Capitol Hill Recap: Child Tax Credit, R&D, Trusts, Step-Up, Oh My!

March 23, 2023

Congress’s top GOP tax-writer supports expanding the Child Tax Credit – if – the credit includes a work requirement. That condition doesn’t fly on the other side of the aisle. Meanwhile, lawmakers express themselves on tax issues.

What Went Down:

  • House Republicans retreated in Orlando, Florida, this week to discuss their legislative priorities. Tax was not at the top of the list (energy, debt, China, and inflation were), but taxes were mentioned this week by the chamber’s leading tax-writer.
  • A bipartisan group of lawmakers seek to preserve Step-Up for certain taxpayers.
  • Senators want to clamp down on trusts.
  • Congress will soon receive details on how IRS will spend the $80 billion.

Let’s get to it:

CTC for You and Me

House Republicans identified their legislative priorites: Energy, debt, China and Inflation.

Taxes didn't make the list, but it could fall under the Inflation category. 

To that point, House Ways and Means Chairman Jason Smith (R-Mo.) told reporters on March 20th that he supports expanding the Child Tax Credit. More money could help families combat inflation.

The catch: The expansion must include a work requirement, which congressional Democrats oppose. That being said, President Joe Biden would accept the requirement to expand the credit, according to reporting last December by the independent news outlet Common Dreams:

In a last-ditch bid to revive the expanded Child Tax Credit in some form by year's end, the White House has reportedly suggested to congressional Democrats that it is willing to accept a compromise deal that adds more stringent work requirements to the anti-poverty program--a reversal of President Joe Biden's previous opposition to such restrictions and a move that some progressives condemned.

A deal has yet to materialize.

Expanding the Child Tax Credit has been the lynchpin for permitting R&D costs to be expensed.  Democrats linked these provisions together (i.e., one is not enacted without the other), but Republican opposition to CTC expansion has stopped any progress on R&D expensing.

Smith’s admission that he supports expanding the Child Tax Credit might not make much of a difference if congressional Democrats remain opposed to recipients needing a job to receive relief.

Other Republicans have tried to decouple the CTC/R&D connection. They seek to remove it from the R&D conversation. Instead, a CTC expansion would be paired with repealing the SALT deduction (not the cap, the deduction).

Lawmakers supporting this initiative say it would remove a deduction benefiting wealthier taxpayers (i.e., homeowners) and provide relief to poorer taxpayers (i.e., lower-income taxpayers).

Democrats are big supporters of the Child Tax Credit and the SALT deduction. It is unlikely that they will agree to kill the SALT deduction to expand the Child Tax Credit.

Until there is an agreement for how to handle the Child Tax Credit, it does not seem likely that R&D costs will be expensed.

Three Cheers for Step-Up

Some might get excited that a bipartisan contingent of House lawmakers introduced legislation preserving the step-up in basis for assets inherited by family-owned farms and small businesses.

Don’t get excited.

The legislation introduced on March 21st starts with an "H.Res." and it does not become law.


H.Res. stands for a resolution of the House of Representatives.  House resolutions are not binding law, but rather express the collective sentiment of the House on a particular issue, person, or event…

Bills that start with “H.R.” do become law:

H.R. stands for the U.S. House of Representatives, and any legislation with this prefix indicates that the bill originated from the House.  If passed by the House, the bill moves on to the Senate for consideration.

Think of H.Res. bills as feeling pieces. Lawmakers introduce them to let everyone know how they feel about a certain subject.

In this case, lawmakers want the world to know that they support step-up for working folks.

From the bill:

[T]he elimination of the stepped-up basis would threaten the ability of farmers, ranchers, agribusinesses, and small business owners to make generational transfers of their operations: Now, therefore, be it

Resolved, That the House of Representatives—

(1) supports the preservation of the stepped-up basis;

(2) opposes any efforts to impose new taxes on family farms or small businesses; and

(3) recognizes the importance of generational transfers of farm and family-owned business operations.

If the House approves this bill, lawmakers will likely cheer, but it does not advance to the Senate, and it will not become law.

Clamping Down on Trusts

Four Senators, who are arguably the chamber’s most liberal lawmakers, called on Treasury Secretary Janet Yellen to clamp down on tax avoidance maneuvers related to trusts.

“We write in support of your strong commitment to tax fairness and to urge you to use your existing authority to limit the ultra-wealthy’s abuse of trusts to avoid paying taxes,” the Senators state in their letter to Yellen states.

The word “million” appears 18 times in a six-page document. “Billion” appears nine times. “Ultra-wealthy” also appears nine times.

Legislation clamping down on trusts would likely not pass a politically divided Congress, which could be why these lawmakers trained their focus on the chief regulator.

Their suggestions include:

  • Revoke Revenue Ruling 85-13 and follow Rothstein v. US.
  • Revoke Revenue Ruling 2004-64.
  • Require GRATs to have a minimum remainder value.
  • Reissue family limited partnership regulations.
  • Clarify that Intentionally Defective Grantor Trusts (IDGTs) are not entitled to stepped-up basis.

The Senators also asked Yellen to game-out how much revenue could be gleaned if certain abuses were curbed. From the letter:

Please provide an estimate for how much tax revenue the Treasury Department believes could be raised in the near-term and long-term by addressing grantor trust abuse through the Treasury Department’s existing authority as outlined in this letter.

a. How much additional tax revenue would be raised from estates valued at $12.92 million – $50 million.

b. How much additional tax revenue would be raised from estates valued at $50 million – $100 million?

c. How much additional tax revenue would be raised from estates valued at $100 million – $1 billion?

d. How much additional tax revenue would be raised from estates valued over $1 billion?

It remains to be seen if Yellen will follow the lawmakers’ lead. She recently testified before the House Ways and Means Committee and noted that her highest tax priority is finalizing energy tax credit regulations from the Inflation Reduction Act.

“We have no higher priority at Treasury in our office of tax policy,” she said.

EV Tax Credit Rules are expected to be released next week. It is not clear when other energy rules will be made public.

Yellen hopes that final regulations for all energy tax credits will be completed by the third quarter.

It is not clear if clamping down on trusts ranks high on Yellen's priority list.

Dets on $80 billion

Secretary Yellen on March 22nd said details will soon be released for how the IRS will spend the $80 billion (over ten years) given to it by the Inflation Reduction Act.

“I have seen a draft of the plan… It’s not final, but you should see it very shortly,” she told the Senate Appropriations Subcommittee on Financial Services and General Government.

The tax agency missed its February 17th deadline to inform Congress on how it intends to spend this money.

Once the plan is released, expect lawmakers to focus on how much money will be spent enforcing tax laws. Extreme attention will be paid about whether audit numbers increase for taxpayers earning less than $400,000 a year.

Honorable Mention

The pass-thru deduction got a shout-out during a congressional hearing on health insurance.

Kelly Moore, owner of three NAPA Auto Parts stores, told the House Ways and Means Health Subcommittee said that the deduction was instrumental in affording health insurance for her employees. It also covered other costs.

“That 20 percent deduction not only helped us cover health care insurance, it helped us [cover] other significant expenses,” she said, adding "we were able to take some of that income and boost out inventory."

The extension of the pass-thru deduction is expected to be included in House legislation that extends all tax cuts included in the 2017 tax reform bill. It is not clear when the chamber will act on this bill.

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

Adios amigos!

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