TAX TIDBIT

Brownstein Budget Breakdown. The Brownstein Tax Policy team has gone through the thousands of pages and countless spending tables to compile a summary and analysis of the Biden administration's fiscal year 2023 budget proposal and the tax provisions in the Green Book. Click  here to read it and our key takeaways.

Now that the administration's budget request has been received by Congress, committees will hold hearings to further review the details and ask administration officials about specific department requests. Appropriators will then work to craft spending legislation to advance later this year. Congress must pass a funding measure by the end of the fiscal year, Sept. 30, or enact a continuing resolution to avoid a government shutdown.

LEGISLATIVE LOWDOWN

COVID-19 Relief Nears Finish Line. A bipartisan group of lawmakers is finalizing negotiations on another COVID-19 relief package for businesses afflicted by the pandemic. The package contains funding for additional therapeutics, testing and vaccines.

The Biden administration had originally hoped Congress would pass about $22.5 billion in COVID-19 relief funding. However, negotiations have since reduced that amount by about half. The package will now be closer to $10 billion. And while negotiators had sought to pass around $9 billion in domestic funding and $1 billion in foreign funding a few days ago, an  overview released by Sen. Mitt Romney (R-UT), the lead Republican negotiator, reveals the package will be entirely focused on domestic spending.

The following offsets will be used to pay for the package:

  • SBA Shuttered Venues Operators Grants - $1.93 billion
  • SBA Economic Injury Disaster Loans - $900 million
  • USDA ARP and CARES - $1.6 billion
  • Transportation Aviation Manufacturing Jobs Protection Program - $2.31 billion
  • Higher Education Emergency Relief Fund - $500 million
  • Local Assistance and Tribal Consistency Fund - $887 million, includes S. 3011 Cornyn-Padilla
  • Treasury State Small Business Credit Initiative - $1.873 billion*
    • *Rescinds $2.13 billion in budget authority to yield an outlay savings of $1.873 billion

Lawmakers are aiming to pass the package soon. But with other items consuming floor time, like the confirmation of U.S. Supreme Court nominee Kentanji Brown Jackson, it is unclear if it will pass this week. If it does not pass, the relief package will have to wait until later this month, when Congress returns from a two-week recess. Also delaying movement is an official score from the Congressional Budget Office, which Republicans have asked to see.

The House is already taking action this week on additional COVID-19 relief spending. The chamber will vote on the Relief for Restaurants and Other Hard Hit Small Businesses Act (H.R.3807), which would provide $42 billion in relief for restaurants and $13 billion for other “hard hit” industries. The spending under this bill would be offset by “all funds rescinded, seized, reclaimed or otherwise returned” from various programs enacted under other COVID-19 relief measures.

Build Back Sometime, Maybe? The Build Back Better Act (BBBA) remains stalled despite months of ongoing negotiations. However, congressional Democrats are determined to make one final effort to pass a bill ahead of the midterm elections.

Sen. Joe Manchin (D-WV) remains a major obstacle to passage. The West Virginia senator was somewhat cryptic about the odds of passage in a recent interview. When asked about the BBBA, he said, “I can't give you a reading on it, if there's anything serious about this.” However, he also sounded a bit more optimistic and specific about timing, saying “maybe things will pick up” after the Senate confirms Jackson, which is expected this week.

According to Sen. Tim Kaine (D-VA), the clock is ticking. He said last week that Congress will either “do it before Memorial Day,” which is May 30, or it is “not going to do it.” Sen. Bob Casey (D-PA) has also recently suggested a potential timeline for action. Last week, he said Congress could pass something between April and May. 

One hurdle still to be cleared is the misalignment between Manchin and Sen. Kyrsten Sinema (D-AZ) with respect to revenue raisers. Manchin has explicitly supported additional revenues through corporate and individual rate increases, but Sinema has rejected this. She instead prefers surtaxes on corporations, such as the 15% book profits minimum tax.

The arrow is currently pointing down for BBBA passage unless lawmakers can quickly reach an agreement on a scaled-back bill.   

Tax In or Out of the Competitiveness Package?  Congress is preparing a formal conference process to iron out the differences between the House and Senate versions of the U.S. competitiveness package—the America COMPETES Act and the U.S. Innovation and Competition Act, respectively. That process will begin this week and is expected to take weeks, if not months, to complete. Negotiations are expected to be somewhat contentious, particularly with issues like trade.

Neither the House nor the Senate version currently contains any tax title. That does not mean the final product will be entirely devoid of tax. A 25% tax credit for semiconductor fabrication, introduced in the Facilitating American-Built Semiconductors (FABS) Act (S.2107/H.R.7104), has gained bipartisan and bicameral support. Among its cosponsors are Sens. Ron Wyden (D-OR) and Mike Crapo (R-ID), chair and ranking member on the Senate Finance Committee, in addition to Sen. John Cornyn (R-TX), an original author of the semiconductor program, which is a major part of the U.S. Innovation and Competition Act.

Despite interest in tax incentives for the semiconductor industry, there is also pushback from some lawmakers. For instance, Rep. Lloyd Doggett (D-TX), who sits on the House Ways and Means Committee, warned recently about efforts to attach tax provisions to the package. Because few tax bills are expected to move this year, Doggett thinks lawmakers will seek to capitalize on the conference process and advocate for tax provisions that would otherwise be unlikely to advance on their own.

The addition of a new tax title would complicate an already-sensitive process. Because the competitiveness package remains one of the last hopes for bipartisan legislation, leadership will want to avoid anything that threatens passage. Speed is of particular interest to Democrats, who will want another “win” to show voters ahead of the November midterms.

Retirement Legislation Outlook. Last week, the House passed retirement legislation with overwhelming bipartisan support. The Securing a Strong Retirement Act (H.R.2954), also known as “SECURE 2.0,” would promote retirement security by, among other things, providing for the automatic enrollment of employees in certain plans and increasing the age at which participants are required to begin receiving mandatory distributions. According to the  Joint Committee on Taxation, the bill would raise $93 million over a decade. An estimate from the  Congressional Budget Office found that it would cost about $1 billion.

The package now heads to the Senate, where lawmakers are focused on other legislative items. Senate Finance Committee Chair Ron Wyden (D-OR) indicated as much last week when he said the Senate has “a lot on [its] plate.” As a result, the package is likely to be considered later this year.

Regardless of timing, SECURE 2.0 will likely include changes from the Senate prior to its enactment. Sens. Ben Cardin (D-MD) and Rob Portman (R-OH), two Senate Finance Committee members who have previously coordinated on retirement legislation, are drafting another retirement bill: the Retirement Security and Savings Act (S.1770). Sen. Mike Crapo (R-ID), ranking member on the Senate Finance Committee Ranking, said last week he would like that bill to serve as the “base” for any retirement package.

The Senate Health, Education, Labor and Pensions (HELP) Committee is also seeking to advance retirement legislation. Chair Patty Murray (D-WA) is, for example, already working with Ranking Member Richard Burr (R-NC), who also sits on the Senate Finance Committee, on a package she aims to move “later this spring.” The Senate HELP Committee held a hearing on retirement issues last week, during which Murray expressed an interest in working across the aisle “over the next few weeks so we can build a good bipartisan package that helps workers, retirees and families.”

1111 CONSTITUTION AVENUE

Planning for Scanning.  National Taxpayer Advocate Erin Collins issued a  directive last week imploring the Internal Revenue Service (IRS) to implement paper return scanning technologies. It is an effort to reduce the processing backlog, which stood at 15 million paper returns as of mid-March.

Adopting paper return scanning technologies will help IRS employees more quickly process them. That is because, unlike returns submitted electronically, IRS officials have to manually enter paper returns. This consumes time and resources, thereby delaying return processing. As Collins described in the directive, the “archaic data intake process” requires IRS employees to “transcribe the data, literally keystroking each number and letter.”

Collins proposed the IRS work with tax return software companies over the next 45 days to develop a plan for companies to “voluntarily place 2-D barcodes on returns prepared with their software products.” For handwritten tax returns and those with barcodes that cannot be read, Collins wants the IRS to craft a plan “to implement optical character recognition or similar technology to automate the processing of these returns by the start of the 2023 filing season” or the 2024 filing season. While the IRS lacks the authority to require return software developers to place barcodes on paper tax returns, it may request barcodes be incorporated on such returns.

GLOBAL GETDOWN

You Really Need to Keep Us in the Loop. Last week, Senate Finance Committee Republicans sent a  letter to Treasury Secretary Janet Yellen raising issues with the “insufficient level of engagement and consultation” they have had concerning the international tax agreement negotiated through the Organisation for Economic Co-operation and Development (OECD).

The letter accused the administration of failing to adequately engage congressional Republicans, who they say have only been provided informational briefing after negotiations had occurred, and “in most cases, after developments were publicly announced and the corresponding documents were publicly released.” The Republicans also accused the administration of failing to provide sufficient data for Republicans to evaluate the effects of the agreement.

The letter specifically refuted claims made by Jonathan Davidson, Treasury's assistant secretary for legislative affairs, who said the administration has received valuable congressional input while crafting the administration's negotiating positions. Republicans took issue, saying they explicitly recommended the Treasury Department negotiate for current U.S. law to be deemed Pillar Two-compliant, which the department failed to do. Additionally, while Democrats have voiced support for the foreign-derived intangible income (FDII) and retained a scaled-down version in the House-passed Build Back Better Act, Republicans noted that the Treasury Department has taken conflicting positions, supporting the House version while “convey[ing] to OECD countries that FDII will be ‘abolished.'”

The Republicans ultimately urged the administration “to begin fully engaging and consulting with us going forward, starting with in-person briefings and hearings to discuss these important issues.”

Committee Approves Chilean Tax Treaty. The Senate Foreign Relations Committee favorably reported the  United States-Chile tax treaty last week. The treaty, which has been stalled in the Senate since 2010, would expand the U.S. treaty network in South America and provide preferential tax rules for U.S. and Chilean multinational businesses.  The committee also approved “reservations” with respect to the treaty to protect against:

  • Base-Erosion Payments: The United States reserves the right to impose taxes under the Base Erosion Anti-Abuse Tax, commonly known as the “BEAT” (Internal Revenue Code section 59A) on the profits of a U.S. or Chilean company attributable to a permanent establishment in the United States.
  • Double Taxation: The United States clarifies that U.S. citizens who pay Chilean income tax may credit it against U.S. income tax. The reservation also provides that U.S. companies that own at least 10% of Chilean resident companies and receive dividends may deduct the dividend amount when computing their taxable income, rather than claim a credit for the taxes paid.

The treaty and reservations were approved by voice vote. Next, the full Senate must ratify the treaty, which requires a two-thirds majority. It is unclear when Senate Majority Leader Chuck Schumer (D-NY) will call up the treaty and reservations for consideration.

AT A GLANCE

  • Rettig Climbing the Hill.  IRS Commissioner Charles Rettig will  testify before the Senate Finance Committee this Thursday. He is slated to speak about the president's fiscal year 2023 budget request and the ongoing tax filing season.
     
  • Pelosi Dismisses Gas Tax. House  Speaker Nancy Pelosi (D-CA) shot down a Democratic legislative proposal last week that would suspend the federal gas tax until 2023. She called the idea “very showbiz,” suggesting the legislation is unlikely to have her support and thus unlikely to pass the House.
     
  • Tax Preparer Standards.  Rep. Dan Newhouse (R-WA) introduced legislation last week, the  System Transparency and Accountability for the IRS (STAIRS) Act, that would allow the IRS to establish competency standards for tax return preparers.

BROWNSTEIN BOOKSHELF

  • Furman on Budget Tax Proposals. Jason Furman, an economics professor at Harvard University and former chair of the Council of Economic Advisers during the Obama administration, published an  article in the Wall Street Journal praising the tax provisions in President Biden's fiscal year 2023 budget request.
     
  • IRS Paper Jam. The Wall Street Journal's Richard Rubin  detailed the tax return processing woes at the IRS.

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