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Capitol Hill Recap: Can You Hear Me Now?

December 7, 2023
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Key Takeaways

  • On the heels of lawmakers calling for Congress to pass tax breaks, business leaders sound the alarm that without tax relief job loss will occur.
  • The Supreme Court hears arguments over taxing unrealized income.
  • Two tax subcommittees discuss upcoming tax issues and possible solutions for them.

Business leaders sound-off for R&D expensing as congressional leaders focus on addressing spending concerns and leaving town before the holidays.

What Went Down:

  • On the heels of lawmakers calling for Congress to pass tax breaks, business leaders sounded the alarm that without the tax relief job losses would occur.
  • The Supreme Court hears arguments over taxing unrealized income.
  • Two tax subcommittees discuss upcoming tax issues and possible solutions for them.

Message Received?

A cadre of 1,000 business leaders this week urged congressional tax leaders to pass legislation before the end of the year that would allow for R&D expensing.

“We are reaching out with a pressing concern about the “Research and Experimentation” (R&E) tax policy change that is about to inadvertently stifle American innovation and compromise our nation's leadership in science, technology, and innovation. This matter requires your prompt attention before the end of 2023, as it directly jeopardizes the survival of numerous small businesses – the lifeblood of our innovation ecosystem,” the letter states, as reported by Bloomberg($).

Their plea comes on the heels of last week’s attempt by congressional lawmakers to modifying the Big Three (allow for R&D expensing, expand the 163(j)-interest deduction and up Bonus Depreciation to 100%).

From last week’s Recap:

Scores of House Republicans signed and sent a letter this week to Speaker Mike Johnson (R-La.) imploring him to pass by year-end legislation on the Big Three (R&D expensing, expanding 163(j)-interest deduction, and upping Bonus Depreciation to 100%). 

From the letter:

“We write to urge you to support legislative action in any upcoming package by the end of the year to support three important, pro-growth tax changes. Specifically, we support extending: immediate R&D expensing, full capital expensing, and a pro-growth interest deductibility rule… Failing to act quickly will jeopardize hundreds of thousands of American jobs.”

Arguably, the business leaders’ letter packs more of a punch because its addendum includes receipts. It shows the number of jobs that will be lost if Congress does not switch R&D amortization (which is current law) to R&D expensing. The lawmakers’ letter simply mentions the prospect of job loss.

The business leaders’ addendum shows specific job losses by state if R&D expensing does not become law, which includes:

  • Alabama: 471 jobs lost,
  • Arizona: 2,575 jobs lost,
  • California: 57,415 jobs lost.

The list shows jobs losses in every state.

Will congressional leaders hear these calls and pass a year-end tax bill? Senate Republican Whip John Thune (R-SD) suggested this week that leadership has yet to hear them.

In an interview with Punchbowl News, Thune was asked about the prospects for passing a year-end tax package. The Senator kind of shook his head and shrugged his shoulders before offering a grim outlook for advancing such a bill.

“There is some talk around it. House, the Ways and Means Committee is looking at it and there are discussions in the Senate,” Thune said.

Thune said the subject of moving tax legislation by year-end was discussed during a Senate Republican lunch this week. The focus was on passing the Big Three along with an expanded, or increased, Child Tax Credit. The Senator did not sound optimistic about tax legislation including those provisions passing this year.

“If this happens, what’s the number and is it realistic,” Thune said, suggesting that a tax bill might be too expensive to pass Congress.

Republicans have recently focused on lowering deficits and the debt.  A bill containing the aforementioned measures is expected to cost $100 billion over two years (2024 and 2025). Whether or not that amount is too expensive remains to be seen.

Legislative Outlook: Lawmakers are scheduled to leave Washington for the holidays in roughly one week (assuming they don’t stay in town longer). Congressional leaders could agree to add tax measures to spending legislation – if they can get an agreement on the spending measures.

Currently, the two congressional chambers have yet to agree on spending legislation that could pass before year-end. This issue must be addressed before congressional leaders change their focus to tax legislation. And it is not clear if there are enough days on the calendar for leaders to shift focus and take-up taxes before everyone heads home.

If a tax bill does not pass Congress before year-end, the next opportunity for passing tax legislation will be 2025, according to tax lawmakers and staff.

Next year, 2024, lawmakers are expected to examine the 2017 tax reform provisions that are set to expire in 2025 and determine which ones should be extended, modified, or allowed to expire. This is expected to be a year-long process that would culminate with a vote on tax legislation in 2025.

The year 2025 is also expected to be an expensive endeavor when it comes to taxes, costing trillions of dollars. Tax staffers recently acknowledged that the 21% corporate income tax rate, which is permanent law, might be increased to help pay for renewing tax reform measures.

If the corporate tax rate enters the discussion to pay for tax cuts, expect a huge pushback from corporate lobbyists – and there are a lot of them in D.C. who help finance a lot of re-election campaigns.

In short, 2025 is looking to become a tumultuous year for taxes. And the outcome of the 2024 elections will have a major impact on how lawmakers and the president handle the tax situation.

Moore on Taxes:

The Supreme Court heard arguments this week on the Moore v. United States case that could have a major impact on the tax code.

Basically, the case centers on whether taxes should be paid on unrealized income. Taxes are usually paid on income that has been realized.

The petitioners, Charles and Kathleen Moore, in 2018 were subject to a mandatory repatriation tax that was included in the 2017 tax reform bill. The legislation ended the unlimited deferral of foreign earnings from U.S. taxes by requiring a one-time tax on earnings that should go to U.S. citizens but are held by foreign companies.

Simply put, the Moore’s held a stake in an Indian corporation. And while the couple did not receive a dividend, the 2017 tax bill required them to pay tax on the unrealized income from that dividend.

If the Supreme Court sides with the couple, the decision will have significant impact on the revenue raised by the tax code, according to the Tax Foundation, a non-partisan D.C. thinktank:

If the Supreme Court strikes down the entirety of the deemed repatriation for corporate and noncorporate taxpayers, we estimate this would reduce revenue by about $346 billion over the next 10 years, including a refund of tax payments made from 2018 to 2023…

If the Supreme Court’s decision more narrowly strikes down the deemed repatriation tax for pass-through firms and individuals only, we estimate that this would reduce overall revenue collections by about $3.5 billion over the next 10 years inclusive of payments made since 2018.

The Supreme Court is expected to release its decision on this case in June of 2024.

Legislative Outlook: Based upon the court’s decision, Congress might have to tweak the tax code to conform with its verdict.

Subcommittee Hearings:

Two House Ways and Means Subcommittees held separate hearings this week. One was on curbing the debt and the other was about increasing prosperity for Americans.

The hearing on deficits and debt came on the heels of the House Budget Committee holding a similar hearing.

Similar to the House Budget hearing, the tax subcommittee highlighted that the debt level is historically high. It also noted that increasing interest rates will worsen the situation. Lawmakers stressed that getting control over the debt will require spending cuts and tax increases, which can be politically unpopular.

During the hearing there was talk of creating a debt commission that would be comprised of lawmakers and financial professionals. Their task would be to figure out a way to dig the country out of debt. As mentioned in last week’s Recap, lawmakers already know the answer to this question, but the answer is not politically popular:

The Joint Select Committee on Deficit Reduction (aka: Supercommittee) was created in 2011 and cheered by lawmakers from both parties. But none of them followed its lead. In fact, the Supercommittee didn’t even send debt-reducing recommendations to Congress because they would have been politically toxic for lawmakers to support.

The answer: Tax more. Spending less. And possibly create another way for the Federal government to raise revenue, which brings us to the second hearing:

The House Ways and Means Subcommittee held a hearing on prosperity. It was chiefly focused on renewing tax provisions in the 2017 tax reform bill that will expire in 2025. Today’s hearing is arguably a taste for what the Committee will focus on as the expiration of 2017 tax cuts become more imminent.

"As a committee and conference, we are committed to economic growth, opportunity and fiscal responsibility. Looking ahead to 2025, when many TCJA provisions are set to expire, we need to ensure our tax code encourages investment, job growth, and economic security for American working families,” said Rep. Mike Kelly (R-Penn.) who chairs the Tax Subcommittee.   

Another focus of the hearing was creating of a new tax system, like a Value Added Tax or a consumption tax. 

The quest to add another tax element to the Federal government has been around for years, if not decades. The everlasting argument is that the current tax system is confusing, downright unworkable, and will not raise the revenue needed to run the country.

That being said, for the past twenty years (or so) the political environment has not been right for Congress to create another tax system. The political parties disagree on the right tax system.

Legislative outlook: Both hearings were more about expressing talking points than passing legislation. That does not mean that legislation could stem from these hearings. But right now, it seems a longshot that legislation creating a debt commission or a bill creating a new tax system would pass the current Congress.

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

Adios amigos!

 

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About the Author(s)

Jay Heflin Photo

Jay Heflin

Director of Legislative Affairs
Jay brings more than two decades of experience to his job as Director of Tax Legislative Affairs in Eide Bailly’s Washington D.C. office. Jay provides political intelligence and guidance to the firm on the progress of tax legislation on Capitol Hill. Prior to joining the firm, he was a director at the tax lobbying shop Federal Policy Group, LLC, where he tracked tax legislation in Congress and participated in lobbying efforts to amend tax legislation. Before joining the Federal Policy Group, he was a Congressional reporter for several news organizations where his beat was tax policy.