Debt ceiling negotiations continue without much progress as lawmakers scrutinize tax breaks enacted over the past two decades.
What Went Down:
- Congressional leaders and President Biden continued their talks on lifting the Debt Ceiling with little to show for it.
- Republicans defend tax cuts enacted over the past two decades.
- Democrats defend the tax incentives in the Inflation Reduction Act.
- Possible tax vehicles.
- Will the IRS prepare your tax return?
Washington leaders have spent the past couple of weeks discussing how the debt ceiling should be lifted. They’re biggest accomplishment so far is that each side has named the people who will lead these negotiations.
House Speaker Kevin McCarthy (R-Calif.) said that a deal “in principle” could be reach as early as this weekend. So far, the House has been the only chamber to pass a bill increasing the debt ceiling. It includes tax increases that repeal or shrink energy tax breaks in the Inflation Reduction Act.
Details on those tax increases is here.
Debt ceiling negotiations are currently based on what passed the House because it is only piece of legislation that has been approved by a chamber of Congress. This means that the tax increases included in that bill are still on the negotiation table.
Democrats in Congress have repeatedly stated that the tax increases in the House-passed bill will not become law. They also suggested their own tax increases that would apply wash sales rules to digital asset sales. They also want to prohibit deferring taxes on real estate swaps.
Republicans rejected their proposals.
Currently, talks are focused on non-tax issues. However, some House Republicans have referred to the tax increases in their bill as “spending cuts” because they see tax credits (refundable or not) as a form of federal spending. They contend that repealing these tax breaks would cut spending. In other words, spending cuts increase taxes. Interesting.
House Speaker Kevin McCarthy (R-Cal.) wants Congress to pass a debt ceiling bill next week. To do that, debt ceiling negotiations must hit warp speed in reaching an agreement because the parties are very far apart on lots of issues.
Legislative Outlook: It is highly likely that lawmakers and President Biden will agree on increasing the debt limit before the federal government defaults on its debt. However, that agreement may be short-term, which means the argument over increasing the debt ceiling will start all over again as we near the next deadline.
Defending Tax Breaks:
Lawmakers in both political parties took issue with members in the other party who want to repeal tax cuts they support.
The Senate Banking Committee held a hearing on May 17th titled “The Rich Get Richer, Deficits Get Bigger: How Tax Cuts for the Wealthy and Corporations Drive the National Debt.”
At this hearing, Senate Budget Chairman Sheldon Whitehouse (D-RI) said that tax cuts enacted under Presidents George W. Bush and Donald Trump have led to lots of red ink.
“Together, the Bush and Trump tax cuts have added $10 trillion to the debt, and they account for 57% of the increase in debt-to-GDP ratio since 2001,” he said.
At the insistence of Senator Whitehouse, the nonpartisan Congressional Budget Office issued a report saying that extending tax breaks in the 2017 tax reform bill would add $3.5 trillion to the deficit over the next ten years.
Republicans countered with a familiar refrain: Spending increases led to higher deficits, not tax cuts.
Senator Chuck Grassley (R-Iowa), who is the committee’s ranking member:
'The last time the federal budget was balanced in 2001, revenues were 18.9 percent of our gross domestic product. Last year, federal revenues amounted to 19.6 percent of GDP. Yet, we still managed to run a deficit of $1.4 trillion. That’s because even though tax collections have increased by $2.9 trillion since 2001, spending has grown by $4.4 trillion.'
Senate Finance Chairman Ron Wyden (D-Ore.) took issue with House Republicans attempt to get rid of several tax incentives in the Inflation Reduction Act (which is mentioned above).
“Since Democrats passed the IRA, there has been an explosion of new investment announced in clean energy projects all over the country. Wind energy, solar, electric vehicle manufacturing, energy storage,” he said at a May 18th hearing titled “Tax Incentives in the Inflation Reduction Act: Jobs and Investment in Energy Communities.”
Senator Mike Crapo (R-Utah) responded by saying that the cost for the Inflation Reduction Act has greatly increased, which adds more red ink to federal coffers.
“The IRA’s costs keep rocketing upwards by hundreds of billions of dollars. For example, Penn Wharton’s Budget Model originally estimated the climate and energy provisions in the IRA would cost nearly $385 billion. After new implementation details emerged, Penn Wharton revised the model, estimating the climate and energy provisions would actually cost over $1 trillion,” Crapo said.
From Penn Wharton:
'The 2022 Inflation Reduction Act (IRA) contained a range of climate and energy provisions that PWBM previously estimated to cost $384.9 billion over 10 years (FY2022 – 2031). Since that estimate, newer implementation details have emerged, and the fiscal year calendar has moved to start at FY2023. Our updated estimate for over 10 years (FY2023 – 2032) for just the climate and energy provisions is now $1,045 billion.'
Legislative Outlook: No lawmaker is looking to reform the Bush tax cuts (enacted in 2001 and 2003). It is also highly unlikely that tax incentives in the Inflation Reduction Act will be repealed (or retooled) because of a divided Congress. President Biden has also stated that he will not sign legislation that restricts these tax incentives.
Ticket to Ride?
After years of discussion, the US-Chile tax treaty is moving toward a vote on the Senate floor. Probably.
This is a tax bill, which means that it could include other tax provisions, like R&D expensing, expanding the 163 interest deduction and allowing for 100% bonus depreciation.
Will these provisions be added? Unlikely. Certain Senators insist that expanding the Child Tax Credit must accompany these tax provisions. Other Senators oppose expanding the Child Tax Credit to what it was when the American Rescue Plan was enacted.
Senate leaders are unlikely to include controversial tax measures in the tax treaty because it would likely torpedoe the trade deal.
Legislative Outlook: The tax treaty will likely pass – as long as the other provisions aren’t added.
Sidenote: A bipartisan piece of legislation has been introduced that would increase the 1099-K reporting requirements to $10,000 for the 2023 tax year. Currently, the requirement to issue 1009-Ks is $600. If this bill gains momentum it could be another tax vehicle for modifying the aforementioned tax incentives.
IRS Tax Preparer:
The Inflation Reduction Act required the IRS to study the feasibility of creating a direct e-file tax return system.
Democrats appear to love this idea.
‘Between tricking Americans into accepting unnecessary charges and lobbying relentlessly against reforms that would simplify tax filing, the big tax software companies are some of the world’s most sophisticated pickpockets.’
Republicans not so much.
‘Having the IRS act as tax preparer, tax collector and tax enforcer raises significant conflicts of interest, would incur billions of dollars in development costs, and would expose exponentially more taxpayer information to misuse or abuse, providing hackers and identity thieves yet another IRS outlet to exploit.’
Legislative Outlook: The IRS is expected to offer tax return preparation in 2024. Congress could pass legislation prohibiting this, but that is unlikely. Congress is currently divided, so passing legislation that stops the IRS from doing anything seems like a longshot.
Pardon if this recap missed a monumental moment, but we can recap it next time!