Taxation & Representation, Nov. 8, 2023
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Taxation & Representation, Nov. 8, 2023

November 08, 2023

By Brownstein Tax Policy Team


Legislative Lowdown

Appropriations/Shutdown State of Play: Two weeks into his speakership tenure, House Speaker Mike Johnson (R-LA) has continued to move the House in scheduling and passing multiple appropriations bills, with the Legislative Branch and Interior-Environment bills passing on Nov. 1 and Nov. 3, respectively. According to Speaker Johnson’s proposed calendar for the consideration of appropriations bills during his speaker candidacy, the House will aim to also pass the Financial Services and General Government (FSGG) and Commerce, Justice, and Science (CJS) bills this week. The FSGG bill would rescind $10.2 billion in funding allocated to the Internal Revenue Service (IRS) by the Inflation Reduction Act (IRA, Pub. L. 117-169), as well as prohibit the IRS from developing a Direct File program. During the week of Nov. 13, the House plans to consider Labor-Health and Human Services (HHS) and Agriculture-Federal Drug Administration (FDA). The calendar predicts that the House will pass all bills before government funding expires on Nov. 17, but Speaker Johnson acknowledged there is a ”growing recognition” that a continuing resolution (CR) would be needed to avoid a shutdown. On Nov. 2, he suggested a “laddered CR” as a path to create different funding deadlines for each of the 12 fiscal year (FY) 2024 bills, a decision that will likely face blowback across the political spectrum, as it could allow a shutdown multiple times in the span of a few weeks.
House Passes Israel Aid Bill with IRS Funding Cut. On Nov. 2, the House of Representatives passed Speaker Mike Johnson’s (R-LA) bill to provide $14.3 billion in aid to the Israeli government amid the ongoing Israel-Hamas war, which is offset by rescinding $14.3 billion in enforcement funds allocated to the Internal Revenue Service (IRS) in the Inflation Reduction Act (IRA).
An analysis by the Congressional Budget Office (CBO) showed that the Israel aid bill would increase the federal deficit by $26.786 billion, because of CBO’s view that funding IRS enforcement would bring in more revenue than its cost, due to revenue gained from enforcing tax compliance. However, this view has several critics, including House Ways and Means Committee Chair Jason Smith (R-MO), who praised the rescission of IRS funding in a one-pager released on Nov. 1. Chair Smith said that the IRS funding in the Inflation Reduction Act (IRA) would increase audit rates on low- and middle-class Americans and allow the IRS to engage in other projects that have been controversial among Republicans.
Most Democrats have maintained that Israel aid should be linked with aid for Ukraine, as proposed in President Biden’s $106 billion aid package, which includes $16 billion in aid for Israel and $61.4 billion for Ukraine. The House-passed bill received praise from some Senate Republicans who advocated for separate aid packages for Israel and Ukraine. Other Senate Republicans, including Senate Minority Leader Mitch McConnell (R-KY), voiced support for a large security package akin to President Biden’s proposal. Senate Majority Leader Chuck Schumer (D-NY) maintained that the Senate would not take up the House proposal and that the Senate would craft a bipartisan emergency aid package including funding for Israel, Ukraine, humanitarian aid for Gaza and competition with China. The Senate is expected to pass a rebuttal bill this week, which will need to be reconciled with the House version.
The White House also signaled that President Biden would veto the bill linking Israel aid to IRS cuts if it were to pass both chambers, according to a statement by National Security Council Spokesperson John Kirby. IRS Commissioner Daniel Werfel also announced his opposition to the bill, saying that the IRS funding cuts would hamper the agency’s ability to conduct audits on wealthy taxpayers. He stated that the cut would, “over the course of the [IRA], cost taxpayers $90 billion.”
House Ways and Means Committee Passes Disaster Relief Tax Bill. On Nov. 2, the House Ways and Means Committee held a markup of several tax and trade bills, including H.R. 5863, the Federal Disaster Tax Relief Act of 2023. The bill was reported unanimously to the full House for consideration, with all 38 members present voting in favor of the bill.
The bill extends rules for the treatment of certain disaster-related personal casualty losses and provides tax relief for losses due to wildfires and the Feb. 3, 2023, East Palestine, Ohio, train derailment. Specifically, the bill excludes from taxpayer gross income any amount received by an individual taxpayer as compensation for expenses or losses incurred due to a qualified wildfire disaster occurring between 2020 and 2025, allowing the same benefit to victims of the East Palestine train derailment. The bill would also modify the Taxpayer Certainty and Disaster Tax Relief Act of 2020 in temporarily creating an above-the-line deduction for personal casualty losses for major presidentially declared disasters from 2020 onwards, which is not limited to wildfires.




Tax Worldview

Pushback Against DST Imposition Continues. With the Organisation for Economic Co-operation and Development’s (OECD) continued negotiations and delays over the implementation of its profit reallocation plan in its proposed Pillar One global tax regime, Biden administration officials continue to urge governments to resist unilaterally imposing digital services taxes (DSTs). During a conference on Oct. 30, Treasury Assistant Secretary for Tax Policy Lily Batchelder stated that the U.S. government continues to prefer extending the freeze on existing and prospective DSTs until the OECD can formalize and resolve longstanding issues with Pillar One.
Though multiple countries that are part of the OECD Inclusive Framework have agreed to an outcome statement that extended the DST freeze into 2024, Canada did not sign onto the statement. Instead, Canada has continued moving forward with plans to implement a unilateral DST, an action that has received criticism not just from opposing governments and the OECD, but by Canadian business interests as well. On Nov. 2, Goldy Hyder, the president and CEO of the Business Council of Canada, sent a letter to Prime Minister Justin Trudeau stating that “Canada’s economic interests will be severely harmed if Canada continues to defy the overwhelming OECD consensus,” citing potential U.S. retaliatory measures and other potential deteriorations in trade relationships.



1111 Constitution Avenue

IRS Pledges Support of Biden Executive Order Concerning AI. On Oct. 30, President Biden signed an Executive Order (EO) on the Safe, Secure and Trustworthy Development and Use of Artificial Intelligence (AI). The EO is intended to establish safety standards for leading artificial intelligence (AI) companies to follow in the absence of legislation on the issue. The order reflects the growing sense in Washington that the United States must shape how AI evolves in order to maximize its potential, mitigate any negative effects on vulnerable populations and limit the influence of foreign adversaries. The order also aims to address the safety, privacy and job security concerns raised by AI’s rapid development.
The EO requires the Treasury Department to assess ways AI may make critical infrastructure more vulnerable to critical failures, physical attacks and cyberattacks, as well as options for mitigating these vulnerabilities. The EO also encourages independent agencies to contribute to this effort. Separately, the Treasury Department is directed to issue a public report outlining best practices for how financial institutions can manage AI-specific cybersecurity risks. Independent regulatory agencies are encouraged to use their authorities, including considering new rulemakings and clarifying existing regulations and guidance, to respond to the risks stemming from the rise of AI.
After the release of the EO, IRS Commissioner Daniel Werfel said that the agency is “absolutely committed” to the EO, as he said the EO gives the IRS and other agencies the liberty to explore and innovate with AI while being wary of any of the drawbacks and security issues of using AI.
The EO also urges agencies to address AI and algorithmic bias and discrimination, an issue that the IRS is currently working to fix in audit algorithms. On Oct. 31, Commissioner Werfel held a briefing to discuss the agency’s plan to fix audit algorithms that studies had shown disproportionately targeted Black taxpayers and made them more likely to face audits. For instance, a Stanford Institute for Economic Policy Research study released earlier this year found that Black taxpayers were three to five times more likely to be audited than other taxpayers. Commissioner Werfel stated that the agency’s efforts include changing audit selection algorithms and refocusing audit efforts away from low- and middle-income taxpayers toward wealthier filers. In response to the briefing, Senate Finance Committee Chair Ron Wyden (D-OR) stated that he is “encouraged” that the IRS is “striving to fully eliminate bias from its audit selection methods.”



At a Glance

Wyden Urges Funding IRS to Crack Down on Hamas Financing. On Oct. 31, Senate Finance Committee Chair Ron Wyden (D-OR) wrote a letter to Internal Revenue Service (IRS) Commissioner Daniel Werfel asking him to detail how proposed funding cuts to the agency would negatively affect their ability to pursue investigating tax schemes and activities that fund terrorist organizations, such as Hamas. The letter claimed that “Hamas has reportedly used fake charities and cryptocurrencies to evade sanctions and fund its attacks,” and that various divisions in the IRS have used their funding to “police fake charities” and “address sanctions evasion.” The letter urges Congress to continue funding the IRS so that the agency can strengthen its investigative power and asks Commissioner Werfel to “provide a list of the ways that the cuts being contemplated in Congress would undercut the IRS’s ability to address these concerns.”

IRS Issues Guidance on ERTC Qualification Criteria. In a memorandum released on Nov. 3, the IRS clarified that guidance from the Occupational Safety and Health Administration (OSHA) that merely suggests taking action to prevent the spread of COVID-19 does not qualify as sufficient reason for an employer to qualify for the Employee Retention Tax Credit (ERTC). The ERTC was a credit that was intended to help businesses who had to shutter to cut payroll due to the COVID-19 pandemic. OSHA would have had to issue an order, such as for a facility to close, in order to qualify for the credit. The memorandum said “are not ‘orders’ for purposes of the credit and cannot be used to claim the credit by employers, even if employers took steps in response to the communications.”
IRS Chief Counsel Nominee Advances to Full Senate Consideration. On Nov. 2, the Senate Finance Committee voted to advance the nomination of Marjorie Rollinson for Internal Revenue Service (IRS) chief counsel. The vote was 16-11, with Sens. Bill Cassidy (R-LA) and Thom Tillis (R-NC) joining with Democrats to approve Rollinson. Rollinson had previously testified before the committee in a nomination hearing on Sept. 28, where Democrats cited Rollinson’s experience in the tax sector, including at the Office of Chief Counsel, and Republicans criticized the IRS and Treasury Department for alleged instances of executive overreach by both agencies.
IRS Opens Registration for Energy Credit Online Tool for EV Sellers. On Nov. 1, the Internal Revenue Service (IRS) announced that sellers of certain clean vehicles and electric vehicles (EVs) can register on the agency’s newly released Energy Credits Online tool. The tool is designed to allow sellers of qualified vehicles, such as car dealerships, to be able to apply for advance payments of certain clean vehicle credits, so that they will be able to advertise lower at-sale prices to buyers. The tool will generate a Time of Sale report that the taxpayer will use when filing his or her federal tax return to claim or report the credit. The tool has been made available in advance of the dealer-transfer program, which becomes effective for sales made on or after Jan. 1, 2024.
Democratic Lawmakers Introduce Excise Tax Bill on CEOs. On Nov. 2, Sen. Sheldon Whitehouse (D-RI), along with Reps. Barbara Lee (D-CA) and Alexandria Ocasio-Cortez (D-NY) announced that they would introduce the Curtailing Executive Overcompensation (CEO) Act. The bill seeks to apply an excise tax on publicly traded and private companies with over $100 million in gross receipts and $10 million in payroll, which have a CEO-to-median-worker “pay disparity ratio” of at least 50:1. The pay disparity ratio is determined by calculating the ratio of a:b, with (a) being the wage of the highest-compensated employee of the employer, with this determination being made by analyzing pay over the previous five years, and (b) being the median amount of the wages paid to all individuals of the employer whose annual wages are at least $5,000. The tax rate imposed would be proportional to the size of the executive’s compensation (including all aspects of their compensation, like bonuses and stock options), and the degree to which the pay disparity ratio exceeds 50:1. However, the tax imposed would not exceed 1% of a company’s gross receipts.



Brownstein Bookshelf

IRS Announces IRA, 401(k) Contribution Limits for 2024. On Nov. 1, the Internal Revenue Service (IRS) announced that in 2024 they would be raising the maximum amount of money individuals contribute to a 401(k) retirement plan and to an individual retirement arrangement (IRA). The IRA annual contribution amount increased to $7,000 from $6,500, and the 401(k) annual contribution amount increased to $23,000 from $22,500. The agency cited cost-of-living increases and inflation adjustments as their reasons for increasing contribution limits.




Hearings and Events

House Ways and Means Committee
On Nov. 7, the House Ways and Means Committee held a hearing titled “Ensuring that ‘Woke’ Doesn’t Leave Americans Broke: Protecting Seniors and Savers from ESG Activism.”
Senate Finance Committee
On Nov. 9, the Senate Finance Committee will hold a hearing titled “Examining How the Tax Code Affects High-Income Individuals and Tax Planning Strategies.
The Senate Budget Committee will hold a hearing on Nov. 8 titled “Fairness and Fiscal Responsibility: Cracking Down on Wealthy Tax Cheats."