Capitol Hill Recap: Think the Child Tax Credit is Not Your Concern, Think Again

D.C. folks pushing the enactment of business-related tax breaks have realized that the fate of their pet provisions is inextricably tied to modifying the family-oriented Child Tax Credit.

What Went Down:

• The fight over the Child Tax Credit will likely determine the fate of the tax bill that includes business tax relief.
• Tax the rich.

Let’s Get To It: 

CTC, You and Me:

The years-long effort to enact legislation providing business tax relief has always been tied to modifying the Child Tax Credit that many on Capitol Hill have opposed.

To wit, business relief has been sidelined since 2022 because of opposition to changes to the Child Tax Credit. There is (and always has been) bipartisan, bicameral support for the business tax relief provisions.

Things, however, took a turn for the better last month when the House approved legislation providing tax relief to businesses and families. Its top provisions include:

• R&D expensing for domestic costs
• Expand the 163(j)-interest deduction from EBIT to EBITDA
• Up Bonus Depreciation to 100%
• Increase section 179 expensing
• Increase the information reporting threshold for certain payments
• Enlarge the Child Tax Credit
• Modify the Employee Retention Credit

A section-by-section summary of the bill is here.

The bill passed with huge bipartisan support, 357 yeas to 70 nays. This level of support is very rare. Normally bills pass along partisan lines.

The bill now travels to the Senate where, you guessed it, there is resistance to support the Child Tax Credit approved by the House.

The House-approved provision basically allows families with more children faster access to the Child Tax Credit. The maximum amount received would also be increased over time. And qualifying for the Child Tax Credit could be based upon prior-year’s income, and not current year’s income.

Certain Senators have issues with the House-approved measure. Those concerns include:

• Allowing families to qualify for the Child Tax Credit using income that is no longer current.
• Increasing the Child Tax Credit will stop people from looking for work or keeping a job.

Advocacy groups and lobbyists – who don’t have a dog in the Child Tax Credit fight – are starting to realize that they need to advocate for passing the Child Tax Credit in order to get their business provisions enacted into law.

The quickest way to do this would be for the Senate to approve the House-passed bill.

That is unlikely to happen.

Certain Senators seek changes to the Child Tax Credit. Some want to expand upon the House-passed version. Others want to limit it.

Arguably, the biggest issue with the House-passed Child Tax Credit is the income used to qualify for it. The bill allows income from the preceding year to calculate the credit. For example, a person earning $5,000 in a prior year, but who is now earning $100,000, could use the prior year’s income to qualify for the credit. Several Senator do not support this.

Legislative outlook: House and Senate lawmakers were on recess this week. Both chambers will return next week with a long do-to list that might not include approving the House-passed tax bill.

Over the course of the next few weeks, the Senate must contend with the impeachment of Homeland Security Secretary Alejandro Mayorkas. The chamber is expected to deal with this issue quickly so it can move on to other priorities, like funding the federal government. Congress must extend government funding beyond March 1st for some agencies and March 8th for others or suffer a partial shutdown.

Tax legislation could be attached to the spending bills. But some Senators, and tax staffers, say that fixing the tax bill could be time consuming and likely will not be ready for votes before the upcoming funding deadlines.

There are also issues with the House-passed bill regarding the Employer Retention Tax Credit. In short, a lot of Senators don’t think it will offset the cost of the bill and want to remove it from the legislation. It is not clear if this issue will become a real problem, or just something lawmakers complain about.

Tax the Rich:

Senate Finance Chairman Ron Wyden (D-Ore.) released a report this week showing that rich people are using life insurance to dodge paying taxes.

The report claims that wealthier folk are using private placement life insurance (PPLI) to avoid income, estate and gift taxes.

From the committee:

The investigation, the first of its kind into PPLI, found that the domestic PPLI industry is now a tax shelter made up of at least $40 billion in policies held by only a few thousand individuals, who have net-worths reaching into the hundreds of millions or billions of dollars. Marketing materials obtained by the committee from the largest PPLI providers revealed how PPLI products were explicitly promoted as tax-free investments in private equity and hedge funds, as well as a means to dodge income, gift and estate taxes. Policyholders were also able to borrow against those assets at extremely favorable rates.

Over the course of his time in the Senate, Chairman Wyden has released several reports that highlight how the wealthy avoid paying taxes. Few of his proposals have become law.

Legislative outlook: Highlighting tax cheats is kind’ve Wyden’s jam. But the opposing political party has yet to support legislation that turns Wyden’s findings into legislative text. His proposals don’t do well in a divided government. Still, the report’s findings could be fodder for how lawmakers could offset extending TCJA provisions that expire next year. Stay tuned.

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

Adios amigos!