November 22, 2021
House Passes Biden’s Economic Plan, Senate Fate Uncertain – Erik Wasson and Billy House, Bloomberg ($). “President Joe Biden’s signature plan to expand the social safety net, address climate change and rewrite tax policies passed the House Friday morning as Speaker Nancy Pelosi united fractious Democrats to send the legislation to the Senate, where its fate remains uncertain.”
The House action is a political victory for Biden, but his agenda is still far from the finish line. Democratic senators are expected to make extensive changes before voting on it, potentially in December. Passage in that chamber will require unanimous support from the Democratic caucus, and two pivotal members, Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, have yet to give their full public support. Republicans are united in opposition.
House-passed tax and spending bill faces Double-Edged Sword in the Senate – Jay Heflin, Eide Bailly. “The House on November 19th voted 220-213 to advance to the Senate the tax and spending reconciliation bill where it will undergo an arduous vetting process. This is because the legislation is making its way through Congress under the protection of 'budget reconciliation,' which can be a double-edged sword.”
Simply put, using budget reconciliation means that the bill can pass both chambers of Congress with only Democrats supporting it. It also means that the legislation will likely not include all of their priorities.
What’s in the House-Passed Tax and Spending Bill Backed by Biden – Alex Ruoff, Laura Davison and Ari Natter, Bloomberg ($). “The House on Friday passed a roughly $2 trillion bill incorporating the core of President Joe Biden’s economic agenda -- ramping up funding for the social safety net and increasing taxes on corporations and the wealthy -- sending it on to the Senate, where it’s likely to be significantly reshaped. The legislation will likely undergo several more changes, both to get all 50 members of the Senate Democratic caucus on board with it, and to comply with the chamber’s complicated rules to avert a filibuster, in face of Republican opposition.”
Levies on High Earners
A millionaire surtax would place a 5% levy on individual incomes in excess of $10 million and an additional 3% tax on those over $25 million. There’s a 3.8% investment income tax for high earners who own businesses and a limit on how business owners can use losses to reduce their taxes. The plan puts a $10 million cap on individual retirement accounts, after concerns that some wealthy individuals were using these tax-advantaged vehicles to skirt IRS bills.
After weeks of haggling, House lawmakers settled on raising the cap on the federal deduction for state and local taxes, or SALT, to $80,000 from the $10,000 imposed by Republicans in 2017. The higher cap would be in place through 2030, and then revert to $10,000 in 2031.
This is likely to undergo changes in the Senate, where key members, including Bernie Sanders of Vermont and Bob Menendez of New Jersey, said they prefer to focus on limiting the universe of people able to claim the SALT deduction to those earning under a certain amount -- potentially around $400,000 a year.
What's next for Biden's social spending bill: The Senate struggle – Marianne Levine, Politico Pro ($). “Chuck Schumer wants the Senate to pass President Joe Biden's social spending plan before Christmas. Standing in his way is the chamber's long to-do list, its rules referee and — more likely than not — Joe Manchin.”
While Democrats expect the Senate to bring the spending legislation to the floor shortly after returning from the Thanksgiving recess, the chamber still needs to pass its annual defense policy bill. Schumer began that process this week, but the Senate has yet to vote on amendments to the legislation.
When asked Friday about timing for final passage of the defense policy bill, Senate Armed Services Chair Jack Reed (D-R.I.) laughed and replied: “We got to wait until we get to the vote.”
The defense policy bill, first on the to-do list, could take up much of the first week of December. The chamber also needs to fund the government past Dec. 3. Under that timeline, Democrats aren't expecting the Senate to take up the social spending bill until the second week of December, at the earliest.
Regarding the recently enacted $1.2 trillion infrastructure bill:
IRS Guidance Likely on Repeal of Employee Retention Credit – Fred Stokeld, Tax Notes ($). “The IRS expects to publish guidance addressing the retroactive repeal of a tax credit established to help businesses and nonprofit employers survive adverse economic consequences of the COVID-19 pandemic.”
The IRS has heard the concerns of many employers about the sunset of the employee retention credit for the fourth quarter of 2021 for organizations other than recovery start-up businesses, Rachel Leiser Levy, IRS associate chief counsel (employee benefits, exempt organizations, and employment taxes), said November 19. The early termination of the credit was part of the Infrastructure Investment and Jobs Act (P.L. 117-58), signed into law November 15.
‘Rest assured, we are aware of this problem,’ Leiser Levy said during a TEGE Exempt Organizations Council program. ‘We were aware of the problem when we saw the legislative language. We are more aware of the problem now, as many, many people have reached out to us to share their consternation. We understand it.’
‘What I can assure everybody . . . is that we do anticipate providing further information and guidance addressing these changes as soon as possible,’ Leiser Levy said. ‘It is a very, very high-priority item for us.’
Implementing the New Crypto Reporting Guidance – Marie Sapirie, Tax Notes ($). “It’s time to start composing the coda for the digital assets reporting changes in the Infrastructure Investment and Jobs Act (H.R. 3684). Some unhappy members of the cryptocurrency industry may still hold out hope for repeal. But it would be better to acknowledge that although this may not have been the ideal way to implement tax guidance, what with the unnecessarily overinclusive statutory language, Treasury and the IRS can shape the rules so that the industry — or most of it — can live with them. That was always the best-case scenario.”
Treasury and the IRS have signaled that they’re willing to work with the industry. Industry commentators might want to make an early request for a lengthy comment period. During implementation of the Tax Cuts and Jobs Act, comment periods were shortened from 90 days to less than 60 days. “I would encourage them to go back to pre-TCJA comment periods,” said Lisa M. Zarlenga of Steptoe & Johnson LLP. A longer comment period would give the guidance writers and industry members time to discuss what is feasible for the industry to implement.
Back to the budget reconciliation bill:
CBO: Democrats' increase in IRS funding would generate $127B – Brian Faler, Politico Pro ($). “Democrats’ plans to boost IRS enforcement would generate $127 billion for federal coffers, the Congressional Budget Office said Thursday — less than half of what Democrats were hoping to reap. In a much-anticipated estimate, the nonpartisan agency said their bid to increase IRS funding by $80 billion would produce $207 billion in additional revenues over the next decade. Democrats, pointing to a competing analysis by the Treasury Department, had hoped to get credit for $400 billion in projected savings.”
CBO agreed greater enforcement would deter some would-be cheaters, but said the effect would be small.
'Increased enforcement activities would modestly increase the voluntary compliance rate – that is, the share of taxes owed that are paid voluntarily and on time,' the agency said in a letter to Sen. Lindsey Graham (S.C.), the top Republican on the Budget Committee.
'The magnitude of that effect is highly uncertain, however, and the empirical evidence about the effects of audits on taxpayers’ behavior is mixed.'
The Graham letter is here.
Democrats Trying to Retool IRS Financial Data Plan - Colin Wilhelm, Bloomberg ($). “Congressional Democrats and the Biden administration are discussing a more narrowly targeted plan for financial institutions to provide more customer account data to the IRS, hoping that a tighter focus will assuage privacy concerns while still helping Democrats pay for their significant social spending plans.”
An administration official said in a Thursday interview that while negotiations are fluid, the focus is on harder-to-track transactions related to business partnerships, rental income, proprietorships, and royalties. The additional data collection would be paired with increased penalties for unauthorized access to or leaks of taxpayer information, a felony already punishable by up to five years in prison, the official said.
SALT Cap Boost in House Bill Destined for Changes by Senate – Laura Davison, Bloomberg ($). “House Democrats from high-tax states celebrated the inclusion of a more generous state and local tax deduction in the House-passed version of President Joe Biden’s economic plan, but they face some intensive negotiations on its final form as the Senate takes up the bill."
‘Nobody thought we would get this far. There was a lot of skepticism,’ Representative Tom Suozzi, a New York Democrat, said. ‘So it’s a major victory and we’re gonna keep on pushing to make sure it gets done all the way and signed by the president.’
The legislation that passed the House Friday calls for raising the cap on state and local tax deductions, or SALT, to $80,000, up from the $10,000 limit imposed in former President Donald Trump’s 2017 tax law. The SALT deduction on federal taxes is one of the most controversial aspects of the legislation, but also politically important for many members representing high-tax areas, including New Jersey, New York and California.
If memory serves correctly, the original mantra was “no repeal, no deal” and it was shouted from roof tops for months. SALT cap repeal didn’t happen, but the lawmakers touting this slogan voted for the bill anyway. If the Senate modifies the SALT provision (which is highly likely), it seems that these lawmakers will back whatever change is made to the cap.
The Senate plan would cap the SALT deduction based on income, allowing unlimited write-offs for those earning less than about $400,000 and then phasing down the deduction for those earning more. Sanders, a Vermont Independent who caucuses with Democrats, and Menendez, a New Jersey Democrat, say they are still fine tuning the specifics.
Tax Plan Inflames Democratic Debate in Senate Over Biden’s $2 Trillion Spending Bill – Andrew Duehren and Richard Rubin, Wall Street Journal ($). “House passage of Democrats’ $2 trillion education, healthcare and climate package has inflamed an intraparty debate about whether the bill gives overly-generous tax benefits to high-income Americans.”
At the center of the dispute is the House plan to raise the $10,000 cap on the deduction for state and local taxes to $80,000 through 2030. A small but committed group of lawmakers from high-tax states like New York and New Jersey have for years insisted on repealing the $10,000 cap, which Republicans put into place as part of the 2017 tax law…
Setting the tax-deduction cap at $80,000 without an income limit means that its benefit goes to even the highest-income households, who all would save $25,900 more in taxes than they do under current law. Nearly one-third of the benefit of that $80,000 cap would go to the top 1% of households, according to the Tax Policy Center.
Family Farms Said Shielded From Democrats’ Proposed Tax Hikes - Megan U. Boyanton, Bloomberg ($). “Small family farms and ranches are likely out of danger from proposed tax increases in Democrats’ massive spending bill, the top Agriculture Department official said Friday, reassuring American producers worried about their livelihoods.”
Agriculture Secretary Tom Vilsack was responding to concerns recently expressed by the American Farm Bureau Federation, which came out in opposition to the bill earlier in the week.
‘I don’t see anything in this bill that compromises the ability of family farms to stay in business,’ Vilsack said at a press conference… Vilsack said he ‘doubts very sincerely’ that a 5% surcharge on the income tax bill of farmers or ranchers making $10 million annually will result in the loss of their establishments.
Electric vehicles spark discord at Biden's trilateral summit – Andy Blatchford, Sabrina Rodriguez and Gavin Bade, Politico Pro ($). “Canadian Prime Minister Justin Trudeau came to Washington this week fuming about President Joe Biden’s proposed tax incentive to encourage U.S. consumers to buy American-made electric vehicles. But it might be another Joe — Sen. Joe Manchin (D-W.Va.) — who gets credit for squelching a continental squabble."
Canada and Mexico strongly oppose the electric-vehicle tax credit, which the countries warn would damage their auto sectors and undermine the new United States-Mexico-Canada trade agreement.”
For Trudeau, warning U.S. officials about the fallout of Biden’s electric vehicle proposal was a top objective during his two-day visit to Washington.
'We underlined to what point this would be a big problem for auto production in Canada,' Trudeau said at a news conference late Thursday after the North American Leaders’ Summit. 'We very clearly underlined our position.'
Green energy tax package will cost $316B over 10 years, CBO says – Kelsey Tamborrino and Matthew Choi, Politico Pro ($). “The slate of clean energy tax credits included in Democrats' budget reconciliation package would contribute $316 billion to the deficit over a 10-year period, the Congressional Budget Office said on Thursday.”
The figure is in line with the $320 billion investment in expanded clean energy tax credits that congressional Democrats and President Joe Biden laid out in the reconciliation framework. Those tax credits comprise the largest portion of the historic $555 billion climate provisions included in the budget reconciliation bill.
McConnell looks for way out of debt ceiling box – Alexander Bolton, The Hill. “After taking a hard line and refusing to negotiate with Democrats during the last standoff over the debt limit, Senate Minority Leader Mitch McConnell (R-Ky.) is quietly looking for a way to get the issue resolved without another high-profile battle.”
McConnell has a number of reasons to find a way out.
He doesn’t want another battle over the debt limit that would draw the attention and ire of former President Trump, according to Republican senators.
He also fears the threat of a national default could convince Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.) to support a exception to the filibuster rule to let Democrats raise the debt limit without any GOP votes.
IRS to Destroy Estate Tax Returns Older Than 40 Years Next Year – Allyson Versprille, Bloomberg ($). “The IRS will begin destroying estate tax returns that are more than 40 years old next year, an agency official said Friday.”
Earlier this week, the National Archives and Records Administration approved the IRS’s proposal to lower the retention period for estate and related gift tax returns stored in the archives’ federal records centers from 75 years to 40 years, said Lauren Busternaok, an attorney-adviser for estate and gift tax policy at the IRS.
IRS’s New Estate Tax Return Retention Policy Could Cause Problems – Jonathan Curry, Tax Notes ($). “The IRS’s decision to limit how long it retains estate tax returns to 40 years and to destroy all older returns could trigger some tricky situations for taxpayers.”
The IRS recently announced that it would reduce the length of time it keeps records of estate tax returns and associated documents like gift tax returns and appraisals from 75 years to 40 years, in response to a governmentwide effort to more efficiently preserve records. The agency made the decision in part because those older records were rarely requested.
A Popular Tax Trick for Savers, the Mega ‘Back Door’ Roth IRA, Is Eliminated in House Bill – Anne Tergesen, Wall Street Journal. “Americans would no longer be able to use some popular strategies to move money into tax-free Roth individual retirement accounts under a roughly $2 trillion education, healthcare and climate package House Democrats approved on Friday.”
Starting Jan. 1, 2022, the legislation would prohibit use of a type of Roth conversion known as the mega-backdoor Roth conversion. Regular Roth conversions would still be allowed, although starting in 2032, they would be off-limits for people with higher incomes.
The mega-backdoor Roth strategy lets participants in 401(k) plans that allow after-tax contributions put as much as $58,000 a year into a 401(k) account and convert a substantial chunk of the money to a tax-free Roth account, potentially with a minimal tax hit.
Starting Jan. 1, 2022, the bill would also eliminate backdoor Roth conversions of after-tax contributions of as much as $6000 to traditional IRAs, or up to $7000 for those 50 and older. The strategy is often used by single individuals with incomes above $140,000 and married couples making more than $208,000, who aren’t eligible to make Roth IRA contributions.
Libor Legal Fix for Phase-Out Hits Hurdle in Congress Tax Spat – Erik Wasson and William Shaw, Bloomberg ($). “U.S. legislation designed to protect trillions of dollars of assets from chaos when global regulators phase out the interest-rate benchmark Libor is being held up in the House, over a dispute involving tax-related language, according to lawmakers and congressional aides.”
Democratic Representative Brad Sherman, who is sponsoring the legislation, said lawmakers are divided about whether to include language aimed at preventing the Internal Revenue Service from recalculating firms’ tax liability at the moment that contracts transition -- a move that could in theory eat into profits for financial institutions.
Fate of Arizona’s Flat Income Tax Set for Voters on 2022 Ballot - Brenna Goth, Bloomberg ($). “Voters in Arizona will have a chance next year to prevent their state adopting a flat income tax system, pending a legal challenge.”
Opponents of the tax plan that was signed into law by Gov. Doug Ducey (R) this year collected an estimated 163,287 valid signatures for a 2022 referendum, the office of Arizona Secretary of State Katie Hobbs (D) confirmed Friday. That exceeds the 118,823 needed to make the ballot.
North Carolina Makes Sweeping Tax Cuts, Passes SALT Workaround - Sam McQuillan, Bloomberg ($). “North Carolina is increasing funding in a range of critical areas, even as it cuts a number of important revenue-generating taxes.”
Gov. Roy Cooper (D) on Thursday signed a two-year $52.9 billion budget that phases out the state’s corporate income tax over the next decade, lowers the individual income tax, and creates a workaround to the federal cap on state and local deductions for pass-through business owners.
Biggest-Ever Carbon Capture Project Facing Midwest Opposition - Stephen Joyce, Bloomberg ($). “What’s touted as the world’s largest carbon capture and sequestration project is facing headwinds from farmers and environmentalists even as John Deere & Co. and New York financiers are investing in the $4.5 billion endeavor.”
The Midwest Carbon Express is a privately financed, 2,000 mile-long pipeline network. It will collect carbon dioxide emissions at dozens of Midwest ethanol facilities and inject the emissions into underground porous rock in North Dakota, where project supporters say the emissions will be trapped forever.
Louisiana Forced to Defend ‘Arbitrary and Fragmented’ Tax System – Michael Bologna, Bloomberg ($). “The first acts of a sales tax drama worthy of Tennessee Williams played out this week in Louisiana.”
The state stumbled on its path to tax simplicity over the weekend, when voters rejected a constitutional amendment creating the State and Local Streamlined Sales and Use Tax Commission. As a practical matter, the amendment would have shifted authority for sales tax administration from 64 local taxing jurisdictions to a single electronic system operated by the commission, reducing complexity and compliance costs for retailers.
The response from unhappy retailers and tax policy wonks was immediate.
Global Tax Negotiators Got a Deal. Now They Have to Sell It – William Horobin and Christopher Condon, Bloomberg ($). “Negotiators hammering out details of a transformative new global corporate tax regime are shaping the deal to maximize its chance of winning acceptance in the U.S., whose companies face the biggest impact from the overhaul.”
Failing U.S. approval, the entire agreement would collapse, undermining public finances on both sides of the Atlantic and reigniting unilateral measures and trade tensions that have made life difficult for multinationals. A rare triumph for multilateral diplomacy in recent years would also be obliterated.
'We’re not completely stupid -- so we created a mechanism so that U.S. ratification is a no-brainer,' Pascal Saint-Amans, the OECD’s top tax official, said on Wednesday at a briefing of France’s economic journalist association AJEF. 'There’s a serious chance of success.'
In banking news:
Biden renames Powell to lead Fed, risking the left’s wrath – Victoria Guida, Politico. “President Joe Biden said Monday he will reappoint Federal Reserve Chair Jerome Powell as head of the U.S. central bank, opting for continuity in the government’s most powerful economic post as the specter of rising inflation looms in an election year.”
Powell — a Republican and a Trump appointee — is expected to win confirmation with bipartisan backing, driven by his record in heading off a financial crisis at the onset of the pandemic and steering the economy through the crippling recession that followed. But he’ll face intense scrutiny from some Democrats such as Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez for overseeing a rollback in Wall Street rules, an issue that has sharply divided progressives over whether he deserves a second term, and over a trading scandal that forced two top Fed officials to resign.
But of course, it’s National Cranberry Relish Day! What better way to usher in Thanksgiving than giving props to a steadfast menu item that not only adds flavor to the holiday meal, but also a splash of color!
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.