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Bipartisan tax bill clears House, but Senate prospects remain uncertain

In a rare display of substantive bipartisanship in this Congress, the House on January 31 voted 357-70 to approve the Tax Relief for American Families and Workers Act (H.R. 7024), a roughly $78 billion package that would, among other things, temporarily reinstate several lapsed business-friendly tax provisions originally enacted in the Tax Cuts and Jobs Act of 2017 (TCJA, P.L. 115-97), enhance the child tax credit and the low-income housing tax credit, and impose new strictures on the employee retention tax credit program.

 

House passage of the tax bill represented a significant win for first-term Ways and Means Committee Chairman Jason Smith, R-Mo., who negotiated the package with Senate Finance Committee Chairman Ron Wyden, D-Ore. After more than a year of working to carefully balance business and household tax code changes in a manner that allowed for a 40-3 vote in the taxwriting committee on January 19, Smith then worked with House Speaker Mike Johnson, R-La., up until the night before the House vote to tamp down as many concerns as possible and push the bill through the chamber under an expedited process that sharply limited debate time, prohibited amendments, and required a two-thirds supermajority vote for passage.

 

“Because of this bill, working parents crushed by high prices will have an easier time putting food on the table, more things will be made here in America, and the nation will be more competitive with China,” Smith said in a statement following the House vote.

 

Despite overwhelming approval by both parties in the House, however, the legislation’s fate in the Senate is still uncertain due to pushback primarily from Republican lawmakers whose stated concerns relate to both policy and politics.

 

What’s in the bill

 

At a high level, the Tax Relief for American Families and Workers Act includes provisions that would:

  • Delay through 2025 mandatory capitalization of research expenditures under section 174—for domestic expenditures only—retroactive to expenses paid or incurred in tax years beginning after December 31, 2021;

  • Reinstate 100 percent bonus depreciation through 2025, for qualified property placed in service after December 31, 2022;

  • Reinstate through 2025 the allowance for depreciation and amortization in determining the 30 percent limitation on business interest deductions under section 163(j), retroactive to taxable years beginning after December 31, 2023, and, if elected by the taxpayer, retroactive to taxable years beginning after December 31, 2021; and

  • Enhance the child tax credit through 2025 by permitting the refundable portion of the credit to be calculated on a per-child basis (for tax years 2023, 2024, and 2025), gradually increasing the overall limit on refundability (for tax years 2023 through 2025), allowing parents to use prior-year income to qualify for the credit (for tax years 2024 and 2025), and indexing the maximum credit amount for inflation (for tax years 2024 and 2025).

Other provisions would alleviate double taxation on Taiwanese companies operating in the United States, temporarily increase the state credit ceiling for the low-income housing tax credit and relax the 50 percent bond-financing threshold requirement for certain buildings, increase the small business expensing limit and index it for inflation, provide tax relief for victims of certain federally declared disasters, and increase the dollar threshold that triggers certain information reporting requirements for payments by a business for services performed by an independent contractor or subcontractor.

 

The measure also includes revenue-raising provisions that are intended to address perceived fraud in the pandemic-era employee retention tax credit (ERTC) program—for example, by accelerating the deadline for filing new claims, imposing new reporting requirements and restrictions on promoters of the credit, and extending the statute of limitations for the IRS to assess penalties on improper ERTC claims.

 

A section-by-section summary of the bill is available from the taxwriting committee staff. A description of the legislation as introduced and a description of certain technical modifications to the child tax credit and ERTC provisions that were included in an amendment in the nature of a substitute adopted at the Ways and Means Committee mark-up of the legislation are available from the nonpartisan Joint Committee on Taxation (JCT) staff.

 

The JCT staff estimates that the legislation would, on net, increase federal deficits by $399 million between 2024 and 2033, through the combined effect of $77.5 billion in reduced receipts and increases in spending from the tax relief provisions and $77.1 billion in new receipts from the curbs on the ERTC program. A macroeconomic analysis that the JCT staff released January 24 indicates that the bill’s effects on the larger economy would “not additionally increase or decrease this estimate.”

 

Dissenting voices

 

Opponents of the bill in the House generally came from the far ends of the political spectrum in both parties: some of the chamber’s most progressive Democrats argued that the package was overly skewed towards businesses rather than working families, while a GOP contingent from the ultraconservative House Freedom Caucus decried the child tax credit enhancements as “welfare” that would discourage work and also benefit families that entered the US illegally.

 

Just before voting “no” on the measure, Rep. Rosa DeLauro, D-Conn., the top Democrat on the House Appropriations Committee, told reporters, “I think we had an opportunity, and it’s a missed opportunity,” referring to her view that the child tax credit expansion was not sufficient in comparison with the business tax relief. “I will make a presumption that people tried as hard as they can, but you can’t tell me that something is better than nothing. . . . If the business interests had a red line, then where was our red line?”

 

In the final days before the vote was scheduled, though, it was a group of moderate Republicans that presented the most significant threat and gave Speaker Johnson pause. Newly elected GOP members from jurisdictions with high state and local taxes (SALT) decried the tax package for failing to repeal or raise the $10,000 cap on SALT deductions implemented by the Tax Cuts and Jobs Act and threatened to derail unrelated Republican legislation if the cap was not addressed. As a result of late-night conversations, New York SALT advocates emerged with a commitment from the speaker to quickly begin a process for moving a stand-alone bill that would raise the SALT deduction cap for 2023 to $20,000 for married couples filing jointly with income of up to $500,000. The result was that the House Rules Committee on February 1 advanced a SALT relief bill (H.R. 7160) from Rep. Mike Lawler, R-N.Y., allowing it to move to the House floor the week of February 5. However, in order to pass the procedural measure on the floor that would allow for a vote on the bill itself, Republicans can lose no more than two votes—assuming all Democrats vote against it—and there are expected to be more opponents than the bill can survive.

 

In the end, most House members agreed that the tax relief measure hammered out between the two taxwriting committee chairs represented a reasonable balance of interests and the best outcome that either party could hope for in a divided Congress.

 

“It’s not perfection,” said Rep. Richard Neal, D-Mass., the top Democrat on the Ways and Means Committee. “It’s not what I would have written. But this is a decent tax package to go forward.”

 

An even more precarious fiscal cliff ahead?

 

The legislation would align the expiration dates of its various tax code changes with the $3 trillion-plus array of provisions in the Tax Cuts and Jobs Act that are already due to sunset at the end of 2025. The TCJA made permanent the corporate tax rate cut and other corporate changes but—for cost purposes—most of the tax relief provisions for individuals and passthrough entities were enacted on a temporary basis. As that deadline now looms, the next Congress will be faced with monumental decisions on whether to extend income tax rate cuts for each bracket, a higher standard deduction, lower estate and gift taxes, the 20 percent deduction for passthrough entities, and more.

 

The latest estimated 10-year cost (including additional debt service) of extending all of the expiring individual TCJA provisions is $2.91 trillion, according to budget projections from the Congressional Budget Office (CBO) released in May 2023. CBO estimates that maintaining current law on several business provisions—related to foreign profits and profit shifting—that are also due to change would cost another $166 billion. Adding a 10-year extension of the full expensing provision included in this week’s House bill to the 2025 mix would add an estimated $384 billion to that total.

 

Recent estimates from the Tax Foundation, a Washington-based think tank, peg the 10-year cost of maintaining expensing for research expenditures at $174.5 billion and the cost of retaining the allowance for the 30 percent limitation on business interest expense deductions at $123.1 billion.

 

What’s ahead in the upper chamber

 

Ahead of the House vote, Senate Finance Committee Chairman Ron Wyden had noted that he expected a strong bipartisan show of support in that chamber would influence the bill’s prospects on his side of the Capitol.

 

“It’s been a long time since there’s been bipartisan tax policy,” Wyden said January 30, adding that a big House vote in favor of the bill could send “a very powerful message that the country’s coming together.”

 

However, in contrast with the enthusiasm for the bill displayed by their House counterparts, many of the Senate’s Republican taxwriters have been cool to the legislation as it is currently written, and that big vote in the House has not appeared to deter those who want to make changes to the bill. (The measure will require at least some level of bipartisan support since under Senate rules it would almost certainly need to garner 60 votes to overcome procedural hurdles and advance through the chamber.)

 

In a statement released January 31, the Finance Committee’s top Republican, Sen. Mike Crapo of Idaho said, “Now that the House has passed H.R. 7024, the Senate will go through its own process. I look forward to working with my colleagues to vet the legislation, address concerns, and make the necessary changes to build support.”

 

Similarly, Finance Committee member John Cornyn, R-Texas, told the Wall Street Journal January 31, “I’m certainly not just willing to let the House pass something and then say, ‘Oh well, we’ll just take that,’” adding that he doesn’t feel any urgency to advance the bill. “The price we’re having to pay is pretty outrageous,” he said.

 

Smith and Wyden, however, have been clear that the delicate balance of business and family tax relief they struck in their bill probably cannot withstand much tinkering.

 

The chief criticisms from Senate Republicans mirror those of most House Republicans who voted against the bill and are largely focused on the child tax credit provisions. Although the House-passed legislation maintains the requirement included in the TCJA that eligible children must have a US social security number, critics argue that it would allow benefits for the children born in the US to immigrants who illegally entered the country. The bill also includes a one-year lookback provision that would allow taxpayers to claim the credit based on either current-year or prior-year income, which some Republicans say disconnects the incentive from work.

 

Finance Committee member Charles Grassley, R-Iowa, explicitly tied his objections to politics, telling Semafor that “passing a tax bill that makes the president look good—mailing out checks before the election—means he could be re-elected, and then we won’t extend the 2017 tax cuts.”

 

(Grassley’s comment about “mailing out checks” refers to the provision in the bill that would allow the IRS to adjust refunds for those taxpayers who would be due a benefit from the expanded child tax credit but filed their taxes before the legislation was enacted. The filing season for tax year 2023 opened January 29, so taxpayers will have begun filing already as the measure works its way through Congress. However, Ways and Means Committee Chairman Jason Smith emphasized in a January 26 news release that the legislation requires the IRS to “process any adjustments that might be needed to already-filed tax returns ‘as expeditiously as possible,” and that “the IRS has confirmed its intention to make necessary systems updates by around six weeks after the date of enactment.”

 

Sen. Thom Tillis, R-N.C., who also sits on the Finance Committee, told Semafor that he’s advising his party’s leaders to hold out for a win in November by former President Donald Trump before they make any tax policy decisions. Republicans also have a favorable Senate map this election cycle and hope to retake the majority in November, an outcome that would give them more say over the major 2025 tax policy decisions. (Tillis also has criticized the measure’s revenue-raising proposals to curb the employee retention tax credit program, arguing that they are not true offsets.)

 

In contrast, Senate Majority Leader Charles Schumer, D-N.Y., has voiced his support for the bill—as has President Biden—and said he will work with Wyden to get the bill through the Senate. What that process will look like is unclear at the moment, though.

 

Without an agreement to limit amendments on the floor—which Minority Whip John Thune, R-S.D., said Schumer will not get from Republicans—debate on the bill could take a significant amount of time and attract unlimited amendments. This route is seen as an unlikely one for Schumer to take, as is one in which the majority leader “fills the amendment tree”—essentially blocking Republicans from filing any amendments of their own—as he needs to maintain sufficiently positive relations with the minority to achieve other priorities this session.

 

A more likely possibility is that the strong House vote will demonstrate enough buy-in of the legislation that appropriators and congressional leaders will add it to one of the upcoming spending vehicles that need to pass by March 1 and March 8, respectively, in order to keep the government open. (See additional discussion on that below.) Another option would be to attach the tax bill to must-pass legislation reauthorizing the Federal Aviation Administration by March 8. Both of these paths have their own hurdles but are certain to be part of the discussions now happening in the Senate.

 

“There are 357 reasons to feel good this morning,” Wyden told reporters February 1, referring to the House supporters. “What I do is continue to talk to Senate Republicans about how to proceed.”

 

Spending leaders notch agreement on top-line levels for 12 appropriations bills

 

In related news, efforts to advance government funding legislation for fiscal year 2024, which, as already noted, could provide a vehicle for getting the bipartisan tax relief bill to the White House if it passes in the Senate, got a boost as House Appropriations Committee Chair Kay Granger, R-Texas, and Senate Appropriations Committee Chair Patty Murray, D-Wash., reached an agreement late January 26 on how to subdivide among each chamber’s 12 appropriations subcommittees the roughly $1.7 trillion in total funding for federal departments and agencies agreed to earlier this year by Senate Majority Leader Schumer and House Speaker Johnson.

 

Those agreed-upon subcommittee funding levels—known as “section 302(b) allocations” because they were enacted in section 302(b) of the Congressional Budget and Impoundment Control Act of 1974—are still held private among the respective subcommittee chairs, but are a significant, and necessary, step toward avoiding a government shutdown in the coming weeks. Under the latest continuing resolution (CR) keeping the government’s doors open (H.R. 2872, signed into law January 19), fiscal year 2024 funding was extended at 2023 levels through March 1 for four appropriations measures and through March 8 for the remaining eight spending bills.

 

“My allocation is higher,” said Rep. Steve Womack, R-Ark., who chairs the appropriations subcommittee in the House that writes the Financial Services and General Government (FSGG) spending bill, the measure that provides annual funding to the Treasury Department and the Internal Revenue Service, among myriad other agencies.

 

“I got a bill done at a lower number, so I can get this done,” Womack said, referring to his earlier efforts writing an FSGG bill at a level considerably lower than that envisioned in the spending framework for fiscal 2024 that had been agreed to by President Biden and former Speaker Kevin McCarthy, R-Calif., as part of the Fiscal Responsibility Act (P.L. 118-5) last June.

 

The FSGG bill is among those facing a March 8 deadline.

 

Womack told reporters this week that the biggest challenge now facing appropriators is reaching an agreement on policy riders in their respective spending measures. (Certain factions within the House Republican Conference have demanded the inclusion of policy riders in appropriations bills during the current funding cycle but such provisions are typically regarded as nonstarters by Senate Democrats and the White House.)

 

“That’ll be most of the negotiations, frankly. And there will be some negotiations on amounts in different accounts. But most of the difficulty will be on riders,” Womack said. “We’ve got like 100 policy riders in our bill. We’re not going to get all of them. Can we get some of them? Probably.”

 

Rep. Mike Simpson, R-Idaho, who chairs the House Appropriations Subcommittee on Interior, Environment, and Related Agencies, told reporters that Republicans on his side of the Capitol intend to package their 12 funding measures in “three or four” so-called “minibuses” in an effort to move them quickly through the chamber ahead of the upcoming funding deadlines.

 

As of February 2, the House is expected to be in session for 10 days before the stopgap funding for the first tranche of federal departments and agencies under the current CR expires on March 1, and 14 days before funding for the second tranche expires on March 8. The Senate currently is scheduled to be in session for 9 days ahead of the March 1 deadline and 14 days before the CR lapses on March 8. It is currently unclear if Senate leaders will truncate the President’s Day recess scheduled for the weeks of February 9 and February 16 to give members additional time to complete work on appropriations legislation, the bipartisan tax bill, and other priority items identified by leadership, such as an agreement combining stepped-up security on the US southern border with emergency aid for Ukraine and Israel.

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