and confirmation hearings.
Under the leadership of Sen. Ron Wyden (D-OR), the current chair, the committee will continue to scrutinize the profits of fossil fuel companies, pharmaceutical manufacturers and the perceived unfair tax practices perpetrated by insurance providers, private equity and multinational corporations across several sectors. Wyden is also likely to continue to hold hearings to consider implementing a global minimum tax, a tax on the wealth of high-income individuals or levies against highly profitable oil and gas companies. However, without control of the House, there is no chance that this legislation will receive serious consideration in the 118th Congress.
Several committees in the chamber will also hold hearings to highlight the successes of the IRA, IIJA and other legislation passed in the 117th Congress. These hearings may help develop strategies for agencies allocating the funding provided by these bills.
The Democrat-controlled Senate is likely to increase focus on confirming federal judges and members of executive agencies. Notably, the recent influx of funding to the IRS and Treasury Department will require several new confirmations of high-level positions. Control of the Senate will ensure that these positions can be filled in a timely manner. Speculation has also arisen over the possibility of Yellen retiring in the next year. If this occurs, Democratic control over the Senate will allow for a simple transition of power to a new Treasury secretary.
Senate Finance and Ways and Means Updates: On the Senate side, there are unlikely to be any significant changes to the leadership of either party. This means that Wyden and Ranking Member Mike Crapo (R-ID) will likely retain their top spots on the committee. If Democrats win the runoff race in Georgia, they will likely be able to add one more member to the committee, shifting the ratio in their favor. Republicans will also be required to fill several high-profile vacancies on the GOP side of the committee created by the upcoming retirements of Sens. Richard Burr (R-NC), Rob Portman (R-OH), Ben Sasse (R-NE) and Pat Toomey (R-PA).
On the House side, current Ways and Means Chair Richard Neal (D-MA) will remain the top Democrat on the committee in the upcoming Congress. With the imminent retirement of the current top Republican, Kevin Brady (R-TX), three Republicans are currently locked in a battle for committee chair. The members vying for the spot are Reps. Vern Buchanan (R-FL), Adrian Smith (R-NE) and Jason Smith (R-MO). While Buchanan was generally considered the frontrunner early in the race, Jason Smith has recently been gaining ground. Adrian Smith is largely viewed as the least likely of the three to take control, but as a respected contender, he may be picked if a compromise candidate is required. With control of the committee, many new Republican members will also be added to the committee in place of current Democratic members.
Legislative Lowdown
Retirement Reform Likely in the Lame Duck. Though lawmakers on both sides of the aisle have expressed support for several tax proposals in the lame duck, retirement legislation remains the most bipartisan proposal under consideration for a year-end tax deal. Even if an agreement on the other tax provisions falls apart, retirement savings could still be attached to a potential omnibus.
Negotiations around retirement-savings legislation continue, with lawmakers from the four committees of jurisdiction over the issue looking to finalize the language in the coming weeks. The “eight corners,” as they call themselves, include bipartisan negotiators from the House Ways and Means Committee, the House Education and Labor Committee, the Senate Finance Committee and the Senate Health Education Labor and Pensions (HELP) Committee.
Currently, the eight corners are working to reconcile differences between a March 2022 House-passed bill—the Securing a Strong Retirement Act of 2022, the June 2022 Senate Finance Committee bill—the Enhancing American Retirement Now (EARN) Act, and the June 2022 Senate HELP Committee bill—the RISE and SHINE Act. While the House bill cleared the chamber through an overwhelming 414-5 vote, the Senate Finance and HELP versions have several key differences.
One of the biggest issues for negotiators to resolve is the saver’s credit. While the House and Senate Finance versions both include an expansion of this retirement tool, the Senate version would go a step further in making the credit fully refundable. Another difference between the two bills is that the House version requires employers to enroll their employees automatically in 401(k) plans at a savings rate of at least 3% and then increase it each year until the worker contributes 10% of their pay, unless the worker opts out. The Senate proposal has no such 401(k) auto-enrollment mandate. Apart from these significant differences, there are several minor variances between provisions in the Senate Finance and House bills, such as the age at which catch-up contributions can be made.
Another area of difference is emergency savings. A provision included in the Senate HELP bill, but not included in the Senate Finance or House bills, would permit contributions of up to $2,500 per year to a “sidecar” emergency savings account as part of a 401(k) plan and allow matching contributions based on those contributions. This provision is a priority of HELP Committee Chair Patty Murray (D-WA). The Senate Finance bill would address emergencies by liberalizing the existing hardship distribution rules, allowing withdrawals of up to $1,000 per year. The provisions are not mutually exclusive, and it is possible that both could be included in the final legislation.
Negotiators are determined to get a retirement savings bill across the finish line during the lame-duck session. Rep. Kevin Brady (R-TX), ranking member on the House Ways and Means Committee, recently signaled that he wants to enact the legislation before his retirement at the end of the 117th Congress. Echoing this sentiment, Sens. Rob Portman (R-OH) and Ben Cardin (D-MD) drafted a joint op-ed for The Hill expressing support for the retirement bill.
On Nov. 15, Senate Finance Committee Chairman Ron Wyden (D-OR) told reporters that significant progress had been made on the bill over recess. He predicted the bill would be included in the upcoming budget deal.
If retirement legislation is not passed in this session of Congress, there will likely be more attempts at reform in 2023. However, these efforts may become significantly more difficult with the upcoming retirement of champions such as Portman and Brady.
All Other Tax Priorities Unlikely to Pass During the Lame-Duck. Even after the midterm elections, Democrats’ top tax priority remains the Child Tax Credit (CTC). At the same time, Republicans are still primarily interested in securing extensions for several expiring business tax provisions initially enacted by the 2017 Tax Cuts and Jobs Act (TCJA), as well as other priorities. This includes a modification to the deduction for net business interest expenses under section 163(j) and a delay on the phase-out of 100% bonus depreciation on certain fixed assets. The chances of a deal coming together will likely depend on whether Democrats continue to insist that any business tax provisions must be paired with a broad-based expansion of the CTC or whether Republicans and Democrats can reach a compromise that includes a modest CTC extension (more information here).
On Nov. 17, Reps. Pramila Jayapal (D-WA) and Jimmy Gomez (D-CA) led a group of nearly 60 Democratic members of Congress in a letter advocating for the inclusion of CTC and Earned Income Tax Credit (EITC) expansions in any year-end deal. The lawmakers said they would not support corporate tax breaks unless their priorities were included. Specifically, the letter called attention to a proposed modification allowing businesses to immediate deductibility of research and development (R&D) costs. While this proposal has bipartisan support, the large group of lawmakers clarified that they believed the limitation on R&D expensing through the TCJA was a beneficial provision that “helped level the playing field,” as one of the few provisions in the bill that increased taxes for corporations.
As a result of the partisan landscape, any tax-extenders deal would require significant negotiations and concessions from both sides. Moreover, the likelihood of a lame-duck tax deal is further reduced by the existence of several must-pass legislative items, such as a general budget resolution or continuing resolution, the National Defense Authorization Act (NDAA), and Congressional action to avoid a national railroad strike.
Low-Income Housing Tax Incentives—Potential Legislation. At a recent panel discussion regarding tax potential bipartisan in the 118th Congress, tax staffers from both parties and chambers expressed support for a potential expansion to housing tax incentives like the existing Low-Income Housing Tax Credit (LIHTC). Many of these proposals would provide a basis boost for certain housing developments, including those that cater to extremely low-income tenants.
Recently, Wyden has advocated for consideration of the Decent, Affordable and Safe Housing (DASH) for All Act. The bill would expand LIHTC, provide increased vouchers for homeless Americans, create a tax credit similar to LIHTC for the development of housing for middle-income households and provide a tax credit of up to $15,000 for first-time homebuyers. While this bill is unlikely to receive serious bipartisan consideration, many of these proposals may be modified and incorporated into a scaled-back housing reform bill. The final proposal is more likely to look like the Affordable Housing Credit Improvement Act, a bipartisan bill introduced by Sens. Maria Cantwell (D-WA) and Todd Young (R-IN). The bill would make relatively minor modifications to LIHTC, including changes to the state allocations and average income formulas associated with the credit.
More recently, in a Nov. 28 letter led by Reps. Suzan DelBene (D-WA) and Brad Wenstrup (R-OH), a bipartisan group of over 50 lawmakers advocated in favor of the Cantwell-Young bill. The letter cites the current lack of affordable housing as a dire issue that needs to be immediately addressed by legislation. The members of Congress ask that congressional leaders work to enact these LIHTC modifications by the end of 2022. While it is unlikely that these LIHTC provisions would be included as part of the upcoming budget bill in the lame duck, it is more likely that discussions on affordable housing will play out in 2023.
Global Getdown
Treasury Proposes Long-awaited Modifications to Foreign Tax Credit Regulations. The Treasury Department and IRS finally published changes to the new foreign tax credit (FTC) regulations on Nov. 22. Importantly, the new proposed regulations provide a limited safe harbor for foreign withholding taxes imposed on royalty payments and further clarification of the cost-recovery requirements under the January final FTC regulations. Taxpayers generally may rely on the proposed rule as if they were included in the January final regulation. The proposed regulations are open for public comment for 60 days, with comments due by Jan. 23, 2023.
A key feature of the proposed regulations relates to the creditability of foreign withholding taxes imposed on royalties relating to intellectual property (IP) licenses. The final rules have been criticized for limiting FTCs where the foreign country generally does not follow the U.S. sourcing rules for royalties—most countries base the tax on the residence of the payor of the royalty, while the United States imposes royalty taxes based on the country in which the IP is used or the taxpayer has a right to use it. To address this disparity, the proposed regulations allow taxpayers to claim FTCs relating to royalties where the use or right to use the royalty is limited to a single country imposing the withholding tax. The proposal includes a limited transition rule for taxpayers to modify their licensing agreements and qualify retroactively under the proposed rule, with such changes generally required to be executed by May 17, 2023. While this proposal will ease the resulting compliance burdens associated with royalty payment in certain cases, it may have limited applicability for companies with broad IP licensing arrangements, which may or may not be open to modifications.
With respect to the cost-recovery requirement in the final regulations, which were subject to correcting amendments published on July 27, the new proposed regulations provide some important flexibility. Several safe harbors are proposed to the general requirement that a foreign country’s tax laws must allow for the recovery of substantially all of the significant costs or expenses relating to the income on which the foreign tax is imposed for that tax to be creditable. Of particular note, the proposed regulations include a 25% safe harbor under which significant costs or expenses can be disallowed up to that threshold without running afoul of the cost-recovery requirement. These new safe harbors are expected to ease the compliance burdens for companies operating in multiple foreign jurisdictions with varying cost-recovery rules that may not be reasonably similar to U.S. tax rules, as required under the final regulations.
The new proposed regulations have been expected since then-Deputy Assistant Treasury Secretary Jose Murillo announced in May that changes to the royalty and cost-recovery rules would be forthcoming. With the comment period running into 2023, final regulations are not anticipated until later next year, and other changes to the final regulations are not expected before that time.
At a Glance
IRA Implementation Hurdles. With just over a month until the new corporate minimum and stock buyback excise taxes officially take effect, the Treasury Department has still released almost no guidance on how these Inflation Reduction Act (IRA) policies will be administered. At a recent event with the Tax Policy Center, Lily Batchelder, assistant Treasury secretary for tax policy, confirmed that the agency has been conducting numerous stakeholder meetings with both trade groups and corporations that may be directly affected by the tax. Treasury has also increased hiring activity, seeking new employees with a deep understanding of the financial accounting standards that will be crucial in calculating companies’ book profits. On the energy tax side, Treasury has solicited public feedback on the new credits through two rounds of questions and is planning to hold roundtable stakeholder meetings beginning in 2023. Treasury anticipates that these meetings will primarily be conducted with trade groups representing certain energy industries incentivized through the IRA.
Werfel Nomination. On Nov. 10, President Joe Biden announced his intent to nominate Danny Werfel to replace Douglas O’Donnell as the commissioner of the IRS. O'Donnell, the current acting IRS commissioner and former deputy commissioner for services and enforcement, was picked to serve as acting head of the agency after Charles Rettig’s term expired last month. Werfel is currently the managing director of Boston Consulting Group’s federal and public sector teams, and he briefly served as acting commissioner of the IRS for seven months in 2013. The timeline for Werfel’s imminent nomination is unclear, with Senate Finance Committee staffers recently confirming that they were unsure if it would occur in the lame duck. When his nomination is considered, Werfel is expected to undergo heavy scrutiny from Senate Republicans on his plans to implement agency-wide reform using the $80 billion in extra funding provided to the IRS through the IRA.
GAO Recommends Steps to Improve Out-of-State Taxation “Patchwork.” On Nov. 14, GAO published a report to determine how successfully states had implemented out-of-state taxation regimes in the wake of the 2018 Supreme Court Decision, South Dakota V. Wayfair. After conducting the study, GAO concluded that the post-Wayfair system had largely failed multistate sellers. While traditional brick-and-mortar taxpayers are still only required to contend with the tax laws of the state in which they are headquartered, e-commerce businesses must now understand and comply with myriad tax laws from each of the 45 states that now impose levies on remote sellers. This has dramatically increased costs for e-commerce businesses, requiring them to employ services or consultants to ensure compliance with each state’s tax laws. To limit the difficulties imposed on these businesses, the GAO recommended that Congress work directly with states to create broad nationwide parameters.
Brownstein Bookshelf
IRS Unveils Initial Guidance on Energy Credit Apprenticeship and Wage Requirements. On Nov. 29, the IRS released the first round of proposed guidance on the prevailing wage and apprenticeship requirements associated with many of the clean-energy tax credits included in the Inflation Reduction Act (IRA). This is the first round of proposed guidance related to the tax provisions of the IRA, and stakeholders may provide feedback to the agency on any aspect of the proposal within the next 60 days.
Ways and Means Committee Set to Receive Trump Tax Returns. After months of litigation, on Nov. 22, the U.S. Supreme Court allowed the release of former President Donald Trump’s tax returns to the House Ways and Means Committee. That day, House Ways and Means Chairman Richard Neal (D-MA) released a statement supporting the ruling, while Republicans on the committee also issued a statement in opposition.
Tax Extenders in an Uncertain Economy. Last week, the Tax Foundation published an article in support of extensions to several expiring business tax extenders (more above) as a way to prevent a possible future economic downturn. The report also argues against the expansion of tax relief for individuals, arguing that expansions to policies like the Child Tax Credit tend to exacerbate inflationary pressures.
IRS Successful in Repelling Cyber Attack. In a report on Nov. 23, the Treasury Inspector General for Tax Administration (TIGTA) commended the IRS for successfully preventing a ransomware attack that threatened the agency last June. This report comes as lawmakers have scrutinized the agency’s digital security following high-profile leaks of sensitive taxpayer data last year.
Refundability for Adoption Tax Credit. On Nov. 28, the Adoption Tax Credit Advocates sent a letter to the ranking members and chairs of the House and Senate tax writing committees, urging the lawmakers to expand the current adoption tax credit. The group specifically noted its support for the Adoption Tax Credit Refundability Act, a bill that would restore the full refundability of the credit for low- and middle-income taxpayers.
Thune-Grassley IRS Accountability Bill. On Nov. 16, Sens. John Thune (R-SD) and Chuck Grassley (R-IA) introduced the IRS Funding Accountability Act. The bill would impose restrictions and increase oversight on new IRS funding for taxpayer enforcement activities.
Hearings and Events
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.
Administration
Wednesday, Nov. 30
Small Business Administration
Tax Readiness for Business-Owners
Small Business Administration
The New Retirement Savings Time Bomb
Private Sector
Wednesday, Nov. 30
Brookings Institute
Federal Reserve Chair Jerome Powell: The Economic Outlook, Inflation, and the Labor Market
American Enterprise Institute
11th Annual Housing Conference
Thursday, Dec. 1
Brookings Institute
A Comparative Perspective on Policies to Support Single-Parent Families
Bipartisan Policy Center
Health Policy in the Next Congress