Capitol Hill Recap: They’re Back!

By Jay Heflin
September 7, 2023

Lawmakers have been on recess since July 28th. They return to Washington this week and will continue to do so next week; upon arrival their primary focus will likely be on spending and not taxes.

What Went Down:

  • Senators returned to Washington on Tuesday. House members will return next week. As soon as everyone arrives, lawmakers will have roughly two weeks to figure out how to fund the federal government beyond September 30th or suffer a partial shutdown.
  • Several tax insiders – including key lawmakers and staff who craft tax legislation as well as top tax lobbyists – are not optimistic that Congress will pass a large tax bill this year. However, smaller pieces of tax legislation could pass.
  • House Republican tax-writers traveled to Europe to pooh-pooh OECD tax plans.
  • The Senate Finance Committee is likely to vet the next lead for the IRS chief counsel’s office. Vetting the IRS could also be on the to-do list.

Let’s Get To It:

High Anxiety:

A majority of House and Senate lawmakers must agree on funding the federal government beyond September 30th, or the government will suffer a partial shutdown on October 1st.

A ‘partial shutdown’ means that only “essential” government employees show up for work during a shutdown, largely without pay until the government reopens.

IRS operations are severely limited during a shutdown, but tax deadlines remain the same. This means taxpayers could mail forms to meet deadlines that arrive at IRS buildings void of many workers. This could result in another processing backlog.

How likely is a partial shutdown?

Based upon lawmakers’ comments, it appears that the House and Senate will not agree on spending levels, making a partial shutdown likely. This situation could be avoided if House Speaker Kevin McCarthy (R-Calif) holds a vote on legislation that agrees with spending levels passed by the Senate. He could also call for a vote on a “Continuing Resolution” that would temporarily extend current funding levels.

However, House passage of a Senate spending bill (or a Continuing Resolution) would require the support of House Democrats and likely anger far-right Republicans.

McCarthy is beholden to far-right members in his party because their support is how he became Speaker. Some on the far-right have threatened to remove McCarthy from the Speakership if he moves spending legislation they oppose. It is unclear if McCarthy will betray the far-right and hold a vote on spending legislation that could pass the House with Democratic support.

If McCarthy calls for a vote on spending legislation that the far-right supports, it is unlikely to pass the Senate and a partial shutdown of the federal government will likely ensue.

Legislative Outlook: If funding is not extended beyond September 30th, either through spending legislation or a Continuing Resolution, the federal government will suffer a partial shutdown. How long the shutdown will last is anyone’s guess.

By the way, funding the federal government is a core responsibility for lawmakers. Imagine hiring a person to answer the telephone at your office and instead of performing this basic task the person makes up excuses for why the phone should not be answered. This is what is about to happen on Capitol Hill. Lawmakers elected to fund the federal government are about to quibble over why it should not be funded.  

Low Expectations:

The current probability is low for Congress passing tax legislation this year that would include R&D expensing, expand the 163(j)-interest deduction, and up Bonus Deprecation to 100% (these measures are known as “The Big Three” among staffers). This intel is according to several sources.  However, there is one outlier.

A single, well-placed source told Eide Bailly that the chairmen who head the congressional tax-writing committees are working together to create legislation that would include The Big Three. Tax staffers who spoke with Eide Bailly did not confirm this information.

Based upon several meetings with lawmakers, tax staff, and lobbyists, the only way to pass tax legislation this year that includes The Big Three would be to pair them with an expansion of the Child Tax Credit – or some other tax provision aimed at helping families, like modifying the low-income housing tax credit.

If a tax bill containing The Big Three does not pass Congress this year, tax staffers believe the next opportunity for passage will be in 2025. This is the same year when the individual tax cuts from the 2017 tax reform bill expire. Renewing these provisions will be an expensive endeavor.

More on congressional passage of a tax bill containing The Big Three is here.

Despite the pessimistic outlook for passing a large tax bill, some expect smaller tax bills could pass Congress this year.

The list includes a treaty-like tax agreement with Taiwan, and/or tax legislation providing relief to people affected by recent natural disasters, like the fires in Maui or the hurricane affecting Florida, Georgia, and South Carolina. (This relief is expected to go beyond what the IRS has already announced.) There could also be a technical tax corrections bill for Secure 2.0. 

The Big Three are not expected to be added to any of these bills because they would threaten their passage.

Legislative Outlook: Legislation that would include R&D expensing, expand the 163(j)-interest deduction, and up Bonus Deprecation to 100% is currently not expected to pass this year. That could change, and passing such legislation would likely require bicameral, bipartisan support for providing tax relief to families. Tax legislation pertaining to Taiwan, disaster relief, or Secure 2.0 could pass Congress – assuming there is time to pass them. (Spending fights can eat-up a lot of time.)

Not On My Watch:

A handful of Republican members on the tax-writing House Ways and Means Committee traveled to Europe this week to explain to the OECD that their tax proposals will not pass Congress.

From the House Ways and Means Committee (Republican side):

During these meetings, Members made clear that the OECD’s proposed global tax deal would give foreign competitors like China an economic advantage because they would never fully comply with the agreement. Meanwhile, the United States would surrender over $120 billion of tax revenue over the next decade. Given the Biden Administration’s lack of constitutional authority to write U.S. tax laws, Members explained that Congress would not pass into law any OECD tax deal that permits foreign countries to impose unfair taxes on American workers and make the United States less competitive in the global economy.

Nuf said.

Legislative Outlook: If Republicans control at least one chamber of Congress or the White House, then enacting the OECD tax proposals appears unlikely.

Meet & Greet:

Senate Finance Chairman Ron Wyden (D-Ore.) reportedly met Tuesday with Marjorie Rollinson, who has been named to lead the IRS chief counsel’s office. 

Bloomberg ($):

Wyden told reporters Tuesday night that in his meting [sic] with Rollinson, they discussed the need for the IRS to go after tax cheats. Wyden said he didn’t know when a confirmation hearing may be, or whether staff has completed the vetting process.

Legislative Outlook: Senate approving this nomination is unclear.

Senate Finance Ranking Member Mike Crapo this week said that Congress might investigate the data that was destroyed by the IRS, Tax Notes ($) reports:

In response to Tax Notes reporting that taxpayers claiming the earned income tax credit for 2020 were negatively affected by the destruction, Crapo said, 'We’re going to go back and push again' for information on those impacts from the IRS. 'We’ve got to get the right data and right answers about who was harmed by this, and then there has to be some corrective action taken,' he said.

Legislative Outlook: A congressional fix could be hard to pass. Any legislation would have to pass the House and lawmakers in that chamber will likely use the bill to cut funding for the tax agency, which President Biden might not sign into law.

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

Adios amigos!

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