Lot’s of tax action on Capitol Hill that more than likely will amount to nothing if the federal government suffers a partial shutdown.
What Went Down:
- There appears to be a higher-than-normal chance that the federal government will suffer a partial shutdown and what it means for passing tax legislation.
- Congressional tax-writers respond to the international tax guidance released by the Organization for Economic Cooperation and Development (OECD).
- A House Ways and Means Subcommittee held a hearing on the OECD tax proposal.
- Media reports movement on attaching a Child Tax Credit provision to tax legislation.
- Lawmakers look into IRS visiting taxpayers.
Let’s Get To It:
Shutdown:
There appears to be a higher-than-normal chance that the federal government will suffer a partial shutdown in the new congressional year, which begins on October 1st. This is because lawmakers can’t agree on spending levels.
House GOP appropriators look like they’re in for a rude awakening.
The general consensus in the Capitol is that a government shutdown is likely at some point this fall.
Other reporters have told Eide Bailly the same thing.
The basics are that the House and Senate will likely approve different spending levels for agencies, and they will not be able to reconcile those differences. When this happens, the federal government can’t spend money and it shuts down (partially, essential stuff stays open).
The most likely time for a partial shutdown to occur would be October 1st. That is when the new congressional year begins. One way to avoid this mishap would be for lawmakers to agree to continue spending in the new congressional year at the levels they are today. This is called a “Continuing Resolution” or CR.
Passing a CR in the current Congress will require bipartisan support from both chambers. There are lawmakers in each chamber, and in both parties, that are expected to oppose a CR because they want spending levels to be different in the next congressional year.
How will this likely affect advancing tax policy through Congress?
Whether there is a partial shutdown of the federal government or lawmakers pass a CR, the problem is the same. Lawmakers will be hyper-focused on getting spending bills through Congress that align with their priorities. And sadly, while lawmakers say they can chew gum and walk at the same time, they can’t.
Between moving a tax bill or funding the federal government, they will choose funding because its politically more important than moving a tax bill.
Legislative Outlook: Passing tax legislation is wholly dependent on Congress first passing spending bills.
OECD:
Top, congressional tax-writers this week responded largely along party lines to the international tax guidance released by the Organization for Economic Cooperation and Development (OECD).
From Senate Finance Chairman Ron Wyden (D-Ore.):
There are concrete wins for American taxpayers and businesses in this announcement, particularly for companies involved in our clean energy sector that's booming as a result of the Inflation Reduction Act. It's a clear sign that the U.S. can shape this process in beneficial ways, and Republicans ought to give up their inflexible opposition to it or else American workers and businesses will lose out in the long run.
From House Ways and Means Chairman Jason Smith (R-Mo.):
Today’s ‘administrative guidance’ acknowledges what Republicans have warned for more than two years: the UTPR surtax is unworkable and unlawful.
On Monday, the OECD released guidance on the global tax agreement that 130 countries have agreed to follow. The guidance includes the following:
- Companies paying below 15% in taxes are required to “top up” their tax payments to 15%. However, the “top up” payment is only made if the parent company’s tax rate is 20% or lower. The U.S. corporate tax rate is 21%, which means the “top up” payment will not apply until 2026.
- Regarding tax credits, the guidance allows companies to take most credits without falling below the 15% line and having to pay more in tax.
It is unlikely that Congress will approve of the OECD tax, known as Pillar Two.
Republicans control the House and many of them have repeatedly stated that their chamber will not approve this tax.
Smith recently highlighted a Joint Committee on Taxation (JCT) report that showed the U.S. would lose revenue if the OECD tax was enacted. The loss is between $60 billion and $120 billion over a ten-year period, according to the JCT.
Chairman Smith recently introduced legislation that would retaliate against any country that adopts the Pillar Two tax.
Smith’s “Defending American Jobs and Investment Act” would create a reciprocal tax on foreign countries that adopt Pillar Two.
Other Republicans who sit on the House Ways and Means Committee introduced a separate bill. The “Unfair Tax Prevention Act” seeks to “discourage foreign countries from attacking U.S. jobs and tax revenues through the Organization for Economic Co-operation and Development’s (OECD) Pillar 2 so-called Under Taxed Profit Rule (UTPR) surtax,” according to the press release on the bill’s release.
Legislative outlook: The OECD effort and the Republican bills are not expected to become law in the current Congress.
Hearing on OECD Tax:
The House Ways and Means Subcommittee on Tax Policy held a hearing on July 19th on the OECD tax proposal.
The hearing pretty much allowed lawmakers to share their feelings about the tax deal.
Subcommittee Republicans largely groused that Congress should have been involved in sculpting the OECD tax situation.
“They [foreign countries] do not have the right to try and fund themselves with U.S. tax dollars no matter what the Treasury Department might think. Congress writes the rules. The Administration administers them,” said Committee Member Carol Miller (R-W.Va.).
Subcommittee Democrats mostly cheered that the OECD tax deal would ensure that big, rich taxpayers pay their fair share (which has never been defined).
“American workers and taxpayers have paid the price for a system that rewards large multinational corporations that do business in one country and park their profits in the country with the lowest tax rate they can find. Republicans’ desperate attempts to preserve this system is more of the same: sparing the largest, most profitable companies from paying their fair share while honest taxpayers are left with the bill,” said Committee Member Mike Thompson (D-Cal.).
There was a flash of bipartisanship when it came to the OECD needing to recognize that U.S. tax credits (like for R&D) should not trigger the top-up tax.
Rep. Miller asked Michael Plowgian, Treasury Department’s Deputy Assistant Secretary for International Tax Affairs who testified before the subcommittee, about actions the administration was taking to ensure that U.S. tax credits don’t enlarge tax bills.
Plowgian’s reply:
It’s [the concern that U.S. tax credits will increase taxes] a shared and consistent priority across the administration that have participated in these negotiations to protect U.S. interests, to protect U.S. businesses and to protect American workers.
In Washington parlance, this is called a “non-answer answer.” This happens when the answer sounds like it is responding to a question, but the actual words being used don’t amount to an answer.
For example:
Question: Mr. lawmaker, what are you going to do to reduce inflation?
Answer: I feel your pain.
Legislative Outlook: Lawmakers must approve the OECD tax deal for it to be a reality stateside. That doesn’t look likely to happen in a divided Congress.
Child Tax Credit:
There is reportedly movement on attaching a Child Tax Credit provision to tax legislation.
Two Capitol Hill publications reported this week that lawmakers are having discussions on how to affix the Child Tax Credit to tax legislation that would include The Big Three (R&D expensing, expand the 163(j) interest deduction, and increase Bonus Depreciation).
Last year’s attempt to marry these provisions ended in divorce. This year is apparently different, according to the news organizations.
[I]f you’ve been watching closely, the tone of the conversations around the tax items is slowly but surely shifting.
A bipartisan group of House members that’s played a role in brokering recent legislative deals plans to work on a proposal to beef up an existing tax credit for families with young children.
Problem Solvers Caucus co-chair Brian Fitzpatrick, R-Pa., said the group is planning to launch a subcommittee to work on issues associated with the child tax credit, which currently provides up to $2,000 per child.
If true, a tax bill could pass Congress this year – like soon(ish).
However, don’t get your hopes up.
First off, no matter what the amount the Tax Credit becomes, it will not appease the far left (who will argue the credit is too small) or the far right (who will argue the credit is too big).
Other hurdles that will also be hard to clear:
- Hurdle One: Republicans are expected to want a work requirement for families who receive the credit. Democrats oppose this idea.
- Hurdle Two: Democrats are expected to want the credit to be 100% refundable. Republicans oppose this idea.
Legislative Outlook: CTC issues will take time to vet. There are also problems with the SALT cap. Repealing or increasing it does not have a majority of support in either chamber.
And right now, as reported above, lawmakers are more focused on passing spending bills to avoid a partial shutdown of the federal government. A tax bill is a lower-tiered priority, as was also reported in last week’s Recap.
Knock, Knock:
Republican members on the Senate Finance Committee contacted IRS Commissioner Daniel Werfel via letter on July 18th. They asked about IRS agents making unannounced visits to homes and offices, “which were depicted as intimidating to the taxpayers in question,” the letter states.
The letter includes three examples of such shenanigans:
On March 9, 2023, journalist Matt Taibbi received an unannounced home visit from an IRS agent on the same day he testified in front of the House Select Subcommittee on the Weaponization of the Federal Government.
On April 25, 2023, a taxpayer in Marion, Ohio, received an unannounced home visit from an IRS Criminal Division agent identifying himself with the alias “Bill Haus.” The agent entered the taxpayer’s home under apparent pretenses, stating a desire to discuss one matter, before revealing he actually sought information about another. When this agent was asked to leave, he said he was entitled to enter homes because of his position at the IRS and made a statement about the extreme financial consequences of not complying with an IRS request.
On June 14, 2023, Montana Attorney General Austin Knudsen stated that 20 heavily armed IRS agents entered Highwood Creek Outfitters in Great Falls, Montana, and seized dozens of boxes of ATF Forms 4473, the background check form containing information on gun purchasers. Form 4473 is not a financial document and is of questionable relevance to the IRS.
These developments come as the IRS is trying to show that the extra money given to it by Congress will not become a legislative regret for lawmakers.
To be honest, this is not the first time that stories have surfaced about surprise IRS visits.
Back in the day when I was a tax reporter, a source told me that an IRS agent showed up unannounced at a home carrying his personal sidearm and told the homeowner that he was with the agency’s criminal division (he wasn't). The homeowner ran a business within the premise and the agent was there to “audit” payroll tax payments.
The agent showed up during work hours. The business being operated in the home was a daycare. You know, kids. Little kids. And when those little kids saw the gun, they got scared. Crying, screaming scared.
The proprietor had her hands full. She wanted to produce her payroll documents to the IRS agent ASAP so he and his gun would exit her home while also trying to calm a room full of crying, screaming little kids.
The IRS agent had created a fraught situation, to say the least.
The event happened years before I was a reporter, and when I tried to confirm it with the IRS, no one would go on the record saying it happened.
Legislative Outlook: It is highly unlikely that legislation clamping down on IRS agents’ actions will pass Congress. A Republican-controlled House is unlikely to agree with a Democratic-controlled Senate on how to handle this issue.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!
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