Capitol Hill Recap: Legislative Whirlwind on Several Tax Fronts

March 10, 2023

Capitol Hill was busy this week with confirmation votes, President Joe Biden delivering his budget to Congress, several legislative hearings, and staffer talk.

What went down:

  • The Senate took two votes to confirm Daniel Werfel to be the next IRS Commissioner.
  • President Joe Biden delivered his budget proposal to Congress.
  • Treasury Secretary Janet Yellen testified before the House Ways and Means Committee about Biden’s budget.
  • The Senate Finance Committee held a hearing about providing incentives for home ownership.
  • The House Ways and Means Committee passed legislation that would redefine how the federal government pays its debts (non-tax related).
  • A congressional staffer said not to expect an R&D fix happening this year.

Let’s get to it:

Newly Knighted King:

The Senate on March 9th confirmed Daniel Werfel to be the next IRS Commissioner.

Democrats in Congress and in the White House have urged Werfel to increase the audits on taxpayers earning over $400,000 a year. Based upon Werfel’s responses during his confirmation hearing, he will follow their lead. 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.

Before these audits can began, Werfel plans to hire folks with a deep knowledge of tax laws, according to what he told lawmakers:

'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 and added 'I’m not sure that training the current workforce would be sufficient.'

It will be interesting to see how quickly Werfel can ramp-up auditor employment.

Biden Budget:

President Joe Biden on March 9th delivered to Congress his budget request for FY 2024. 

The document proposes several tax increases, but they are not expected to become law in the current Congress. Republicans control the House of Representatives and have vowed to not pass legislation that increases taxes. Legislation cannot become law if it does not pass the House.

Some of the tax increases in Biden’s budget include:

  • Increasing the top marginal income tax rate to 39.6 percent for single filers making more than $400,000 a year and married couples making more than $450,000 per year.
  • Raising the corporate income tax rate to 28 percent.
  • Prevent basis shifting by related parties through partnerships.
  • Preventing excessive accumulations by high-income taxpayers in tax-favored retirement accounts.
  • Taxing carried (profits) interests as ordinary income.
  • Repeals deferral of gain from like-kind exchange.

The budget also seeks to extend the Trump tax cuts for middle-class taxpayers. Republicans could support this effort.

A link to these proposals (and more) is here.

A link to the budget is here

Yellin’ for the Budget:

Treasury Secretary Janet Yellen on March 10th testified about the Biden’s budget before the tax-writing House Ways and Means Committee. 

Spoiler alert: She's in favor of it.

The biggest takeaway from the hearing was Yellen stating that the Biden Administration supports allowing R&D outlays to be expensed (which is not in the budget).

She also said that the White House is working with Congress on this issue – but could not provide details on this development because she was interrupted by the lawmaker who asked about R&D. (Later in the hearing it was mentioned that the Administration would support a refundable R&D tax credit. Yellen did not respond to this comment.)

The biggest surprise from today's hearing was about investigations into leaked IRS tax data.

A handful of organizations have leaked personal tax data from the IRS that is not supposed to be publicly available.

Yellen told the Committee that the Treasury will wait to conduct its own investigation into leaked tax data after other agency investigations (like at DoJ and FBI) have concluded theirs.

“I am waiting to see… with the outcome of those investigations,” she said

House Ways and Means Chairman Jason Smith (R-Mo.) seemed gobsmacked by this answer.

“You’ve done no internal audits with Treasury yourself to see if there might have been any kind of leak or any kind of vulnerabilities in protecting taxpayers’ confidential information.” Smith asked.

Yellen essentially repeated that she will wait to see what other investigations produce before having Treasury conduct its own.

The Treasury Secretary also made news on Pillar Two. She predicted that a Republican-controlled House would approve this international tax proposal. Her reason was that the U.S. would be hurt in international markets if Congress does not approve Pillar Two. Committee Republicans didn’t support this forecast.

Yellen will testify on Biden's budget before the Senate Finance Committee on March 16th.

Senators back Homeownership:

The Senate Finance Committee held a hearing on March 7th aimed at providing incentives for homeownership.

The biggest takeaway from this hearing was that there is bipartisan support to get people to own a home.  

Shortly after gaveling this hearing closed, Senate Finance Chairman Ron Wyden (D-Ore.) reintroduced legislation that has bipartisan support and, if enacted, would provide tax incentives to improve the availability and affordability of housing.

The bill, the Decent, Affordable, Safe Housing for All (DASH) Act, would increase the low-income housing tax credit, create a middle-income housing tax credit to develop middle-income housing, create a refundable tax credit for property owners renting to low-income tenants, and provide a down payment tax credit for first-time homebuyers.

Senate Finance Ranking Member Mike Crapo (R-Idaho) thanked Wyden for introducing the bill.

Legislation aimed at improving home ownership could be the best chance to pass tax policy from this Congress. But it is unclear if a housing tax bill could become a vehicle for fixing outstanding tax issues, like R&D expensing or expanding the interest deduction. The reason is because addressing those tax issues is tied to expanding the Child Tax Credit, which congressional Republicans oppose.

Also, tax bills must originate in the House; so the Senate passing Wyden's bill does really mean that much until the House takes it up.

Prioritizing Debt:

The House Ways and Means Committee passed legislation on March 9th that would prioritize how the federal government pays its debts. For example, paying bondholders would be more of a priority than paying Social Security recipients.

The effort to prioritize debt payments has been around for decades, and roughly 20 years ago it was considered a joke. It now merits a markup by one of the most influential committees in Congress.

This bill could pass the House, but it will not pass the Senate – in the current Congress. Who knows what future Congress’s will do with this issue?

R&D is MIA:

Lawmakers' effort to restore R&D expensing might be for not, according to reporting by Law360 Tax Authority:

Sarah Schaefer, majority chief tax adviser for the Senate Finance Committee… said she's skeptical that either provision will be signed into law this year.

‘When there is action on those items, I don't see the conversation being any different than it was at year-end, and that is the position … that if we are doing corporate tax cut changes from the 2017 tax law, we need something on the child tax credit,’ she said. ‘I don't expect that discussion to change … the child tax credit is our priority.’

The quickest way to enact R&D expensing would be to simultaneously expand the Child Tax Credit, which would add roughly $1 trillion to the national debt over ten years. Currently, there is not enough bipartisan support to expand the Child Tax Credit. But there is bipartisan, bicameral support to expense R&D outlays.

If only the aforementioned lawmaker would have held his tongue, we might have heard from Yellen about how the Administration seeks to proceed with R&D.

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

Adios amigos!

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