Capitol Hill Recap: BOOM!

The U.S. House of Representatives politically blew up.

What Went Down:

• The U.S. House of Representatives on October 3^rd voted to remove Rep. Kevin McCarthy (R-Calif.) from being Speaker of the House. The outcome has put a huge question mark over whether the chamber can govern.
• Leading tax-writers ask IRS Commissioner to get cracking on ERCs.
• Tax group warns Moore Supreme Court case could wreak havoc on tax provisions currently in law.

Let’s Get To It:

Help Wanted:

The firing of Speaker McCarthy on October 3rd was not eye-opening because it happened, it was eye-opening because of why it happened. And his replacement should view McCarthy’s fate as a cautionary tale.

McCarthy was accused of going back on his word. He originally said that he would not work with members from the opposing party, and then he worked with them. This action prompted a single lawmaker to offer a “motion to vacate,” which is a measure that forced the House to vote on whether McCarthy remained Speaker. The chamber voted 216 to 210 to remove him from the office.

The incident that prompted the motion to vacate was that Speaker McCarthy worked with Democrats to stop the Federal government from shutting down on October 1st. In short, he was fired for working across the aisle, something that used to be considered a good thing. Also, the motion to vacate was originally intended to be used only when the Speaker showed signs of senility and couldn’t do the job. McCarthy seemed to have his wits about him on the day he was fired.

Moving forward, the House is scheduled to be in recess until next week. When House lawmakers return, they are expected to vote for a new Speaker on October 11^th. After a new Speaker is chosen (which might take a while), the House is expected to continue to work on and pass appropriation bills.

Passing tax legislation is not a huge priority right now. It’s all about the passage of spending bills, be it for Ukraine, the border, or appropriation bills.

The state of play:

House and Senate lawmakers have until November 17^th to approve 12 appropriation bills. If the chambers complete this task (a big ‘if’), it is expected that the bills will have different spending levels. To wit, the Senate is expected to approve larger spending amounts than the House. To make spending levels copasetic will likely require a “conference” between House and Senate lawmakers.

In a conference, lawmakers meet in a room and argue about spending levels until they reach an agreement – which can take a lot of time. There are several stories about the lengths congressional leaders have gone to get conferees to reach an agreement. In one case, the leaders put the conferees in a room, locked its door, turned off the air conditioning and would only allow them water if they reached an agreement. They reached an agreement quickly. This took place in July in sweltering weather. 

If the House and Senate cannot reach an agreement on the 12 appropriation bills by November 17^th they will have to pass legislation that extends funding beyond this date.

If funding is not extended, the Federal government partially shuts down, and lawmakers cannot continue to work on the appropriation bills. Instead, they would focus on finding a funding solution to re-open the Federal government.

Currently, the odds favor that lawmakers will have to extend funding beyond November 17th because it is highly unlikely that all appropriation bills will have passed Congress by then.

This means that Congress will likely pass another short-term spending bill to allow lawmakers more time to work on appropriation bills.

Given the partisan vitriol and that Congress is politically divided, most expect lawmakers to wrestle with spending issues for the rest of the year, leaving no time to pursue a tax bill that would allow for R&D expensing, expand the 163(j)-interest deduction, and up Bonus Depreciation to 100%.

House Ways and Means Chairman Jason Smith (R-Mo) said earlier this year that if a tax bill doesn’t pass this year, the next opportunity will be 2025. This is the same year that individual tax measures from the 2017 tax reform bill expire.

Several lawmakers and staffers are calling 2025 either the “World Series of tax” or the “Superbowl of tax.” In other words, 2025 is expected to be a huge tax year.

However, before the fight over spending begins, the House must choose a new Speaker. And whoever takes the post will likely face a similar ousting if he or she works with Democrats to pass legislation. This new threshold for removing the Speaker because of bipartisanship puts a question mark on whether the chamber can govern.

ERC Plan:

Two congressional tax-writers penned an October 3^rd letter to IRS Commissioner Danny Werfel asking for his plan to process Employee Retention Credits (ERC).

The inquiry came on the heels of the IRS announcing last month that it would stop processing ERC claims through at least the year end “to protect honest small business owners from scams,” the IRS release states.

The two lawmakers – House Ways and Means Jason Smith (R-Mo.) and Ways and Means Oversight Subcommittee Chairman David Schweikert (R-Ariz.) – stressed to Werfel in their letter that a pause in processing ERC claims will only lead to a processing backlog, something the tax agency recently emerged from in processing tax returns.

“While we appreciate efforts to protect taxpayers from scams, the announced moratorium will exacerbate wait times, worsen the existing backlog of claims, and prevent taxpayers with legitimate claims from receiving payments,” the two lawmakers wrote.

Smith and Schweikert asked Commissioner Werfel to identify the step the agency would take to ensure that legitimate ERC claims are processed, how fast these claims can be processed with the ERC moratorium underway, what fraud protection measures has to IRS employed to catch ERC cheats, and, perhaps most importantly, what legislative fixes should Congress consider to stop ERC fraud.

Werfel has until October 17^th to answer the lawmakers’ questions.

Taxing Situation:

The Joint Committee on Taxation (JCT) is tasked with all things tax on Capitol Hill. It recently responded to a lawmaker’s request for how a Supreme Court decision on the Moore v. United States could affect current tax law.

Using broad strokes, the case is about whether taxing unrealized income is unconstitutional. The 2017 tax reform law created a "mandatory repatriation tax" (MRT) on foreign income that taxpayers must pay whether or not they received the income.

If the Supreme Court deems that the MRT is unconstitutional, the impact on the current tax code could be huge, according to the JCT.

“If the Court were to strike down the tax as applied to individuals, a question might arise as to whether Congress would be constitutionally permitted to apply the MRT to corporate shareholders of controlled foreign corporations,” the JCT wrote.

The tax group notes that “[l]ook-through provisions that a taxpayer might challenge if the Court finds that looking through an entity is constitutionally impermissible include the following present law rules":

• Subpart F and GILTI;
• Subchapter K;
• Subchapter S;
• REMICs.

The list is not exhaustive, but did mention that taxes based on mark-to-market valuations could be non-grata.

Recently, certain lawmakers sought to pass legislation that would tax unrealized capital gains. The Supreme Court decision on the Moore v. United States case could have a huge impact on whether these lawmakers pursue passing such legislation in the future.

The Supreme Court will hear the case this fall. The decision is expected to be announced next year.

The JCT letter is here. A Bloomberg subscription is required to view it.

Pardon if this recap missed a monumental moment, but we can recap it next time!

Adios amigos!