Capitol Hill Recap: Tax Bill Put on Ice

Special Note: Congress is expected to adjourn at the end of the week. Assuming it does, the Capitol Hill Recap will be on hiatus until lawmakers return to Washington D.C., which is expected to occur in January. Happy holidays!

Barring a Christmas miracle, Congress is unlikely pass business-related tax breaks before lawmakers leave town for the holidays.

What Went Down:

• Congressional lawmakers are currently expected to leave town without passing the Big Three tax breaks.
• The House tax-writing committee looked at foreign contributions going to tax-exempt organizations.

Let’s Get To It:

Maybe Another Day:

Lawmakers are not expected to pass tax legislation this year that would include the Big Three (R&D expensing, expanding the 163(j)-interest deduction and upping Bonus Depreciation to 100%) as well as modifications to the Child Tax Credit (and possibly tax credits for constructing middle/low-income housing).

Both chambers of Congress are expected to adjourn by the end of the week. Tax-writing lawmakers this week told reporters that the tax bill remains a work-in-progress and can’t be completed before lawmakers leave town for the holidays.

Bloomberg($)(scroll down):

“Obviously there’s a ways to go and we’re working through the numbers and evaluating them,” [Senate Finance Chairman Ron] Wyden [D-Ore.] told reporters in the Senate subway Tuesday. “We’re making real progress.” …Ways and Means Ranking Member Richard Neal(D-Mass.) told Bloomberg Tax that conversations at the staff level have been fruitful, but that the lack of time left is an issue… The House plans to adjourn Dec. 15. “The holdup is always the congressional calendar,” Neal said, adding, “That’s reality.”

What?!?!

In the real world, people don’t go home until their work is done. In fact, a huge motivator for getting your work done is the prize of going home.

The true reality for why the tax bill hasn’t gotten done for nearly two years is because the political parties can't agree on it and party leaders haven't given it their full attention.

It also costs a lot. Too much for some. Certain lawmakers who in the past spent public money like drunken sailors have awoken to the reality that the Federal government is drowning in red ink and that a bill's cost should be offset. 

Estimates put the cost of a Big Three/CTC tax bill at roughly $100 billion for two years (2024 and 2025). No provision would be retroactive. The new deficit hawks are now calling for this cost to be offset.

But here’s the thing: Offsets can negatively affect the same people who are positively affected by the ‘good stuff’ in a bill. Zero-sum results like this prompt the question of why even pass a bill if the people targeted for relief don’t receive any.  

Also, the political disagreement over what to do about the Child Tax Credit – a disagreement that persists to this day – has been a drag on passing the tax legislation.

The so-called agreement on the Child Tax Credit that some lawmakers have touted is not large enough for other lawmakers and too big for yet another set of lawmakers, according to tax staffers.

Housing tax credits have re-entered tax bill discussions to help move talks forward. Support levels for the Child Tax Credit have been dicey, so lawmakers hope to entice more lawmaker-support for the tax bill by adding the house tax credits.

If you think you have heard the story before about housing tax credits being used to boost support for Child Tax Credit legislation, you are correct. Lawmakers tried this tactic last year with unsuccessful results.

Roll Call (October 25, 2022):

Lawmakers and advocates are eyeing year-end legislation as vehicles to expand a low-income housing construction incentive as opportunities dwindle to address a growing affordability crisis before the next Congress.

Despite bipartisan support for the low-income housing tax credit, or LIHTC, its expansion in a year-end bill may come down to cost and negotiations around bigger partisan priorities, including the child tax credit, and research and development incentives. 

Speaking of “research and development incentives,” there is bipartisan, bicameral agreement for the Big Three.  

Believe it or not, there was a time when sanity existed on Capitol Hill. Lawmakers used to pass provisions they agreed upon and continued negotiations on provisions where they disagreed.

Applying this logic to the current tax bill, Congress would have passed the Big Three over a year ago and continued negotiations on the Child Tax Credit.

That has yet to happen.

Lawmakers will now apparently continue tax negotiations on provisions where there has been no agreement for nearly two years. The goal is to reach an agreement and pass tax legislation early next year, which is a head-scratcher.

Congressional tax lawmakers and staff have repeatedly said in closed-door meetings (i.e., no press allowed) that the focus in 2024 will be on examining the expiring TCJA (Tax Cuts and Jobs Act) tax reform provisions and decide what stays and what goes. 

Offsets will likely be a big part of the TCJA discussion and could include a new form of taxation. Then, in 2025, Congress would vote on the tax legislation. That’s the current plan. 

Of course, plans change, especially in Congress, which is nothing if not inconsistent.

If lawmakers vote on tax legislation next year it will likely be a very small package that would include the Big Three, the Child Tax Credit and maybe housing tax credits. Offsets will be a troublesome discussion.

That being said, the primary tax focus next year is expected to be on renewing the TCJA provisions that are set to expire at the end of 2025. (The Cato Institute lists the tax provisions that are set to expire in 2025. That list is here.)

Passing tax legislation next year must also hitch a ride on another piece of legislation. The two biggest legislative prospects are the spending bills that Congress must pass by January 19^th and February 2^nd.

However, it remains to be seen if these bills will pass Congress. Failure to pass these measures means a partial shutdown of the Federal government. If the government is shutdown, no one will be pushing for the passage of tax legislation until the government reopens.

Legislative outlook: It looks increasing likely that both chambers of Congress will adjourn for the holidays by the end of the week. Their remaining days in D.C. are expected to be focused on spending concerns and not taxes.

As for Congress advancing tax legislation next year, stay tuned.

Tax-Exempt Hearing:

The House Ways and Means Oversight Subcommittee held a hearing this week on tax-exempt organizations that accept foreign donations and whether those contributions influence the outcome of U.S. elections.

The hearing focused on 501(c)(3) and 501(c)(4) entities and discussed whether tax exempt organizations should accept donations from foreign nationals. This sort of contribution is illegal, but tax-exempt organizations have circumvented the law, according to lawmakers.

"Unfortunately, under current law, if Vladimir Putin were to donate money to a U.S.-based 501(c)(4), this organization is not required to disclose the source of this donation,” said Subcommittee Chairman David Schweikert (R-Ariz.). “Hypothetically, this organization could subsequently direct this money to a Super PAC that could help elect candidates for federal office,”

It was noted during the hearing that political donations amounting to millions of dollars have flowed from foreign nationals to U.S.-based 501(c)(3)s and 501(c)(4)s. These funds are then used to influence U.S. elections.

House Ways and Means Chairman Jason Smith (R-Mo.) noted that an increase in tax-exempts could mean that more organizations are participating in this form of abuse.

“Today, there are almost three times the number of charities in the United States compared to thirty years ago,” Smith said, adding, “The question is what is behind the explosion of these organizations in the United States and for what purposes. A chief concern is the money from foreign nationals that appears to be pouring into tax-exempt organizations while at the same time those same organizations are seeking to influence American politics.”

The Subcommittee’s Ranking Member, Rep. Bill Pascrell (D-N.J.), surmised that members in the other political party were complaining about these donations because they received less of them than Pascrell’s party.

“My colleagues across the aisle are making today about targeting tax-exempt organizations that don’t align with their politics,” he said, adding “I am not optimistic [about a bipartisan agreement on tax exempts] based on the testimony we are expecting here, and the openly partisan manner by which this hearing was conceived.”

Much of the discussion in the hearing could have been considered partisan. Several committee members highlighted donations to the opposing party and urged that these sorts of contributions be stopped.

Legislative outlook: This was more of a messaging hearing than an effort to advance legislation. However, if legislation is introduced, it would likely pass the House, but not the Senate. In short, the bill would go nowhere in the current Congress.

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

Adios amigos!