Capitol Hill Recap: Shutdown Avoided, Tax Bill Needs a Ride

Please note: The Recap will be on hiatus next week because Congress is not in session for the Thanksgiving holiday.

Congress agreed to a bifurcated spending plan that extends Federal government funding into 2024. Meanwhile, some lawmakers say a tax bill could pass by year-end with the right legislative vehicle.

What Went Down:

• Congress avoiding a partial shutdown of the Federal government well before year-end gives lawmakers time to pass tax legislation before the start of 2024.

Let’s Get To It:

Shutdown Avoided, Tax Bill Waits

Congress this week approved legislation that extends funding the Federal government into 2024. That’s the good news.

The bad news: The fight over partially shutting down the Federal government will likely continue in 2024.

The chambers agreed upon a bifurcated spending plan that would extend funding for some agencies to January 19^th and extend funding for the remaining agencies to February 2^nd.

As these dates draw closer, it is expected that the political parties will disagree over how to extend future funding. Some lawmakers will insist on spending cuts while other lawmakers will call for spending increases.  

These lawmakers are expected to be more persistent next year in defending their policy positions when compared to the recent spat. This will likely make it harder to reach an agreement on spending levels. And if these arguments endure beyond the above dates, the Federal government will suffer a partial shutdown.

Despite the expected clash over spending, some lawmakers oddly want to add into the spending mix a tax package. The goal would be to add tax legislation to either spending bill that extends funding beyond January 19^th or February 2^nd. The measure would allow for R&D expensing, expand the 163(j)-interest deduction as well as the Child Tax Credit, and up Bonus Depreciation to 100%. 

A lot can go wrong when a tax package is added to spending legislation that could be destined to fail. If the spending bill never becomes law, the tax provisions will suffer the same fate. Also, tax measures could be cut from the spending bill for a variety of reasons. In short, adding tax legislation to a spending plan fraught with pitfalls may not be a well-thought-out plan.

Some lawmakers have admitted that there is potential calamity for adding tax legislation to next year’s spending endeavor. These members seek to pass tax legislation by year-end.

Their ask: pass legislation that allows for R&D expensing, expands the 163(j)-interest deduction as well as the Child Tax Credit, and ups Bonus Depreciation to 100%.  

These lawmakers contend that since the spending deadlines are next year, they now have roughly 45 days to act on other legislative priorities before leaving Washington to enjoy the holidays. Why not pass a tax bill in the next 45 days?

Here’s the problem: The tax bill will not be a stand-alone piece of legislation, according to tax staffers and lawmakers on the tax-writing committees. It needs to be attached to another piece of legislation. Why? Because this is how Congress passes legislation that modifies or extends current tax policy – by attaching it to another bill.

Could a tax bill pass Congress as a stand-alone piece of legislation? Yes, but lawmakers choose not to. Why? Because they are sticking with how things are done on Capitol Hill. Does this sound crazy? Yes.

In short, Congress needs another bill that is expected to pass before year-end that lawmakers can attach to it a tax bill that includes the aforementioned provisions.

Here’s another problem: The current legislative vehicles that could include a tax bill aren’t very good.

Lawmakers tend to add provisions to bills that already include similar provisions. For example, if a bill includes a tax provision, then other tax provisions can be added to the legislation without having to clear procedural or parliamentarian hurdles. Currently, there are two pieces of legislation that fit this profile, but neither one is great.

They are:

• Legislation that funds and reauthorizes programs for the Federal Aviation Administration. The bill includes provisions related to fuel taxes, which means that other tax provisions could be added to the bill. The FAA bill needs to be addressed before December 31st. 
• Legislation creating a tax agreement with Taiwan. Since it's a tax bill, other tax provisions could be added to it. 

The problem with both bills is that their tax provisions are small, and adding tax legislation that could cost roughly $100 billion over two years would basically overwhelm both bills.

Mind you, these bills could be used, but lawmakers choose not to.

Despite the perception that these legislative vehicles are not great, some lawmakers are still interested in using them to advance tax policy that has been waiting in the wings for nearly two years. And if they succeed, yet another problem emerges.

There remains an outstanding question about whether the modifications to the business tax breaks should be made retroactive. Many of these tax changes occurred in 2022, and some lawmakers are concerned that making the tax benefit retroactive two years hence will be too expensive and require cost offsets, aka: tax increases.

Right now, the effort is to extend the tax provisions for 2024 and 2025 only. 

Still, there has been a concerted effort from lobbyists and corporate leaders to make changes to the business tax breaks (R&D expensing, an expanded 163(j)-interest deduction, and 100% Bonus Depreciation) retroactive to 2022.

Tax staffers have said that it is highly unlikely that the modifications will be retroactive to 2022. At best, retroactivity might be for 2023, but even that is iffy since the bill’s cost could soar above lawmakers’ comfort level and require offsets.

Legislative Outlook: We’re in wait-and-see mode on whether Congress will pass a year-end tax bill or wait until next year to pass such legislation.

That being said, several lawmakers do not expect tax legislation to pass Congress in 2024. This group includes House Ways and Means Committee Chairman Jason Smith (R-Mo.), who is Congress’s chief tax-writer.

In 2024, Smith seeks to vet the worthiness for extending individual tax provisions in the 2017 tax reform bill that are scheduled to expire in 2025. Smith plans to host listening sessions all over the country next year to hear from taxpayers about which tax reform provisions should be extended, modified or allowed to expire.

In short, he might not have time to address the other tax provisions in 2024.  

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

Adios amigos!