Capitol Hill Recap: Partial Shutdown of Federal Government will Hamper IRS

The IRS is expected to be negatively affected if Federal government suffers a partial shutdown.

What Went Down:

• The IRS will be negatively affected if the federal government partially shuts down; how much is unclear.
• A partial shutdown of the federal government is not good for passing the Big Three.
• Making tax cuts permanent.
• Payroll tax debate.
• House tax committee advances HSA legislation.

Let’s Get To It:

Shutdown Countdown:

If press reports are accurate, the federal government will suffer a partial shutdown at midnight on September 30th because Congress cannot agree on how to extend funding beyond this date.

A partial shutdown means that “non-essential” government employees do not do their jobs while “essential” workers show up for work.

Determining the difference between “non-essential” and “essential” is more art than science. Basically, government employees who protect individuals or property are considered “essential.” So, if a federal government employee carries a gun, then they are unlikely to be furloughed. They will also not be paid until the shutdown ends.

When it comes to the IRS, employees who deal with tax forms or interact with the public normally do not carry a gun. In past shutdowns, these people did not work.

However, it is not clear what will happen if a partial shutdown occurs, according to Marjorie Rollinson, who testified before the Senate Finance Committee on September 28th to become the next IRS Chief Counsel.

“Choices will have to be made on what work will get done while the government is shutdown,” Rollinson said.

Her statement wasn’t a full-throated threat that a government shutdown would wreak havoc on the IRS, which some lawmakers have warned would happen if a shutdown occurs.

Still, the IRS will be negatively affected by a shutdown. The severity of that impact will depend on the number of workers furloughed and how long the shutdown lasts.

The IRS released its shutdown plan on September 28^th. Roughly 34% of workers would stay on the job.

The agency’s shutdown’s plan is here.

Regarding Rollinson’s confirmation, the Senate Finance Committee did not vote on it during the hearing. A vote will likely occur behind closed doors.

Legislative Outlook: If the Federal government partially shuts down, the IRS will be negatively affected.

Eating the Clock:

Efforts to provide business tax relief will be hamstrung if the Federal government suffers a partial shutdown.

During a shutdown (be it partial or full), lawmakers focus on re-opening the government and efforts to pass legislation are tabled until government employees return to work.

While it has always been considered a longshot that Congress would pass a tax bill by year-end, a partial shutdown only increases the odds of no activity.

At stake are three provisions: R&D expensing, expanding the 163(j)-interest deduction and upping Bonus Depreciation to 100%. These measures are called the “Big Three” by tax staffers because the effort to enact them has lasted nearly two years.

Putting a possible shutdown aside, enacting the Big Three has been a longshot because support for them dwindles if an expanded Child Tax Credit (CTC) is not included in the bill. Support also evaporates if the CTC provision is added. In both scenarios, the level of support drops to the point where passage from both chambers would be impossible.

Adding a shutdown into the mix means that lawmakers will spend their time talking about reopening the Federal government instead of advancing tax policy.

Legislative Outlook: Eide Bailly has learned that the leading tax writers in Congress are working to get bipartisan, bicameral support for a SALT cap and an expanded CTC. The partisan disagreements over these provisions have been consistent for roughly two years. If an agreement is reached, it will likely not be made public until the shutdown is over.

Permanent v. Temporary:

Rep. Paul Ryan (R-Wis.) was House Speaker when Congress passed the 2017 tax reform bill, the Tax Cuts and Jobs Act (TCJA). He told an audience at the Brookings Institution this week why they made corporate tax relief permanent and individual tax provisions temporary.

“We would make permanent that which we thought – for economic reasons, certainty reasons and political reasons – needed to be made permanent – the corporate rate, the territorial system,” he said. “And we made temporary that which we thought had a better chance of withstanding extension under any political arrangement in the future.”

Translation: Both political parties would be more likely to support extending individual tax breaks than they would extending corporate tax measures.

Let’s hope Ryan is right. The individual TCJA tax measures expire at the end of 2025. Extending them will be mind-blowingly expensive.

The cost for extending certain TCJA individual provisions (in billions) over ten years, according to a think tank report:

• Extend the 2017 TCJA’s changes to individual income tax provisions 10, 12, 22, 24, 32, 35, and 37 percent income tax rate brackets −$1,810 
• Modification of Child Tax Credit (CTC): $2,000 not indexed; refundable up to $1,400; $500 other dependents not indexed; phase outs $200,000/$400,000 not indexed −$604  (This not the CTC that Dems want)
• Increase of the individual alternative minimum tax (AMT) exemption amounts and phase-out thresholds −$1,088 
• Modification of standard deduction ($12,000 for singles, $24,000 for married filing jointly, $18,000 for head of household) −$1,036
• Qualified business income deduction (i.e., 199A) −$548
• Election to invest capital gains in an opportunity zone −$67
• Increase of the estate, gift, and good and services (GST) tax exemption amount −$127 

Maintain certain business tax provisions altered by the 2017 TCJA:

• Additional first-year depreciation with respect to qualified property −$325 
• Deduction percentages for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) −$111

Total cost: $5.716 trillion over ten years. Big Three (R&D, 163(j), Bonus) not included.

There is growing consensus in DC that if TCJA tax provisions are extended they will happen one-year at a time.

Legislative Outlook: Lawmakers are not expected to deal with these tax measures until 2025. It will be a huge undertaking when it happens.

Focus on Payroll Taxes:

The Senate Budget Committee this week held a hearing on shoring-up Medicare funding. The focus of the hearing was embedded in its title: “Medicare Forever: Protecting Seniors by Making the Wealthy Pay Their Fair Share.”

Medicare is largely funded through the payroll tax. Witnesses who appeared before the panel provided suggestions on how to boost that funding.

Their suggestions included:

• Requiring all owners of pass-through entities to pay the net investment income tax and Self-Employed Contributions Act taxes;
• Providing IRS funding that would be used to investigate payroll tax cheats, also provide funds to teach IRS employees how to track payroll tax avoidance;
• Increasing the payroll tax for all taxpayers who should be paying it.

During the hearing, the discussion was mostly focused on upping revenue to cover Medicare costs. There was little said about cutting benefits.

Legislative Outlook: Congress is politically divided, with Republicans controlling the House and Senate controlled by Democrats. Modifying payroll taxes will be extremely hard in the current Congress because of this divide. Also, tax legislation starts in the House, which means Senate talk on taxes doesn’t mean much unless the House supports it.

HSA markup:

The House Ways and Means Committee this week marked up two pieces of legislation dealing with Health Savings Accounts (HSA).

The Joint Committee on Taxation, which is charged with providing bill details, offered the following particulars on the bills:

• The “HSA Modernization Act of 2023” (H.R. 5687) is here.
• The “Bipartisan HSA Improvement Act Of 2023” (H.R. 5688) is here.

Based upon the comments made by lawmakers during the markup, it appears that Democrats do not support these pieces of legislation. Many of them claimed that HSAs are used as tax shelters and not as a savings vehicle to pay for medical expenses.

Legislative Outlook: These bills can pass the House without Democrat support, but they won’t pass the Democratically-controlled Senate.

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

Adios amigos!