Capitol Hill Recap: Looking for Common Ground on Taxes

Is bipartisanship back in style on Capitol Hill?

It sounded a bit that way last week, when House Ways and Means Committee Chairman Jason Smith offered kind words for his Democratic counterparts, especially Sen. Ron Wyden, D-Ore., and promised to work on bipartisan legislation in the remainder of this Congressional term.

“I want to legislate,” Smith said, while speaking at a D.C. event sponsored by the Tax Council Policy Institute. “I don’t want to just like pass things just to pass things. I want them to become law.”

Smith, who hasn’t been known for a conciliatory approach during his tenure as committee chairman, has expressed a desire to pass a bipartisan bill on tax and cryptocurrencies. He also helped pass a series of bipartisan tax administrative reforms through the committee and onto the House floor, where they were approved by an overwhelming vote. (As well as a bill to tweak Tax Court rules passed this week.)

Everyone supports bipartisanship in theory. But in practice it becomes difficult as vague notions become real policies. While the chances that these two areas produce real laws seems promising, there are potential pitfalls.

Take the tax administration bill. While the House passed their version, the Senate Finance Committee is considering a larger slate of items, endorsed by the National Taxpayer Advocate and other taxpayer groups, backed by Wyden and Committee Chairman Mike Crapo. Aside from many of the issues in the House package, the Wyden-Crapo bill would address concerns about taxes for Americans living abroad, increase taxpayer rights, and tweak some of the rules on qualifying tax preparers.

It would also aim to boost services towards low-income taxpayers who face difficulties with filings or seeking to resolve issues with the IRS. There’s broad support in this area—but this is happening as many Democrats challenge the Trump administration and Republicans in Congress to bring back the Direct File program, which allowed taxpayers to file returns directly to the IRS, free of charge. The program was created as a pilot under President Biden, but it provoked a backlash among Republicans and was terminated by the agency under Trump.

On Monday, Wyden and Sen. Elizabeth Warren, D-Mass., and Sen. Angus King, I-Maine, released a letter to the Government Accountability Office, asking it to investigate the IRS “Free File” program, which allows taxpayers to file, free of charge, with third-party providers. Their letter claims the providers have used the program to mislead taxpayers into paying when it is not necessary.

These issues are separate but related, and could threaten to become intermingled if a bill gets closer to enactment.

On cryptocurrencies, there is a general bipartisan consensus that the tax code needs to be updated to deal with these new digital assets. Rep. Max Miller, R-Ohio, and Rep. Steven Horsford, D-N.V., released a bill addressing many of these concerns earlier this year.

But the push for new rules have also raised suspicions among some lawmakers, especially Sen. Warren and other Democrats, that crypto lobbyists are really aiming for special treatment, not just updated to ensure fairness. This is another potential sticking point as the legislation moves forward.

The lack of another purely partisan tax bill working through Congress also has given lawmakers more time to look for areas of common ground. Some hope remains for another tax bill through the partisan reconciliation process, however, and if it happens that could take focus away from bipartisan measures, while also increasing rancor between the parties.

Recent Tax Pieces:

The I.R.S. Thought It Could Fight Trump’s Lawsuit, but It Struck a Deal Anyway – Andrew Duehren, The New York Times:

I.R.S. officials prepared a 25-page memorandum outlining what they saw as flaws in Mr. Trump’s suit and advising the Justice Department to move to dismiss it, according to two people familiar with the memo. That memo was provided to Treasury officials in April, and it is unclear if they passed it along to its intended recipients at the Justice Department, according to the people, who spoke anonymously to discuss internal government deliberations.

No lawyers from the Justice Department ever appeared in court to respond to the suit or disputed any of Mr. Trump’s claims, which demanded at least $10 billion from the I.R.S. for not doing enough to prevent the leak of his tax information. The Justice Department instead made a highly unusual deal in the case. In exchange for Mr. Trump’s dropping the suit, the Trump administration created the $1.776 billion “anti-weaponization” fund for people who say they were wrongly targeted by the federal government.

Trump Team Mulls Longer Gas Tax Holiday With Phased-In Return – Jennifer A. Dlouhy and Ari Natter, Bloomberg Tax ($):

A major concern is that any abrupt end of the tax holiday could prompt a rush of buying by consumers looking to take advantage of the discount before it disappears, the official said. Administration officials are considering language that gradually restores the taxes on gasoline and diesel, potentially over more than a year, to avoid sparking supply shortages.

President Donald Trump has called for suspending the tax “until it’s appropriate.” Lawmakers on Capitol Hill have advanced legislation that would lift both the 18.4-cent-per-gallon levy on gasoline as well as the 24.4-cent-per-gallon charge on diesel.

One plan offered by Senator Josh Hawley, a Missouri Republican, would limit the relief to 90 days — though it would give the president the option of extending the tax holiday. A separate proposal being advanced by New Jersey Republican Representative Jeff Van Drew would halt the fees for 18 months before gradually phasing them back in.

Billions in Covid-Era Tax Refunds Are at Stake as US Appeals – David Schultz, Bloomberg Tax ($):

The central conflict began in late 2019, when Congress tweaked Section 7508A of the federal tax code to automatically postpone tax deadlines during federally declared disasters. Just several months later, President Donald Trump declared an unprecedented nationwide disaster that would last through the spring of 2023.

The IRS interpreted this statute narrowly, stating in its regulations and notices that the deadlines were delayed for only 60 days past the start of the disaster declaration. But Silfen, unburdened with having to defer to agency judgment in the wake of the Supreme Court’s Loper Bright opinion, disagreed, finding that “the plain meaning of the statute” is unambiguous.

“The court said, ‘Hey IRS, you can’t say that all of these deadlines are really controlled by your notices,’” said Cassandra Bradford, a partner at Eversheds Sutherland.

What Happens When the Wash Sale Rule Meets Crypto? – Marie Sapirie, Tax Notes ($):

Congress is working on a comprehensive digital assets tax bill and packing it full of new provisions. One notable proposal would apply an established tax law concept — the wash sale rule — to cryptocurrency. But the collision of the old code with a new technological environment seems destined to be more fraught than legislative drafters realize.

“It will not work,” said Abraham Sutherland of the University of Virginia School of Law. In a recent report for Coin Center, a cryptocurrency policy nonprofit, Sutherland gave examples of how complicated the rules become when applied to the standard transactions engaged in by crypto owners who use crypto the way it was designed — as a mechanism of decentralized finance. The results should be instructive for lawmakers who don’t want to create a taxation scheme that discourages the use of crypto.

Pandemic and Precariat: AI Courts Universal Basic Income – Carrie Brandon Elliot, Tax Notes ($):

The Chicago Law Review article offers a formula for estimating the costs of a UBI proposal and the adequacy of funding ideas using population, income, and tax data from 2017 and 2018. The formula generally estimates the cost of UBI by multiplying the number of citizens and lawful permanent citizens and lawful permanent residents (314 million) by the amount of the payment ($6,000 per person per year). That total annual cost is $1.884 trillion (compared with the $2.2 trillion cost of the CARES Act and the $1.9 trillion cost of the American Rescue Plan Act).

That annual cost could be offset by discontinuing $354 billion of cash and near- cash government transfer programs, excluding those administered by the Social Security Administration, leaving a funding gap of $1.53 trillion. This gap could be reduced by assuming a one-third cut to disability and supplemental security insurance benefits, generating $106 billion savings and lowering the gap to approximately $1.42 trillion. That could then be offset with carbon tax revenue of $190 billion (calculated as $36 per ton).

Public Domain Supervillain of the Week

Due to the popularity of the Public Domain Superhero of the Week in our International Tax Weekly post, we're introducing a new feature for a group that so far has been left out--the supervillains.

Every week, a new villain from the Golden Age of comics, that's fallen out of favor.

This week's entry: Valkyrie.

Debut Year: 1943

Debut Publication: Air Fighters Comics #2

Arch-nemesis: Airboy (see May 12 post)

Origin story: Raised by Germans to be a the ultimate warrior in World War II.

Abilities: No superpowers, but she was trained to be the best fighter and pilot.