Capitol Hill Recap: Spending, Not Taxes

Congressional leaders and the White House reached an agreement to extend funding for certain Federal agencies before those budgets go kaput on Friday. The tax bill was not included in the legislation.

What Went Down:

• Spending bill heads for passage without tax legislation.
• Treasury Secretary blasts ERC claims.
• House approves several bills to jumpstart national conversation on energy.

Let’s Get To It:

Spending Fight

Congressional leaders and the White House have agreed to extend Federal funding for certain agencies. The agreement comes days before funding for these agencies would expire.

There was speculation that this spending bill would be a vehicle to enact tax legislation that overwhelmingly passed the House but has been bogged down in the Senate since February 1^st. That rumor did not turn out to be true.

The tax legislation that overwhelmingly passed the House on January 31^st and was approved by a 357 – 70 vote includes the following provisions:

• R&D expensing (domestic)
• Expand the 163(j)-interest deduction from EBIT to EBITDA
• Up Bonus Depreciation to 100%
• Increase the amount a taxpayer may expense under section 179
• Enlarge the Child Tax Credit
• Restrict the Employee Retention Tax Credit (ERTC) by:
  • Penalizing ERTC promoters for “aiding and abetting understatement of a tax liability,” according to description of proposal.
  • Requiring that no credit or refund of the ERTC shall be allowed or made after January 31, 2024, unless the claim for the refund or credit is filed on or before that date.
• Increase the threshold for information reporting of certain payments, from $600 to $1,000, in a calendar year.

The primary reason for the bill stalling in the Senate is because passage will require bipartisan support and certain Senators have yet to support it.

These Senators have the following issues with the House-passed bill (this is not an inclusive list):

• The Child Tax Credit is too large.
• The revenue projection for restricting the Employee Retention Tax Credit is not accurate and should be struck from the bill.
• The bill should not provide retroactive tax relief to businesses.

To move the bill forward, Senate Majority Leader Chuck Schumer (D-N.Y.) this week added the House-passed tax bill to the legislative calendar. This means that the legislation could receive Senate floor vote.  The bill currently does not have the votes to pass the chamber, according to what certain Senators have told the press.

However, lawmakers sometimes say they oppose a piece of legislation but wind up supporting it. There have been numerous examples where lawmakers were initially against a bill but then supported its passage. This scenario could be true if the Senate votes on the House-passed tax bill.

Legislative Outlook: It is unclear when (or if) the Senate will vote on the House-passed tax bill. The chamber is scheduled to be in recess for the next two weeks (March 25^th thru April 8^th). It appears the earliest a vote could occur on the bill will be when lawmakers return from their recess.

Senate amendments could also kill the bill.

If the Senate modifies the Child Tax Credit, then the House must approve those changes. House leaders have said that narrowing the benefits of the Child Tax Credit will not pass the House.

There is talk on Capitol Hill that time is growing short for the Senate to pass this bill, but no concrete deadline has been announced.

Yellen about ERC

Treasury Secretary Janet Yellen testified this week before the Senate Finance Committee about President Joe Biden’s budget proposal for the next fiscal year. More information on the president’s budget can be found here.

The primary message from Yellen was that Congress should enact the president’s proposed tax increases on corporations and wealthier taxpayers. She also gave a shout-out to the IRS’ modernization effort, that was funded, in part, by the Inflation Reduction Act.

She was also asked about the administration’s position on the Employee Retention Tax Credit. Her response was rather blunt.

“The administration has serious concerns about improper ERC claims,” she said. “We’re seeing claims made by entities that did not exist and did not have employees during the period of eligibility.”

She added that the IRS is on the hunt for fraudulent ERC claims.

“Right now, the IRS is actually auditing and conducting criminal investigations that are related to the false ERC claims,” she said.

She was also quizzed on whether companies can claim the 45X Advanced Manufacturing Production Tax Credit if they import parts from overseas and only assemble the product in the U.S. She said that protections should exist to stop this from happening.

“We’re trying to put into effect rules that there is anti-abuse provisions that…essentially no production in the United States that I think would capture that,” she said.

Yellen also strongly alluded that tax incentives for fossil fuels could be coming to an end in the future. 

“There have been tax preferences for oil and gas and coal that we believe destroy markets by encouraging more investment in fossil fuels than would occur under a neutral system. There are a set of proposals that are intended to level the playing field to reduce those advantages that the fossil fuel sector has enjoyed,” she said.

Biden’s budget proposals for eliminating fossil fuel tax preferences would raise over $45 billion in the next ten years, according to the Treasury Department.

Legislative outlook: Budgets do not become law. But measures in them can be included in legislation that can become law. Currently, Congress is politically divided. This means that it is highly unlikely that tax-increase provisions in Biden’s budget will become law in the current Congress. 

Energizing Energy

The House this week debated a non-binding piece of legislation that would express a “sense of Congress” that enacting a carbon tax would be “detrimental to the United States economy.”

This is a messaging bill, and it will not become law. The debate over the measure was strictly partisan.

The non-binding measure was part of an effort in the House to revive the energy debate in Congress. Lawmakers voted on six pieces of legislation aimed at the energy sector. The only tax-related measure was the one mentioned above.

Legislative outlook: The Senate is not expected to pass any of these bills; therefore, they will not become law.

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

Adios amigos!