May 24, 2023
Washington leaders are inconsistent when it comes to including tax increases in debt ceiling legislation.
What Went Down:
Let’s Get To It:
Debt Ceiling Debate:
State of play: This article was posted on the blog when Washington leaders had made little to no progress on addressing the debt ceiling to avoid a default. However, progress could occur at any moment, even over the Memorial Day weekend.
The lead negotiators on the debt ceiling have made some confusing comments/moves when it comes to including tax increases in a debt ceiling bill.
President Joe Biden this week said that tax increases should be a part of debt ceiling discussions.
“I think we should be looking at tax loopholes and making sure the wealthy pay their fair share. I think revenue matters...,” Biden told reporters on May 22nd.
House Republicans appeared to be on the same page with Biden. Their bill, the Limit, Save, Grow Act of 2023, increases taxes by repealing or shrinking several tax breaks included in the Inflation Reduction Act. It passed the House because Republicans supported it.
Now, however, House Republicans no longer appear to support tax increases being included in a debt limit bill.
House Majority Leader Steven Scalise (R-La.) told reporters on May 23rd that his party would not accept tax increases being included in debt ceiling negotiations.
“The President is actually talking about more tax hikes,” Scalise said. “We made it very clear from the beginning: We’re not going to raise taxes.”
President Biden also doesn't want to reverse tax cuts in the Inflation Reduction Act, according to Bloomberg.
The White House has said Biden would flatly reject a proposal that imposes work requirements on federal health care programs, or any effort to repeal the president’s signature Inflation Reduction Act legislation.
Biden supports tax increases on corporations and individuals earning more than $400,000 a year.
More on this issue is here.
Legislative Outlook: It is highly likely that Congress will pass a debt ceiling bill and avoid a default. Currently, it appears less likely that this bill will include tax increases.
Tax Bill in the Works:
House Ways and Means Committee Republicans are readying a tax bill that could be released shortly after lawmakers put the debt ceiling debate to bed.
House Republicans plan to introduce an “economic package” that would allow for R&D expensing, expand the 163(j) interest deduction (from EBIT to EBITDA), and up Bonus Depreciation to 100%, among other measures. These tax provisions have bipartisan, bicameral support.
The bill might also include an extension of the Child Tax Credit that was included in the 2017 tax reform bill. Certain lawmakers will only support modifications to the aforementioned business tax breaks if the legislation also extends the Child Tax Credit. (An extension of the 2017 provision is not what they want. They support extending the provision in the American Rescue Plan – or something close to it).
More on how the Child Tax Credit could impact the impending tax bill is here.
Legislative Outlook: It is unclear if this bill will see the light of day.
The released of this bill is based on lawmakers completing work on the debt ceiling. Many expect that the debt ceiling must be addressed by June 1st or the federal government will default on its debt. That is not exactly true.
Treasury Secretary Janet Yellen told lawmakers that the federal government could default on its debt as soon as June 1 – Not on June 1.
Federal coffers could continue to pay federal government bills into June. If bills can be covered until June 15th, more money will be available.
June 15th is when estimated tax payments are due. Some D.C. budget wonks estimate that the incoming revenue will keep federal coffers partially filled until mid-July or early August. If true, the debt ceiling debate could be postponed until mid-summer.
If the debt ceiling debate is postponed, does that mean the House Republican tax bill gets shelved?
Also, lawmakers usually go on a month-long recess in August. When they return in September, they must debate funding levels for the federal government beyond September 30th. If they fail to reach an agreement on funding, the federal government will suffer a partial shutdown.
Conceivably, lawmakers could pass debt ceiling legislation in July, go on recess for the entire month of August, and return to the Capitol to fight about federal spending levels until September 30th.
This timeline does not leave much space for lawmakers to introduce a tax bill, hold hearings on its provisions, amend those provisions, and pass it through both chambers.
Speaker Kevin McCarthy (R-Calif.) has called for the House to return to “regular order." Putting a bill through the committee process (as described above) is regular order. It's very time-consuming.
Europe or Bust:
Assuming Washington reaches an agreement on the debt ceiling debate, Republicans on the House Ways and Means Committee are expected to travel to Europe during the Memorial Day Recess to vent their frustrations about the undertaxed profits rule in the OECD’s global tax deal.
Legislation spelling-out their position on this tax has been released. It is here.
Republicans on the House Ways and Means Committee explain their bill:
The bill creates a reciprocal tax applicable to any foreign country that imposes unfair taxes on U.S. businesses and workers under the Organization for Economic Co-operation and Development (OECD)’s global tax deal.
The undertaxed profits rule (UTPR) requires multinational companies to pay at least a 15% minimum tax rate. That could be problematic for U.S.-based multinationals that take advantage of domestic tax breaks, according to Bloomberg:
US companies could be subject to the UTPR on their US income if they take advantage of incentives like tax credits for research and development that bring their tax rate below 15%. Under the agreed rules, other countries would then be able to apply extra tax to those companies’ low-taxed income to bring their rate back up.
Legislative Outlook: The House would likely pass this bill, but it will not pass the Democratically controlled Senate. President Biden would also likely not sign it into law.
Head tax-writers on the House Ways and Means Committee and the Senate Finance Committee sent a May 23rd letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel that proposed technical changes to the Secure 2.0 retirement bill signed into law late last year.
“We are writing as the Chairs and Ranking Members of the Committees of jurisdiction to ensure that Congressional intent is carried out with respect to several provisions of recently enacted retirement legislation,” the letter states.
The letter is not accessible online. The corrections it proposes are below:
Section 102 of SECURE 2.0 increases the credit for small employer pension plan startup costs ('startup credit'), in part by allowing eligible employers a credit for a portion of employer contributions made to the plan. The provision could be read to subject the additional credit for employer contributions to the dollar limit that otherwise applies to the startup credit. However, Congress intended the new credit for employer contributions to be in addition to the startup credit otherwise available to the employer.
Section 107 of SECURE 2.0 increases the age at which required minimum distributions from a retirement plan are required to begin. Specifically, it changes the age on which the required beginning date for required minimum distributions is based (the ‘applicable age’). Congress intended to increase the applicable age from age 72 to age 73, for individuals who turn 72 after December 31, 2022 and who turn 73 before January 1, 2033, and to increase the applicable age from age 73 to age 75 for individuals who turn 73 after December 31, 2032.
However, with respect to the increase from age 73 to age 75, the provision could be read to apply such increase to individuals who turn 74 (rather than 73) after December 31, 2032, which is inconsistent with Congressional intent.
Section 601 of SECURE 2.0 permits SIMPLE IRA plans and SEP plans to include a Roth IRA. Section 601 could be read to require contributions to a SIMPLE IRA or SEP plan to be included in determining whether or not an individual has exceeded the contribution limit that applies to contributions to a Roth IRA. However, Congress intended to retain the result under the law as it existed before SECURE 2.0 was enacted regarding SIMPLE IRA and SEP contributions (taking into account that section 601 permits SIMPLE IRA and SEP plans to include a Roth IRA). Thus, Congress intended that no contributions to a SIMPLE IRA or SEP plan (including Roth contributions) be taken into account for purposes of the otherwise applicable Roth IRA contribution limit.
Section 603 of SECURE 2.0 requires catch-up contributions under a retirement plan to be made on a Roth basis, for taxable years beginning after 2023, if the participant’s wages from the employer sponsoring the plan exceeded $145,000 for the preceding calendar year. A conforming change to section 603 might be read by some to disallow catch-up contributions (whether pre-tax or Roth) beginning in 2024. Congress did not intend to disallow catch-up contributions nor to modify how the catch-up contribution rules apply to employees who participate in plans of unrelated employers. Rather, Congress’s intent was to require catch-up contributions for participants whose wages from the employer sponsoring the plan exceeded $145,000 for the preceding year to be made on a Roth basis and to permit other participants to make catch-up contributions on either a pre-tax or a Roth basis. This Congressional intent was noted in the Committee Report to accompany S. 4808, the Enhancing American Retirement Now Act (S. Rept. 117-142).
Congressional tax leaders plan to introduce legislation that would allow these corrections to become law. It is not clear when this bill will be introduced or when Congress would act on it.
Legislative Outlook: Given the bicameral, bipartisan support for these corrections, passage seems likely – assuming both chambers can find time to pass it. President Biden would likely sign it into law.
Pardon if this recap missed a monumental moment, but we can recap it next time!
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