Capitol Hill Recap: Rumor Mill Romp

Rumor has it that tax legislation is gaining some attention from lawmakers, but how serious these considerations are is unclear.

What Went Down:

• Lawmakers are purportedly talking about adding a tax bill to a spending package, but how serious are these talks?
• New Speaker. Same spending fight.
• The IRS is biased.
• A House committee issues a scathing report on the IRS, but the report vanishes from its website days later.
• Tax-writing Committee vets tax bills.

Let’s Get To It:

Tax Bill’s Fate:

Rumors are currency on Capitol Hill. They often contain at least an ounce of truth and sometimes are used to see how other lawmakers react to them (rumors in the latter case are called “trial balloons”).

Currently, there is a rumor that lawmakers could add a tax bill to legislation that extends funding for the Federal government beyond November 17^th. The tax provisions that would be included in the legislation would be R&D expensing, expanding the 163(j)-interest deduction (from EBIT to EBITDA), upping Bonus Depreciation to 100%, and expanding the Child Tax Credit. The bill could also include a fix for the SALT cap. It is not clear if these measures would be retroactive.

Businesses have been clamoring for Congress to modify the business tax breaks for nearly two years. And both political parties support augmenting R&D, 163(j), and Bonus in the way that is described above. However, the parties disagree on how the Child Tax Credit should be handled (as well as a fix for the SALT cap). These disagreements have been the death knell for passing the business tax breaks for roughly two years. Basically, Democrats want a larger Child Tax Credit and Republicans don’t.

Apparently, according to the rumor, moderates in both parties have agreed on a Child Tax Credit that both parties could support. (If this rumor is a “trial balloon,” then it could be to gauge the response of extremists in both parties: The far left has pushed for a larger Child Tax Credit while members on the far right oppose any expansion to the credit. Will both sides accept something in the middle?)

Legislative outlook:  

• If the rumor is true, then adding the aforementioned tax measures to a must-pass spending bill might happen. But passage will require the support from members of both political parties.
• If the rumor is not true -- and a tax bill will not be added to a spending bill -- moving a stand-alone tax bill by year-end will only occur if there is an agreement on how to handle the Child Tax Credit (and maybe the SALT cap).
• If a tax bill does not pass Congress this year, then action on tax legislation is expected to wait until 2025.

House Ways and Means Chairman Jason Smith (R-Mo.) has said that 2025 will be a huge year for tax legislation. It is the year that all individual tax measures in the 2017 tax reform bill revert back to pre-2017 law. This means that on top of R&D, 163(j), Bonus, and the Child Tax Credit, an extension of the entire individual tax code will also need to be addressed in 2025 or taxpayers (and their pass-thru or sole proprietor businesses) will face a huge tax increase in 2026.

Between now and 2025 is the 2024 election where most lawmakers and the president will face re-election.  The outcome of these elections is expected to greatly affect how Washington handles the tax situation in 2025.

Despite the umpteen unknowns for how the elections will affect future tax negotiations, one thing is clear: Both parties support extending the individual tax breaks in the 2017 tax reform bill for taxpayers earning less than $400,000 a year. In short, no matter who wins Congress and the White House in 2024, taxpayers earning less than $400,000 a year are highly likely to have their tax breaks extended beyond 2025.

That is where the clarity ends.

Things get fuzzy when questions about the $400,000 threshold are asked. Does that figure pertain to individuals or joint filers? Can a couple who both earn $399,999.99 expect to see their tax breaks extended? What if one spouse earns $70,000 and the other earns $500,000? Does the lower-wage earner suffer a tax increase because their spouse’s income is above $400,000 (aka: Marriage penalty)?

Chairman Smith seeks to host field hearings throughout 2024 to discuss how the expiration of the individual tax cuts in the 2017 tax reform bill would affect individuals and businesses. His hope is to have a firm understanding on which tax reform provisions should be extended, modified, or allowed to expire before the provisions perish in 2025.

Extending all individual tax reform provision is also an expensive proposition. The most likely scenario is that the tax measures would be extended a year at a time, which essentially will make the entire individual tax code one giant extender package that must get renewed every, single year.

IRS funding cut:

Newly-minted House Speaker Mike Johnson (R-La.) has proposed paying for aid to Israel by rescinding spending to the IRS that the agency received in the Inflation Reduction Act.

For the record, this type of spending does not require a cost offset. Johnson might be adding a cost offset for grins or he might not know that such offsets are not required. Let’s face it, he’s green behind the ears when it comes to being Speaker and he has staffed his office with newbies, according to reporting from Punchbowl News ($):

"Within a week of winning the speakership, the Louisiana Republican has filled every key position on his leadership team. But unlike previous speakers who sought seasoned hands in such roles, Johnson has mostly eschewed experience in favor of political allies and fellow conservative travelers."

Also, cutting IRS funding is projected to increase the deficit. The reason is because the funding is expected to bolster enforcement efforts and collect more revenue than what the funding costs. The Congressional Budget Office’s estimates that rescinding IRS funding will increase deficits by $12.498 billion from 2024 thru 2033. The estimate is here.

Johnson’s proposal will likely pass the House, but it will not pass the Senate and the White House has already threatened to veto the proposal if it reaches President Biden’s desk. The Senate is currently considering a spending bill that would be shorter in length compared to what the House is considering. The Senate funding bill would reportedly last until mid-December. The House bill would extend funding into 2024.

House Republicans have repeatedly tried to cut IRS funding to no avail. Each time, the move has met resistance from the Senate and the White House.

Legislative outlook: It appears that the House will have adjust their legislation and remove the IRS funding cut. If not, funding for Israel could get bogged down at a time when such support is very much needed. (More on IRS funding is below.)

Tax Agency is Biased:

Senate Finance Chairman Ron Wyden (D-Ore.) released a statement on November 1^st that commented on IRS Commissioner Daniel Werfel confirming that there’s a racial disparity in audit selection at the tax agency.

From the press release:

"Senate Finance Committee Chair Ron Wyden, D-Ore., today thanked Internal Revenue Service Commissioner Werfel, following a briefing on Tuesday evening about the agency’s plan to fixing biased audit algorithms that disproportionately targeted Black taxpayers.

In the briefing, Commissioner Werfel confirmed that there’s a racial disparity in audit selection, which is partially driven by Earned Income Tax Credit (EITC) audits, and said the agency has begun changing audit selection algorithms, refocusing enforcement resources to go after fewer low-income taxpayers and more high-earners, partnerships, large corporations, and scammers who prey on low income taxpayers and the elderly. 

Wyden’s stated, in part, that “I’m encouraged that the IRS is using IRA funding to help lower-income taxpayers get it right, in lieu of poorly targeted audits.”

Much of the change that the IRS seeks to accomplish (i.e., auditing rich people over poorer people) is based upon the agency receiving the funding that House Republicans want to cut.

The timing of Wyden’s press release happening as House Republicans seek to cut IRS funding is probably not an accident.

Legislative outlook: The IRS apparently needs the extra funding to change its audit behavior. Granted, taking down wealthy tax cheats who employ scores of lawyers to protect their money is probably harder to do when compared to auditing a low-income taxpayer for EITC fraud, or erroneous ERC payments. So, yes, the IRS needs the money to hire the right employee who can go after wealthier taxpayers.

Currently, the IRS funding seems safe. Senate Democrats and President Biden have both stated that they will not support the funding cuts. But things could change – if history is an indicator.

To wit, the $80 billion funding increase to the IRS was included in the Inflation Reduction Act that Biden signed into law in 2022. Roughly a year later, Biden signed into law debt limit legislation that included IRS funding cuts (albeit not “real” funding cuts).

The rationale for cuts to IRS funding was that the president did not want the Federal government to default on its debt, so he agreed to cut IRS funding so that the Federal government could continue to issue debt. Before agreeing to the IRS cuts, however, Biden vowed to oppose such cuts. But situations changed and so did his mind.

If situations in Israel or Ukraine become more dire, then the fight to protect IRS funding could seem trivial by comparison. Biden (along with Democrats) could agree to cut IRS funding because sending help to the war-torn countries would be the paramount priority. 

House Report:

The House Judiciary Committee released a report on IRS agents showing-up unannounced at someone house. The press release on the report states the following:

"The report reveals how the IRS committed alarming civil liberties abuses, including an unannounced, unprompted field visit to the home of journalist Matt Taibbi on the very day he testified before Congress about government censorship. It outlines how the IRS initiated a case against Matt Taibbi on Christmas Eve—a Saturday—just three weeks after he published the first installment of the Twitter Files. The report further details a disturbing incident in which an IRS agent, using a false name and deceptive pretenses, entered an Ohio taxpayer’s home to harass and intimidate the taxpayer without prior notice or just cause.

The IRS has revoked its policy of unannounced field visits. 

Here’s a funny thing, this report was released on October 27th. As of October 31st, the report is no longer available on the committee’s website. Why was it taken down?

Legislative outlook: C+C Music Factory put it best when it sang “Things That Make You Go Hmmmm…” Why take down a report that supposedly supports the majority’s mission to defund the IRS?

Tax Action:

The House Ways and Means Committee approved two tax bills on November 2nd:

• The Federal Disaster Tax Relief Act of 2023, which would provide personal casualty loss relief for disaster areas declared since 2020, exclude from gross income amounts received as qualified wildfire relief payments, and treat payments for the East Palestine train derailment as qualified disaster relief payments.

The bill is here. A description of the bill is here.

• The Clergy Act, which allows a period in which members of the clergy may revoke their exemption from Social Security coverage.

 The bill is here.

Legislative outlook: It is unclear when the House will take up these bills. Lawmakers in both chambers are more focused on funding their legislative priorities. These tax measures are much lower on the priority list.  

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

Adios amigos!