February 9, 2023
Here’s what went down this week:
Important to note: Tax talk doesn’t always equate to tax action.
State of the Union:
President Joe Biden delivered his State of the Union Address to Congress on February 7th. The primary focus of the speech was not about taxes, but they were mentioned and included:
The first two proposals are tax increases and will likely be dead on arrival on Capitol Hill because a Republican-controlled House might not pass these proposals.
As for Child Tax Credit expansion, Republicans repeatedly opposed it in prior years (after enactment of 2017 tax reform bill). However, a few publications have reported that a Republican-controlled House might expand this tax credit – if Democrats agree to reduce its amount.
Rep. Darin LaHood (R-Ill.), a member of the Ways and Means Committee, told Bloomberg that a lower credit amount would “be good for negotiations.”
Translation: Lower aid for families and we’ll talk.
The 2017 tax reform bill – backed by Republicans – basically doubled the Child Tax Credit, but it didn’t go far enough to win support from Democratic lawmakers. This expansion expires in 2026. Extending it might be what’s on the table for conservative lawmakers. However, Democratic support, especially in the Senate, will be required for passage.
Biden also used his SOTU address to repeat his mantra about increasing taxes on anyone earning more than $400,000 a year. It remains to be seen if that $400,000 threshold is applied to single or joint filers.
Tax increases are currently off the table in debt ceiling negotiations, according to Senate Majority Leader Chuck Schumer (D-NY).
“The debt ceiling should be done without brinksmanship, without hostage taking, without confrontation,” Schumer told reporters on February 7th, adding "I’d like to see [tax increases] on the table, but not as a demand that unless we get [tax increases] done we’re not going to pass the debt ceiling.”
If tax increases are off the table, then fixes for R&D, interest deduction, bonus depreciation, and the SALT cap are likely nowhere near this discussion. (FWIW: The push to repeal the SALT cap is back. Good luck with that.)
The debate over raising the debt ceiling is expected to continue for months. Issues that are on/off the table (spending cuts v. tax increases) will likely change over this timeframe. Also, a debt ceiling increase can occur without modifications to Congress’s pocketbook. It’s called a “clean” debt ceiling increase.
The new Congress began in January, but tax committees picked February to begin congressional hearings.
House Ways and Means Committee:
On February 6th, the panel held a field hearing in Petersburg, West Virginia. Witnesses testifying before the panel were asked a simple question: Name one thing Congress should pass to help your business thrive?
Despite these responses, several lawmakers vowed to help businesses by extending soon-to-expire tax provisions. Chief among them: Lengthening the life of the pass-thru deduction, which is currently scheduled to expire in 2026. Efforts to extend this provision are expected to start this year.
On February 8th, the Committee held its second hearing that focused on fraudulent unemployment claims.
During the hearing, it was stated that in 2022 the Federal government spent nearly $900 billion on unemployment benefits and $191 billion of that amount went to the wrong person “with a significant portion attributable to fraud,” according to testimony.
Rep. Earl Blumenauer (D-Ore.) compared the fraudulent unemployment payments to the Tax Gap, which represents taxes that are due but not collected. He asked why the Tax Gap was not a focus of the committee.
“It’s interesting that higher earners, like partnership income, proprietorships income, rental income – noncompliance can reach 55%. I hope that the indignation that we are expressing for a program that was meant to save desperate people…can be transferred to an area of much greater loss,” Blumenauer said.
No committee member responded to Blumenauer’s comment.
The annual Tax Gap was $496 billion for tax years 2014 thru 2016, according to the latest data provided by the IRS.
The Senate Finance Committee:
The Committee held its organizational hearing on February 9th only to find out that not enough members showed up to have quorum. The hearing was postponed.
Without quorum, the committee cannot officially organize or hold hearings. This matter is expected to be cleared up before its first hearing on February 15th.
That hearing will be about confirming Danny Werfel as the next IRS Commissioner. Expect the $80 billion IRS funding issue to be discussed as well as leaked tax information.
Future tax hearings will likely occur as well, according to a statement by Senate Finance Committee Chairman Ron Wyden (D-Ore.). He responded to President Biden saying in his SOTU Address that the tax system is unfair.
“The president is absolutely right that the tax system in America is deeply unfair. There’s one set of rules that applies to people like nurses and firefighters who work for a living, and there’s another set of rules that lets billionaires pay what they want and when they want. It’s long past time to fix that unfairness, and I’m going to continue fighting to get it done,” the Chairman stated.
Any tax increases championed by Wyden might not pass the Senate and could die in the House.
Current Odds on Tax Action:
The odds are low that Congress will approve tax legislation in the first half of the year. Lawmakers’ focus is elsewhere (first debt ceiling, then funding the federal government). However, economic conditions could change that focus. If the economy falls into a recession, look for tax talk to increase.
Pardon if this recap missed a monumental moment, but we can recap it next time!
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.