Legislative Lowdown
Democrats’ Latest Push for an Expanded CTC. With the year-long effort to legislate a comprehensive energy, healthcare and tax bill finally completed, many Democratic lawmakers and members of the administration have fully transitioned to campaigning for the upcoming midterm elections. When lawmakers return to D.C. after elections, Congress will have about five weeks to consider appropriations and other end-of-year legislation, including various tax items, such as extenders. However, with many of the energy credits already extended in the Inflation Reduction Act, it is unclear if lawmakers will have the impetus to consider a bipartisan tax bill in this Congress.
If a tax bill is considered before January, an extension of the expanded Child Tax Credit (CTC) will likely be at the top of Democrat’s wish list. In the past, some lawmakers on the left have said that they would be unwilling to support tax incentives for corporations in a tax extenders deal without the inclusion of aid for families in the form of a CTC expansion. President Joe Biden has remained a strong supporter of CTC legislation, reportedly meeting with lawmakers, including Sen. Michael Bennet (D-CO), earlier this month to renew efforts to pursue the expanded credit. House Ways and Means Chairman Richard Neal (D-MA) has since echoed Bennet’s support, publishing a statement last week in support of extensions to COVID-era CTC incentives. Following Neal’s comments, a group of lawmakers, including Sens. Sherrod Brown (D-OH) and Cory Booker (D-NJ), as well as Reps. Rosa DeLauro (D-CT), Suzan DelBene (D-WA) and Ritchie Torres (D-NY), published a joint statement in support of CTC legislation.
These lawmakers are requesting a temporary extension to the expanded, monthly CTC (up to $300 monthly per child) that was initially provided through the American Rescue Plan Act (ARPA). Though the CTC amount reverted to pre-ARPA levels at the end of 2021, recent calls for renewing the expanded credit have largely risen in response to a report published last week by the U.S. Census Bureau. The report indicated that a 46% drop in the U.S. child poverty rate between 2020 and 2021 may have been largely attributable to the expanded CTC.
Though an expanded CTC is likely a top tax priority for a significant number of Democrats, there have already been several efforts to attach this provision to a number of legislative vehicles. Most recently, efforts to pass CTC reform through reconciliation were thwarted by Sen. Joe Manchin (D-WV), who requested that work requirements and means testing stipulations be attached to any potential CTC provisions.
Even if all 50 Democratic senators were to reach consensus on a prospective CTC agreement, any tax bill would require the support of at least 10 Senate Republicans. Providing some hope to Democratic efforts, earlier this year, Sens. Mitt Romney (R-UT), Steve Daines (R-MT) and Richard Burr (R-NC) announced their proposed Family Security Act 2.0. The bill would include a simplified CTC worth up to $350 monthly per child that would be paid for by an elimination of several other federal entitlement programs, including the child portion of the child and dependent care tax credit. It also includes changes to the Earned Income Tax Credit (EITC) and would repeal the state and local tax deduction to pay for the credit.
If an expanded CTC is included in any year-end package, Democrats would need to concede to at least some of the business incentives requested by Republicans (see more below).
The Fate of Other Year-end Tax Priorities. While some Democratic lawmakers may require a reinstatement of the expanded CTC to support any potential year-end tax deal (see more above), there is even greater uncertainty over the extension of several other expiring tax provisions.
Most notably, there is broad support from both sides of the aisle on a proposal 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 most R&D expenses over five years. Last Wednesday, Chief Executive Officer of the Business Roundtable Josh Bolten raised concerns on behalf of several U.S. corporations over Congress' ultimate inability to pass legislation to protect full expensing of R&D costs. Later that week, Raytheon Technologies, a Virginia-based aerospace and defense company, announced a projected $2 billion decrease in 2022 free cash flow, mostly attributable to a potential future inability to immediately capitalize R&D costs.
Bipartisan attempts to pursue this goal have been made earlier this Congress but have ultimately fallen short. Last year, Rep. John Larson (D-CT) introduced legislation to fully eliminate the reversion to five-year amortization. The bill was ultimately cosponsored in the House by 59 Republicans and 50 Democrats but did not receive a vote on the floor.
In the upcoming extenders discussion, Republicans may also seek to extend several other expiring 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 allow 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.
Unlike the aforementioned adjustment to R&D expense capitalization, these two proposals are not widely supported by Democrats and will likely only be included in a year-end bill if Republicans allow significant concessions on CTC expansion or other key Democratic priorities.
Other miscellaneous tax proposals may be considered in year-end legislation, including an extension of statutes that would allow taxpayers that donate to charities to take a larger above-the-line contribution deduction. Regardless, the outcome of efforts surrounding a lame-duck package will largely depend on the results of the upcoming midterms.
CR Efforts Proceed (Slowly). Efforts to legislate a bipartisan continuing resolution (CR) have largely proceeded behind closed doors as lawmakers consider what supplemental funding requests will receive serious consideration. Most of Biden's myriad spending requests, including nearly $23 billion in additional COVID aid, are unlikely to be included in any agreement.
However, the administration's request for additional aid to support Ukraine in its war against Russia has more significant support. Last weekend, Senate Majority Leader Chuck Schumer (D-NY) requested at least $12 billion in military aid, $300 million more than Biden's initial request. Senate Republicans are likely to support some level of additional aid for Ukraine.
Potentially complicating bipartisan efforts, members of the conservative House Freedom Caucus have signaled their support for only a “clean” CR, devoid of any additional funding priorities. In terms of action during the lame-duck session, these members have argued that with the possibility of one or both chambers transitioning to Republican control next congress, any appropriations measures should wait until the 118th Congress is seated in January.
Senate Republicans seem split on a “clean” CR versus a CR that does contain a few additional spending priorities. Last week, Sens. Rick Scott (R-FL), Ted Cruz (R-TX) and Mike Lee (R-UT) published a joint op-ed for Fox News in support of “clean” CR that would fund the government only up to 2022 spending levels, with no supplemental funding included. The senators also signaled support for a longer-term CR that would last until the next session of Congress, versus Dec. 16, which is the date that is currently under consideration. This would rule out the possibility of action during the lame-duck session.
On the other hand, Sens. Lindsey Graham (R-SC), Susan Collins (R-ME), Thom Tillis (R-NC), John Boozman (R-AR) and Roger Wicker (R-MS), as well as Senate Appropriations Committee Ranking Member Richard Shelby (R-AL), have expressed support for the short-term CR through mid-December, and they remain open to the inclusion of select spending priorities. Republicans are unlikely to make a decision about action during the lame-duck session until after the midterm elections
1111 Constitution Avenue
Comments From Yellen at Visit to IRS Maryland Facility. During a visit to the IRS facility in New Carrollton, Maryland, Treasury Secretary Janet Yellen offered some clarification on how the IRS intends to use the additional $80 billion in funding provided by the Inflation Reduction Act. In her comments, Yellen primarily focused on the portion of funding dedicated to improving taxpayer services.
Yellen said that the IRS provided a 10-15% level of service during the last filing season, meaning that it answered less than two of every 10 calls. Yellen committed to an updated response rate of over 85% during the next filing season. To accomplish this goal, Yellen said that the IRS will look to hire 5,000 new customer service representatives.
Yellen also pledged to ensure that every single IRS Tax Assistance Center is fully staffed. She said that this effort would provide an estimated 2.7 million taxpayers with in-person assistance in the upcoming filing season.
Furthermore, Yellen commented that the agency intends to fully move into the digital age with this increased funding. She noted that IRS employees still manually transcribe many paper returns. This coming filing season, the IRS hopes to automate the scanning of millions of paper returns. For taxpayers, this will result in faster processing and refunds
At a Glance
Biden Set to Nominate New IRS Chief Counsel. President Joe Biden has announced his intention to nominate Beth Kaufman, a partner at the law firm Caplin & Drysdale to be the new chief counsel at the IRS. Kaufman has a background in estate planning and taxes. Before transitioning to the private sector, she spent over six years in the Treasury Department’s Office of Tax Policy during the Clinton administration.
GOP Expected to Announce Tax Goals for Upcoming Congress. House Republicans are expected to roll out their “Commitment to America” platform on Sept. 23. The tax portion of the plan will focus on extending the 2017 tax rate reduction for individuals and the 20% rate cut on passthrough income and bonus depreciation. The platform will also cover the economic, social, international and political policies of the task forces created by House Minority Leader Kevin McCarthy (R-CA) in June 2021.
Brownstein Bookshelf
Republicans Propose Legislation to Limit IRS. Last Tuesday, Senate Minority Whip John Thune (R-SD) and Sen. Susan Collins (R-ME) introduced a bill to limit the hiring and auditing abilities of the IRS in wake of the influx of funding provided to the agency through the Inflation Reduction Act (IRA). The Increase Reliable Services Now Act would prevent the IRS from employing any new enforcement staff until the agency reduces wait times and clears a majority of the current paper return backlog. The bill would also prevent the IRS from using new funding to audit taxpayers with incomes below $400,000 at increased rates. While the bill is unlikely to gain traction, it is largely emblematic of Republican efforts to position the IRA as an attack on low- and middle-class taxpayers.
Regulation of Crypto Markets. Sen. Elizabeth Warren (D-MA) led a letter to Treasury Secretary Janet Yellen calling on the Treasury Department and Financial Stability and Oversight Council to build a strong regulatory framework for the crypto market. Warren attached nine letters from over two years of oversight investigations into the crypto market which helped demonstrate the need for greater regulation.
Interim Guidance on Invalid Regulations. On Sept. 14, the Treasury Department issued interim guidance on the handling of cases in which the taxpayer claims that a Treasury regulation, an IRS notice or a revenue procedure published in the Internal Revenue Bulletin is procedurally invalid. The memo states that the goal of this guidance is to ensure that disputes are resolved in a manner that is “fair and impartial to the taxpayer and the government.”
Hearings and Events
Senate Banking Committee
On Tuesday, the full committee will hold a hearing entitled, “Tightening the Screws on Russia: Smart Sanctions, Economic Statecraft and Next Steps,” during which the following witnesses will testify:
- Elizabeth Rosenberg, assistant secretary for terrorist financing and financial crimes, U.S. Department of Treasury
- Andrew Adams, director, Task Force KleptoCapture, U.S. Department of Justice
On Tuesday, the subcommittee on Housing, Transportation and Community Development will hold a hearing entitled, “Examining the U.S. Department of Agriculture’s Rural Housing Service: Stakeholder Perspectives,” during which the following witnesses will testify:
- Ms. Elizabeth Glidden, deputy executive director, Minnesota Housing Partnership
- Ms. Marcia Erickson, CEO, GROW South Dakota
- Ms. Tonya Plummer, director, Native American Housing Programs, Enterprise Community Partners
- Mr. David Battany, executive vice president, Capital Markets, Guild Mortgage Company, on behalf of the Mortgage Bankers Association
On Thursday, the full committee will hold a hearing entitled, “Annual Oversight of the Nation’s Largest Banks,” during which the following witnesses will testify:
- Mr. Charles W. Scharf, CEO and president, Wells Fargo & Company
- Mr. Brian Thomas Moynihan, chairman and CEO, Bank of America
- Mr. Jamie Dimon, chairman and CEO, JPMorgan Chase & Co.
- Ms. Jane Fraser, CEO, Citigroup
- Mr. William H. Rogers Jr., chairman and CEO, Truist Financial Corporation
- Mr. Andy Cecere, chairman, president and CEO, U.S. Bancorp
- Mr. William S. Demchak, chairman, President and CEO, The PNC Financial Services Group
House Financial Services Committee
On Tuesday, the subcommittee on National Security, International Development and Monetary Policy will hold a hearing entitled, “Under the Radar: Alternative Payment Systems and the National Security Impacts of Their Growth,” during which the following witnesses will testify:
- Scott Dueweke, global fellow, science and technology innovation, the Wilson Center
- Emily Jin, research assistant for the Energy, Economics and Security Program, the Center for a New American Security
- Dr. Carla Norrlöf, nonresident senior fellow, Economic Statecraft Initiative, GeoEconomics Center, the Atlantic Council
- Ari Redbord, head of legal and government affairs, TRM Labs
- Jonathan Levin, co-founder and chief strategy officer, Chainalysis
On Tuesday, the subcommittee on Diversity and Inclusion will hold a hearing entitled, “A Review of Diversity and Inclusion at America’s Largest Insurance Companies,” during which the following witnesses will testify:
- Eloiza Domingo, chief diversity officer and vice president, human resources, The Allstate Corporation
- Dr. Leroy D. Nunery II, president, Evolution Advisors LLC
- Kimberly Ross, senior vice president, federal relations, American Council of Life Insurers (ACLI)
- Chlora Lindley-Myers, director, Missouri Department of Commerce and Insurance on behalf of the National Association of Insurance Commissioners (NAIC)
- Baird Webel, specialist in financial economics, Congressional Research Service
On Wednesday, the full committee will hold a hearing entitled, “Holding Megabanks Accountable: Oversight of America’s Largest Consumer Facing Banks,” during which the following witnesses will testify:
- Andy Cecere, Chairman, president and CEO, U.S. Bancorp
- William Demchak, chairman, president and CEO, The PNC Financial Services Group
- Jamie Dimon, chairman and CEO, JPMorgan Chase & Co.
- Jane Fraser, CEO, Citigroup
- Brian Moynihan, chairman and CEO, Bank of America
- William Rogers Jr., chairman and CEO, Truist Financial Corporation
- Charles Scharf, president and CEO, Wells Fargo & Company
On Thursday, the subcommittee on Housing, Community Development and Insurance will hold a hearing entitled, “State of Emergency: Examining the Impact of Growing Wildfire Risk on the Insurance Market.” No witnesses are currently listed.
Senate Finance Committee
The committee has no upcoming hearings scheduled for this week.
House Ways and Means Committee
The committee has no upcoming hearings scheduled for this week.
Private Sector
Wednesday, Sept. 21
Brookings Institute
Overtime: America’s Aging Workforce and the Future of Working Longer
Monday, Sept. 26
Bipartisan Policy Center
Solutions to Improve Take-Up and Administration of the CTC and EITC