More questions than answers this week on increasing the debt ceiling and modifying the tax consequence of R&D outlays.
What Went Down:
- Congressional leaders met with President Joe Biden on May 9th to discuss raising the Debt Ceiling. Both sides were dug-in to their positions. House Speaker Kevin McCarthy (R-Calif.) was one of them. His position would raise the debt ceiling and offset part of its cost by rescinding several green energy tax credits enacted in the Inflation Reduction Act.
- Ron Estes (R-Kan.) warned on May 9th that without R&D expensing in the U.S. companies could be lured to relocate in China, where an increasing amount of R&D costs can be deducted for tax purposes.
- House Ways and Means Republicans seek to release an “Economic Plan.” The bill is expected to include the Big Three: R&D expensing, expanding 163(j), and allowing 100% Bonus Depreciation, as Eide Bailly reported on April 28th.
- Taiwan to the rescue??
- The IRS’s outdated technology was discussed on May 10th in a hearing by the House Oversight Committee.
- Big Pharma gets blasted.
Let’s Get To It:
I was a cub reporter in 2000, and back then the debt ceiling was never an issue worth covering because it was raised without conflict. It didn’t matter which political party was in the majority, the ceiling was raised with literally no fanfare.
Things have changed.
It’s 2011 all over again. Back then, House Republicans were the majority party and demanded that a Democratic President negotiate with them on raising the debt ceiling. Republicans wanted deficit reduction in exchange for lifting the federal government's borrowing power.
There is one huge difference between 2011 and the current situation: House Republicans in 2011 didn’t suggest reducing the deficit by increasing taxes. Back then, they called for spending cuts.
This time, it’s different.
House Republicans approved debt-ceiling legislation on April 26th that repeals or shrinks several energy tax credits contained in the Inflation Reduction Act.
In a normal world, this piece of legislation would be considered to increase taxes. It reduces or eliminates tax deductions or credits, which would up a taxpayer’s tax bill. Ergo, a tax increase.
More from the same Recap:
Here are the facts:
- The Joint Committee on Taxation projected that one section of the bill – titled “Repeal Market Distorting Green Tax Credits” (Yes, repealing tax provisions is in the title!) – would increase revenue by over $515 billion over the next ten years.
- The Congressional Budget Office projected that the bill would “decrease outlays by $17 billion and increase revenues by $553 billion over the 2023–2033 period.”
Revenue increases primarily come from upping taxes. The decrease in outlays stem from the federal government no longer paying the bill’s refundable tax credits.
The House passed this bill in April. It is not expected to pass the Senate or become law. President Biden referred to this bill as a “non-starter” when it comes to debt ceiling negotiations.
But here is the problem: Democratic leaders have not passed any legislation that increases the debt ceiling. This means that it is unclear on what they would accept to increase the federal government's borrowing limit.
Until there is a bipartisan, bicameral agreement on raising the debt ceiling, the tax increases in the House-passed bill remain on the negotiation table – no matter what Democrats say.
Legislative Outlook: Legislation that increases the debt ceiling will be approved (hopefully before default). Current revenue projections show that less tax revenue is flowing into federal coffers, which could force more immediate action on raising the debt ceiling.
Whether the bill includes other provisions (like tax increases or spending cuts) remains to be seen.
On taxes, House Minority Leader Hakeem Jeffries (D-NY) said on May 11th that taxpayers earning less than $400,000 a year should not be hit with a tax increase to increase the debt limit. However, he thinks that tax increases for those earning above this threshold should be on the negotiation table in raising the federal government's borrowing authority.
“[President Biden’s budget] will cut the deficit by $3 trillion, on a moving forward basis… in part [by] making sure that we end wasteful subsidies to big oil and end wasteful subsidies to Big Pharma,” Jefferies said… “If my Republican colleagues really want to have a conversation about how we meet the needs of the American people and reduce the deficit in a fiscally responsible way, it’s impossible to have that discussion without talking about revenue.”
(BTW: Jefferies means taxes when “subsidies” and “revenue” are mentioned.)
President Biden has called for a “clean” debt ceiling increase. His call for a clean bill lowers the probability that tax provisions will hitch a ride on the legislation. A ‘clean’ debt ceiling bill would only raise the borrowing limit. If Biden gets his way, spending and tax provisions would not be included in the legislation.
The importance for allowing businesses to expense their research and development outlays was highlighted during a congressional hearing that was focused on trade.
Raising the issue was a bit unconventional since the tax provision was not relevant to the subject of the hearing, which was trade and not tax.
Rep. Ron Estes (R-Kan.) warned that without R&D expensing in the U.S. companies could be lured to relocate in China, where an increasing amount of R&D costs can be deducted for tax purposes.
“China’s R&D expensing has grown up 400%,” he said during the House Ways and Means Committee hearing titled “Field Hearing on Trade in America: Securing Supply Chains & Protecting Workers.”
No lawmaker responded to Estes’s comment, maybe because the remark was nongermane to the hearing.
But using a trade hearing to highlight a tax problem might show how desperate some lawmakers have become to pass an R&D expensing bill.
Desperation might also have been the impetus for Senator Todd Young (R-Ind.) to pen an opinion piece in Bloomberg that highlights what China is offering on R&D:
China currently provides a 200% “super deduction” for R&D expenses that amounts to 20 times the amount allowed in the US tax code. A manufacturing company in China that spends $100 on R&D gets to deduct $200. Even before this provision expired, the US ranked 27th out of 37 OECD countries with respect to R&D incentives. Our strategic competitors know this and are taking advantage.
Legislative Outlook: There is bipartisan, bicameral support to pass the Big Three: R&D expensing, expanding 163(j), and allowing 100% Bonus Depreciation.
However, these provisions are not expected to pass Congress unless the Child Tax Credit is also modified. Republicans have historically been opposed to modifying the Child Tax Credit, but their position could be changing (explanation below).
House Republicans plan to introduce an “economic package” that would allow for R&D expensing, expanding the 163(j) interest deduction (from EBIT to EBITDA), and upping Bonus Depreciation to 100%, among other measures. As state above, these tax provisions have bipartisan, bicameral support.
The bill is expected to be introduced after Congress completes its action on raising the debt ceiling. This means the economic package could be released in June, or perhaps July.
After the bill is introduced, the House Ways and Means Committee is expected to markup the legislation. At this meeting, Republican lawmakers could try to add other tax provisions to the bill. One possibility would be to permanently increase the 1099-K reporting threshold to $20,000 and 200 transactions. Pass-thru tax relief, which expires in 2025, could also be added (but unlikely).
Legislative Outlook: Unclear.
Why is the outlook unclear? The Child Tax Credit.
Rumor has it that House Ways and Means Chairman Jason Smith (R-Mo.) could use the Economic Plan to modify the Child Tax Credit. The measure could be an extension of the Child Tax Credit that was enacted in the 2017 tax reform bill, which Democrats opposed.
Democrats are likely to once again oppose an extension of the 2017 credit if included in Republicans’ Economic Plan. They will likely argue that it does not provide enough relief and condemn the GOP requirement that a valid Social Security number is needed for each child to claim the refundable and non-refundable portions of child credit.
If Democrats oppose the GOP Child Tax Credit, then they will likely oppose the entire bill. It will not become law since liberal support is needed for passage in the Senate.
On the other hand...
Democrats might support the GOP Economic Plan with the 2017 Child Tax Credit included.
Here’s why: Business owners in some Democratic districts are calling for the Big Three to be enacted. Some of these businesses are suffering layoffs and enacting the Big Three would help them.
If Democrats who represent these districts oppose the bill, it might frustrate their constituents. Voters would likely struggle to understand why their representative blocked a bill that would have stopped or slowed layoffs from occurring.
Democrats have also lowered their ask on the Child Tax Credit. Originally, they wanted to extend the Child Tax Credit in the American Recue Plan. Re-enactment of that measure would cost roughly $1 trillion over ten years, according to the Joint Committee on Taxation (JCT).
The Republican plan costs less. The 2017 Child Tax Credit proposal is projected to cost roughly $500 billion over ten years, according to JCT analysis that was completed shortly before the bill became law.
Democrats could opt to support the 2017 Child Tax Credit (and therefore the entire bill). The political backlash for supporting a smaller Child Tax Credit might be less than having to explain to voters why their lawmaker opposed business tax provisions that could have been a lifeline for struggling companies within their district.
There is bipartisan, bicameral support among tax leaders on Capitol Hill to tinker with the tax code where Taiwan is involved:
Taiwan’s unique status precludes it from the typical process of remedying double taxation through a treaty; therefore, Congress should amend the tax code to reduce the burden on U.S.-Taiwan cross-border investment. More investment will lead to more jobs and greater prosperity for American workers and families.
This statement is from House Ways & Means Committee Chairman Jason Smith (R-MO), Senate Finance Committee Chairman Ron Wyden (D-Ore.), House Ways and Means Ranking Member Richard E. Neal (D-Mass.), and Senate Finance Committee Ranking Member Mike Crapo (R-ID).
Why this is important: If a Taiwan tax bill moves forward, it would be a tax bill. Lawmakers can add other tax provisions to tax bills, like the Big Three and the Child Tax Credit provisions.
Legislative Outlook: The odds are high for passing a Taiwan tax bill given that the head tax writers want it done. Whether it will become a legislative vehicle to pass other tax provisions is unknown.
IRS outdated tech:
A House Oversight and Accountability Subcommittee held a hearing on May 10th about security issues with the government’s computer systems.
The subpar computers at the IRS were mentioned during this hearing.
The primary reason for the problem is that IRS computers rely on a program called Common Business Oriented Language or COBOL.
COBOL is old. In fact, it’s older than Rep. Nancy Mace (R-S.C.), who chairs the Oversight Subcommittee that held the hearing. COBOL was invented in 1959. Mace was born in 1977.
The fact that the hearing highlighted IRS’s outdated and inefficient computer systems is not news.
What is news is that a bipartisan group of committee members called for more IRS funding to fix their computers.
This call was made on the heels of some of these same lawmakers voting to defund the IRS in recent legislation that passed the House.
Politics. Go figure.
Legislative Outlook: It is highly unlikely that legislation upping money for the IRS would pass the House. The chamber this year has voted to defund the tax agency – twice.
Senate Finance Committee Chairman Ron Wyden (D-Ore.) on May 11th released a Democratic staff memorandum on how Big Pharma has profited from the 2017 tax reform law.
From the press release about the memo:
The memorandum reveals for the first time the full extent of the tax break Republicans handed Big Pharma in their 2017 tax law: Big Pharma’s average effective tax rate fell by more than 40 percent in the years after the law was enacted. Despite the fact that the U.S. is by far the industry’s largest market, the investigation also found that Big Pharma reports 75 percent of its profits overseas, which allows these hugely profitable companies to pay tax rates lower than many middle class Americans.
Wyden held a hearing on this topic. The discussion was largely partisan. Democrats called for companies to pay more in tax. Republicans warned that tax increases would hurt economic growth.
Head scratcher: The Congressional Budget Office (Congress’s official bookkeeper) released a report this week that showed the revenue loss from lowering the corporate tax rate in 2017 wasn’t as bad as some feared.
From the report:
The 2017 tax act reduced the statutory corporate tax rate by about 40 percent. However, in the years since 2017, that reduction in the rate has not resulted in a significant reduction in corporate tax receipts as a share of GDP.
How did this happen? The 2017 law broadened the tax base as profits increased, according to the report:
That relative stability reflects a combination of large profits in recent years and the effects of the base broadening provisions of the 2017 tax act.
Legislative Outlook: Legislation that increases taxes on corporations would only become law if Democrats controlled both chambers of Congress and the White House. Currently, that is not the case, which means enacting corporate tax increases is a long shot.
Pardon if this recap missed a monumental moment, but we can recap it next time!