House Republican lawmakers are discussing an economic package that will include tax cuts as the chamber passed legislation that increases taxes.
What Went Down:
- House Lawmakers this week confirmed that they seek to introduce an economic package that would include business-related tax breaks. (This development was included in last week’s Recap. It’s being re-reported because several lawmakers confirmed this week that it is a real plan and not just talk.)
- The Republican-majority House passed legislation this week that, if enacted, would pare-back certain tax incentives.
- IRS Commissioner Daniel Werfel testified before the House Ways and Means Committee.
- The House Ways and Means Committee held separate hearings on the solvency of Social Security and tax-exempt hospitals.
Let’s get to it:
Economic Package:
House Republicans plan to introduce an “economic package” that would include provisions allowing for R&D expensing, expanding the 163(j) interest deduction (from EBIT to EBITDA), and upping Bonus Depreciation to 100%. The package is not expected to extend any of the business tax breaks included in the 2017 tax reform bill.
The bill is expected to be introduced after Congress completes its action on raising the debt ceiling. This means the economic package could be released in June, or perhaps July.
Legislative Outlook: The economic package will likely pass the House. The Senate, however, is a different story.
Passage in the Senate will require support from members in both parties. Currently, several Senate Democrats (who support the aforementioned business provisions) continue to refuse to support their passage unless the Child Tax Credit is expanded.
However, Democrats have not been clear on the specifics for expanding the Child Tax Credit.
Rumor Mill stuff:
- One Democratic source told Eide Bailly that legislation could be introduced relatively soon that would spell-out how Democrats seek to expand the Child Tax Credit.
- A Republican source told Eide Bailly that House Ways and Means Chairman Jason Smith (R-Mo.), who is a proponent for providing family tax relief, could extend the expanded Child Tax Credit in the 2017 tax reform bill. That measure expires in at the end of 2025. Smith could extend it beyond this time.
If Smith produces this bill, Senate Democrats will likley oppose it. They opposed the 2017 Child Tax Credit when it first passed their chamber, and they are unlikely to support it now. (Supporting it now would cast them as “flip-floppers.” Think Sen. John Kerry: “I was against it before I was for it,” being applied to all Senate Democrats.)
Two Republican lawmakers told Eide Bailly that they will propose expanding the Low-Income Housing Tax Credit to garner Democratic support. The GOP hope is that Democrats will abandon the Child Tax Credit expansion and accept increased tax credits for low-income housing development.
Important to note: There is a lot of time between now and when this bill is expected to be introduced. Anything could happen when it comes to what the legislation will ultimately include.
GOP Tax Increases:
The House approved legislation on April 26th that if enacted would repeal or shrink several energy tax credits contained in the Inflation Reduction Act.
The true impetus behind the bill’s passage was to jump start talks between Congress and the White House on the debt ceiling.
The House bill modifies several tax credits that became law in the Inflation Reduction Act last year. These changes fall under the bill’s subtitle “Repeal Market Distoring(sic) Green Tax Credits.” (I believe ‘Distorting’ is the correct word.)
These changes largely affect tax credits and would increase revenue by roughly $515 billion over the next ten years, according to the Joint Committee on Taxation, the congressional office that calculates tax provisions' costs. The raise in revenue is considered a tax increase.
Legislative Outlook: This bill is not expected to pass the Senate or become law. President Joe Biden has already issued a veto threat on this bill if it’s presented to him.
A link to an Eide Bailly article on this issue is here.
Tax Chief Talks:
IRS Commissioner Daniel Werfel repeated his claim on April 27th that the tax agency will not increase audit rates beyond that set in 2018 for taxpayers earning less than $400,000 a year.
“The audit rate will not go above that audit rate for years to come,” Werfel said, during a House Ways and Means Committee hearing on the IRS.
Shortly after Werfel said this, there were calls for him to abandon this plan.
Chye-Ching Huang and Kathleen Bryant at the NYU Law Center:
[A]udit rates for 2018 tax returns are a bad guide for what fair, effective tax enforcement should look like given the effects of IRS underfunding and an unprecedented global pandemic. Instead, the IRS should aim to return to representative historical levels of audit rates as quickly as possible.
Important to note: Just because the audit rate will not rise for taxpayers earning less that $400,000 doesn’t mean that no one within these income levels will get audited. For example, according to the 2018 audit rate, 4 out of 1,000 taxpayers earning between $25,000 and $50,000 were audited.
Legislative Outlook: The House has already passed legislation that would rescind the $80 billion that the IRS is to receive over the next ten years. Removing that money would hurt the IRS’s ability to enforce the law. However, this bill is not expected to become law. It will not pass the Senate and President Biden has threatened to veto it.
A link to an Eide Bailly article on this issue is here.
Odds and Ends:
The House Ways and Means Committee held separate hearings this week on the solvency of Social Security and tax-exempt hospitals.
Here’s the breakdown:
- Social Security: The Committee debated how best to avoid the Trust Fund from becoming insolvent in 10 years, which it is currently projected to do. Insolvency means that the Trust Fund would not be able to fully pay out benefits in 2033. Democrats suggested rules that would require more workers (i.e., partners in partnerships) to pay payroll taxes, which, in part, funds the Social Security Trust Fund. Republicans said that if more people had jobs there would be more people paying payroll taxes.
- Tax-exempt hospital: The hearing discussed whether more rules should be enacted to better ensure that hospitals are meeting the requirements to claim tax exemption.
Legislative Outlook: The impetus for both hearings was to raise awareness of the issues addressed. It is currently unclear if legislation will stem from these events.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!
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