March 2, 2023
Lawmakers on Capitol Hill made strides this week in moving forward some agenda items, but not everything.
Wait Almost Over:
Wait No More:
Let’s break it down:
The Tax Man Cometh:
The Senate Finance Committee is expected to approve Daniel Werfel to be the next IRS Commissioner. The endorsement comes roughly two weeks after the committee’s confirmation hearing.
During that hearing, Werfel noted that he had worked for both political parties. He was Controller for the Office of Management and Budget under President George W. Bush and was Acting IRS Commissioner under President Barack Obama. This background suggests that his decisions will be non-partisan.
However, Werfel noted in his testimony that he will focus audits on wealthier taxpayers, which is a Democratic priority. From his testimony:
'Last year, Secretary Yellen issued a directive that the IRS will not increase audit rates, relative to historic levels, for small businesses and households making under $400,000, which I am committed to meeting. Therefore, if I am fortunate enough to be confirmed, the audit and compliance priorities will be focused on enhancing IRS capabilities to ensure America’s highest earners comply with applicable tax laws…'
He basically said the same thing in answers delivered to the Committee after the hearing:
'[T]here is significant evidence that high earners are paying significantly less than what they owe in taxes… My staff received information from the IRS indicating that 195 wealthy tax cheats who hadn’t even filed a tax return going back to 2015 owed a whopping $692 million. These high fliers owed $1.77 million per person. The IRS said it didn’t have the resources to collect these taxes. The IRS now has IRA funding to get a better handle on the matter.'
The word “wealthy” appears 14 times in the Q&A document. “Middle-income” appears three times.
During his confirmation hearing, we reported that Werfel suggested improving tax compliance among high earners could entail hiring the people skilled at hiding money from the tax agency:
‘I think we want to hire and bring in experts – maybe bring in some of the same individuals that earlier in their careers prepared these very intricate returns and are ready to come back and actually serve their country,’ he told the Senate Finance Committee on February 15th.
‘I’m not sure that training the current workforce would be sufficient,’ he added.
It is widely expected the Senate will confirm Daniel Werfel to be the next IRS Commissioner. A confirmation vote has not yet been announced.
(Look ahead: The Senate Finance Committee annouced this week that it will hold a hearing next week titled “Tax Policy’s Role in Increasing Affordable Housing Supply for Working Families.” More on this hearing, and related bills, next week.)
President Joe Biden is scheduled to deliver his budget request to Congress on March 9th.
The details are obviously under wraps. But Biden will likely use his budget to call for tax increases on individuals earning more than $400,000, according to what he said on February 28th:
‘On March the 9th, I’m going to lay down in detail every single thing — every tax that’s out there that I’m proposing — and no one over 400 — making less than $400,000 is going to pay a penny more in taxes. But lay it out by March 9th, everything, and what we’re going to cut, what we’re going to spend, what we’re going to. Just lay it on the table.’
Important to note: The individual tax breaks enacted in the 2017 tax reform bill will expire in 2026. (Corporate tax breaks are permanent.) Both political parties agree that individual tax breaks for those earning less than $400,000 should be extended.
Repeat: There is bipartisan, bicameral support to extend the Trump tax cuts for individuals earning less than $400,000 a year. The political fight will be on taxes paid by individuals earning more than this amount.
Congressional Democrats this week even called for the President’s budget to include tax increases on wealthier folks and not the middle-class:
Senate Majority Leader Chuck Schumer (D-N.Y.) talking to reporters on March 1st:
‘The Trump tax cuts were bad for the country… There’s a whole lot of reasons to cut the Trump tax cuts.’
Sen. Michael Bennet (D-Col.) talking to an interest group on March 1st:
‘We need to reverse the Trump tax cuts for the very rich.’
Despite what these Senate Democrats want, tax legislation begins in the House – which is run by Republicans. The GOP in the lower chamber is likely to extend all individual tax cuts from the 2017 reform bill. Tax hikes won't happen.
If a tax cut bill materializes and passes the House (and it would pass the House), it is unclear if the Democratically controlled Senate would approve it.
That being said, the political consequences could be daunting if Senate Democrats ignore or reject a bill that extends all 2017 tax cuts. Not passing it will give Republicans a political opening to blame Democrats for increasing taxes on the middle-class. (i.e., Democrats don’t pass a bill extending middle-class tax cuts, ergo they increase taxes on said group.)
House Democrats opposing the bill would likely face the same political consequence.
This is not a good look for Democrats heading into the 2024 elections.
Also, a similar situation occurred in 2010 and Democrats chose to extend all Bush-era tax cuts for two years - many of them ran for re-election opposing their extension.
President Biden’s budget is also expected to include the tax increases mentioned during his State of the Union Address. More on that speech is here.
The House Ways and Means Committee on February 28th held a hearing to approve its agenda and pass legislation aimed at curbing unemployment fraud.
From its start, the parties disagreed over just about everything: What the agenda should include, arguing over the use of welfare in the agenda, criticizing the need to repeal extra IRS funding while trying to nab tax cheats.
The bickering elongated the hearing, which lasted roughly six hours. This event was supposed to be non-controversial. It was anything but.
Eide Bailly’s report on the hearing is here.
The Joint Committee on Taxation held its organizational hearing on March 1st. This means that the committee tasked with creating and scoring tax legislation can do just that – if there was only a tax bill…
Sen. Michael Bennet (D-Col.) this week basically threw Sen. Joe Manchin (D-W.Va.) under the bus for being the only Democratic Senator who refused to support expanding the Child Tax Credit to what it was during the pandemic. Manchin didn’t think families would use the extra money from the credit for their children, according to Bennet, who disagreed with Manchin’s position.
“Largely, parents spend the money on their kids,” he said, adding that during the pandemic the extra money from the Child Tax Credit paid for school clothes. He said one parent used the money for purchase a bike for their child, which allowed the youngster to participate in after-school activities.
Bennet stressed this week that he would oppose fixing or extending any corporate tax break unless the Child Tax Credit was also modified. He has repeatedly said this, and several congressional Democrats agree with him. This means that no fixes for Sections 174 or 163(j) are currently on the horizon.
A technical glitch prohibiting taxpayers from making catch-up contributions is still not fixed.
The snafu was accidently included in the Secure 2.0 legislation that was approved last year. Efforts are underway to fix it, according to Tax Notes ($):
House Ways and Means Committee ranking member Richard E. Neal, D-Mass., told Tax Notes that he has discussed options with Treasury Secretary Janet Yellen to address the legislative glitch that may inadvertently bar all catch-up retirement contributions beginning in 2024.
‘She was going to try to do it administratively,’ Neal said of Yellen’s intent to fix the problem through Treasury action. ‘And then she said if that didn’t work, that she was going to try to do it through the IRS.’
And if the IRS issuing guidance isn’t the answer, the ball would be back in House Democrats’ court to try to get a fix — hopefully through a unanimous consent measure with bipartisan support, Neal said.
The issue here is trust. If congressional action is required to fix this issue, then legislation must be passed by both chambers.
However, House Republican leaders do not trust that Senate Democratic leaders will not amend a Section 2.0 fix bill to include measures that will not pass the House (like adding CTC expansion to the bill). If that were to occur, a Secure 2.0 fix would not pass the House and not become law.
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.