Tax Notes Capitol Hill reporters Cady Stanton and Doug Sword discuss the key provisions of the Tax Relief for American Families and Workers Act and its potential paths for passage in the Senate.
For additional coverage, read these articles in Tax Notes:
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This episode is sponsored by the University of California Irvine School of Law Graduate Tax Program. For more information, visit law.uci.edu/gradtax.
For more information on Ask Blue J, visit bluej.com/ask.
***
Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner: Jordan Parrish
Audio Engineers: Jordan Parrish, Peyton Rhodes
Guest Relations: Alexis Hart
Tax Notes Capitol Hill reporters Cady Stanton and Doug Sword discuss the key provisions of the Tax Relief for American Families and Workers Act and its potential paths for passage in the Senate.
For additional coverage, read these articles in Tax Notes:
Follow us on Twitter:
**
This episode is sponsored by the University of California Irvine School of Law Graduate Tax Program. For more information, visit law.uci.edu/gradtax.
For more information on Ask Blue J, visit bluej.com/ask.
***
Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner: Jordan Parrish
Audio Engineers: Jordan Parrish, Peyton Rhodes
Guest Relations: Alexis Hart
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: halfway there.
The U.S. Congress is advancing tax legislation. Well, at least the House is. On January 31 the House passed the Tax Relief for American Families and Workers Act with overwhelming bipartisan support. The legislation now moves to the Senate, where its path is not yet clear. So where do things stand today? And how did we get a finalized bill out of the House?
Here to talk more about this are Tax Notes Capitol Hill reporters Cady Stanton and Doug Sword. Cady, Doug, welcome back to the podcast.
Cady Stanton: Thanks for having us.
Doug Sword: Hi, Dave. Great to be here.
David D. Stewart: All right, now, let's start with an overview of what this tax package is and what's in it.
Doug Sword: Yes. OK. There's 11 tax provisions in this bill. They are scored as costing a total of $79 billion, and then there's one tax provision in it to pay for almost all of that. And that's an early sunset of the employee retention credit. It's really a modest bill, dwarfed by the two ultra partisan bills we saw debated in 2017 and 2022. But it is a bipartisan bill, and it contains some tax breaks, namely the child tax credit and the research and development expensing, that a lot of people care deeply about.
The first two sections of the bill are the Democrats' wish list versus the GOP wish list. They were the contentious part of the negotiations, which lasted some 17 months. Lawmakers ultimately reached the deal to give each wish list the same amount of funding, around $33 billion.
First, there's what Democrats wanted. In easing on how the child tax credit refunds are calculated for families that don't make enough to have a tax liability, the bill would deliver bigger refunds, in particular for families with more than one child. There's one feature though that's come under fire from some Senate Republicans, and that's using prior years' earnings to calculate refunds. So a household gets to use the higher of its earnings over a two-year period to determine its refund. The concern is this will provide an incentive for low-income family members to work one year and then not work the next.
The Joint Committee on Taxation and some think tank economists have basically said that's not how things work, and they're predicting a negligible net effect on workforce participation rates from the child tax credit provisions. Plus there's lots of other places in the tax code where the use of prior years' earnings is allowed. So this is not unique.
The second section is what Republicans have been trying to get ever since the Tax Cuts and Jobs Act passed in 2017. Now that huge tax bill was partially paid for by tightening three business tax breaks: R&D expensing, bonus depreciation, and net interest expensing. This bill would roll most of those changes back through 2025, setting up these three tax breaks to be part of negotiations to extend TCJA next year or maybe even to be used once again as pay-fors.
Now, the rest of the bill was widely bipartisan. There's a section on affordable housing incentives, tax relief for those in disaster areas, the Taiwan tax agreement, and boosting the reporting threshold for 1099-MISCs and [1099-NECs] to $1,000. Like I said, it's paid for by the employee retention credit, both in early and in also beefing up IRS enforcement powers for what's been really a fraught program. And this is also disliked by several Republicans, particularly because the ERC, when it was created during COVID in 2020, it was never paid for. And now, it's being used to pay for something else.
David D. Stewart: All right, so as we've seen over the last several years, nothing seems to go in a straight line as it's going through Congress. So how did this get through the House?
Cady Stanton: Yeah, that's a great question, and there was definitely at least a little bit of chaos. So the framework for this deal, which was made between House Ways and Means Committee Chair Jason Smith [R-Mo.] and Senate Finance Committee Chair Ron Wyden [D-Ore.], was released on January 16, and there was a markup in the Ways and Means Committee scheduled for January 19.
So in those couple of days between when the framework was released and when the markup was held, some Democrats on the Ways and Means Committee voiced some complaints that they believe the bill didn't expand the child tax credit far enough. They wanted something in this tax deal that made the child tax credit a lot closer to what was in the American Rescue Plan [Act] of 2021. That included a bump on the amount of the credit, full refundability for the credit, and distribution of the credit in monthly payments rather than all at once.
So those Democrats did introduce a few amendments during this Ways and Means markup, aimed at trying to expand the child tax credit even further. But all of the votes on those amendments failed on party lines. In the end, most of the Democrats on the panel acquiesced and ended up voting in the markup to advance the bill through committee. So that vote landed at 40 to 3, with only three Democrats voting against it. So there was a lot of bipartisan support from the markup that transferred over moving a little bit further to the full floor vote.
But before this deal could get a full floor vote, it got caught up in what you could call a SALT [state and local tax] mess. Members of the state and local tax deduction caucus, also known as the SALT Caucus, voiced some frustration, as they have in the past, that this tax deal didn't include a raise in the cap on the state and local tax deduction that was set at $10,000 in the TCJA.
So there were four Republicans from New York, in the SALT Caucus specifically, who really were frustrated with the lack of inclusion of the raised amount of SALT cap in the deal. And because of that, they actually participated in close to a rebellion as a way to voice their frustration about this lack of inclusion. So they actually threatened to tank an unrelated procedural vote on the House floor that would try to get the attention of [House] Speaker Mike Johnson [R-La.] and Chairman Smith. And it did.
They actually, during that vote on the unrelated procedural issue, huddled off of the House floor — it was actually kind of exciting to watch from the gallery — with Chairman Smith and Speaker Johnson and then came back out, changed their votes, voted for the rule. And an agreement was made to have separate consideration on a SALT bill that would be completely separated from the tax deal, in order to try to get support for that rule vote and then the tax deal from these SALT Caucus members.
We can go into a little bit of detail later about what they got in return for those talks, but ultimately, this bill was never seriously in danger because of the SALT Caucus. House Republican leadership actually opted to push the bill through this easier procedural route suspension of the rules that's reserved for bills that can garner a two-thirds vote. And the tax bill reached that threshold and then some, passing through the House on a full floor vote of 357 to 70. That was 84 percent of members of the House, 78 percent of Republicans, and 89 percent of Democrats.
David D. Stewart: So this seems to be a sort of rare moment of unanimity in the House. What are we expecting to see in the Senate?
Doug Sword: Well, the tax bill had actually been the news of the day for a week or more, but that ended with border security and foreign aid, the biggest issue of the year, has taken all the political oxygen out of the room. So it's pretty much knocked the tax bill off of the daily roundups you see from accounting firms and think tanks. And the momentum from its really overwhelming passage by the House, it's kind of dissipated, and the bill awaits something to spark it back into life. And certainly, once and if the border security and Ukraine, Israel, Taiwan funding can be figured out, perhaps we move back onto this bill. Although, by that time, we also face a March 1 and a March 8 deadline on spending bills that, if nothing is done there, there's a partial government shutdown.
So what we're waiting for now, I think, is a deal on amendments for Republicans who are unhappy with features of the bill. Or as we began to see in recent days, some Senate Republicans may be getting a little irked with the opposition to such a really highly popular bill, and they're coming out publicly in favor of it. The more then that do so, that puts more pressure on Senate Republicans to reach a deal on amendments to be heard on the floor, particularly if Democrats at least appear to be negotiating in good faith. Still a large majority of Republicans currently appear to be giving Senate Finance ranking member Mike Crapo [R-Idaho] and others room to negotiate the changes and amendments, at least for now.
Cady Stanton: I will also add here that I had the chance to have a conversation with both the ranking member and the chair of the Tax Subcommittee within the Ways and Means Committee about what would happen should a House vote have to occur again on this bill with some changes that come from the Senate. And they seemed pretty optimistic that the support was so overwhelming in the House the first time, they think a slightly rewritten package from the Senate could definitely withstand a second vote in the House.
Obviously, that bars some really major changes that could happen in the Senate, but ultimately, they think that that support was so large the first time, should it come to it and there need to be another vote, they're not particularly anxious about that.
David D. Stewart: What do you see as the potential paths for this to get through the Senate?
Cady Stanton: That's a great question. I wish I had a better crystal ball to tell you exactly which one of those paths we'd go down, but something to consider here is the different factors that could change the timeline. Doug mentioned, for example, the focus on border security and the supplemental in the Senate taking up a lot of room, in terms of their consideration right now. But the Senate is also scheduled to take a two-week recess in February.
So that means that, really, this tax bill isn't going to see any progress in the Senate until at least February 26, when they come back from that recess. In terms of the different pathways and what might be the fastest, the quickest way would be the bill moving as a stand-alone bill, just like it did in the House. So there's a couple of different sub paths within that.
There's the possibility that a deal could be reached between Majority Leader [Charles E.] Schumer [D-N.Y.] and other senators on voting on amendments on the floor, a kind of package of amendments. Or, as ranking member Crapo has pushed forward, there could be a markup in the Senate Finance Committee. Beyond that, if Republicans, like Doug mentioned, who want to see the bill move forward and aren't really pushing for a markup, really get impatient with the slowdown, Majority Leader Schumer might see an opening to bring the bill to the floor for a cloture vote, which would need 60 votes but could be a pathway to also get this done pretty fast.
If it does go that stand-alone way without any changes, that would definitely be the fastest way. It wouldn't have to be sent back to the House. With amendments or a markup, that would definitely slow things down because there would have to be consideration for those changes. And it would also require another vote in the House.
Something else to keep an eye on is, if this bill ends up being opened back up for a markup or amendments on the Senate side, that doesn't just open the door for Republican amendments but also possibly some Democrat amendments. So there are some Democrats, just like on the House side, who might want to see the child tax credit expanded or at least an attempt through an amendment to make it even further expanded.
So really, by definition, a can of worms, if the amendment process is opened up, either through a markup or on the floor. So separate from the stand-alone option, the other option is taking a look at those March 1 and March 8 spending bill deadlines that Doug mentioned, particularly a minibus that would be targeted to the March 8 deadline will contain around $1.3 trillion in spending, which could be a really nice place to stick the $79 billion bill.
Here, the spending bill scenario might be the best bet for moving forward on the tax deal. In 2019 and 2022, there were some retirement bills with tax sections that kind of similarly flew through the House by really wide margins and then ended up languishing in the Senate, each for more than six months. And Majority Leader Schumer didn't take the time to bring them to the floor. In the end, those two bills were jammed into year-end spending bills, so when we think about the recent history of how tax bills passed, tucking them into larger spending bills is what's happened recently and could be what happens here again.
David D. Stewart: Now, you mentioned that the state and local tax deduction had been a sticking point here. Could you tell us about the bill that arose from that? And what ended up happening?
Cady Stanton: So the bill that ended up getting consideration on the floor would've raised the SALT deduction cap for joint returns from $10,000 to $20,000, with an income cap at $500,000. And that would've been for tax year 2023. The morning after the vote on the major tax deal, there was an emergency hearing in the Rules Committee, around 8 a.m., where this bill was considered and passed through the Rules Committee on a partisan basis.
One Republican voted against the bill for procedural reasons since it was rushed through the committee. Of the SALT cap proposals from the SALT Caucus, it's one of the biggest compromises. Other proposals have put the cap at $50,000 or $100,000 or even eliminated the cap altogether. While the bill wouldn't have gone as far in changing the provision as other proposals, it still had a pretty hefty estimated price tag. The legislation would have costed $11.7 billion for 2023, according to estimates from the Tax Foundation, and it would've reduced revenue by $12 billion over the 10-year budget window, according to estimates from the Penn Wharton Budget Model.
So it's still a pretty expensive proposal. Ultimately, the House held a procedural vote on this bill February 14, and it failed on the floor. The vote was 195 to 225. All Democrats voted against the legislation, as well as 18 Republicans. Some Democrats, including those who themselves are advocates for raising the SALT cap, said that they voted down the rule because it was attached to the rule for another resolution that was pretty politicized. It denounced the energy policies of the Biden administration.
So they used that attached rule as a reason to vote against the rule for SALT, even though they ultimately believe in raising the SALT cap. Even if the bills rule had been approved, there's no telling how it would've done at a full floor vote. And more importantly, the legislation would've been basically dead on arrival in the Senate. It didn't really have a future anyway. The prospects for this particular bill may be dead, but the New York Republicans who advocated for it have said they'll keep pushing for SALT cap relief in the future, especially during an election year where they're running for reelection in vulnerable blue state seats.
David D. Stewart: Are there any other tax issues out there that we should be keeping an eye on?
Doug Sword: Not really. This is the big game in town, covers all the bases; all the issues with the biggest supports are wrapped into it, besides child tax credit and the three TCJA business provisions in it. It's got the Taiwan agreements, and it's got a boost in the low-income housing tax credit program. And it's got disaster relief in it. Because this is the only tax vehicle around, any extenders that didn't make it into this bill may have missed their last chance. A thoroughbred racehorse amortization extender, long a favorite of Kentuckian [Sen.] Mitch McConnell [R], has now been expired for three years and is no longer really even on life support there. The rum cover over for distillers in Puerto Rico and the Virgin Islands expired two years ago and may be in the same boat.
There's another way to see Senate Republican opposition. Senate Finance Republicans hope to control the committee in 2025 after the elections. And 2025 is when whatever is going to be extended and TCJA probably gets extended. Control of the committee would give Senate Republicans a much stronger hand in those negotiations, and some wouldn't mind if the current bipartisan bill went away for a little while and the business tax breaks were addressed next year instead of this year. As one Republican negotiator put it to me, everything is about 2025.
David D. Stewart: Well, it sounds like there's a lot of things to keep track of, and I'm glad both of you are there to keep us updated on it. Cady, Doug, thanks for being here.
Cady Stanton: Great to be here. Thanks.
Doug Sword: Yeah, thanks for having us, Dave.
David D. Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Senior Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?
Jasper B. Smith: Thanks, Dave. In Tax Notes Federal, Max Angel explores the unique challenges of estate planning with cryptocurrency. Joseph Olivieri examines constructive realization and whether it should apply in Moore.
In Tax Notes State, Timothy Gustafson and Gursharan Kaur examined two 2023 decisions that may affect California's informal guidance and the issuance of guidance in 2024. Robert Willens examines a recent Florida District Court of Appeal holding, finding that the entire amount of tax-exempt interest earned by State Farm should be added back to its insurance company taxable income.
In Tax Notes International, three KPMG practitioners referenced the familiar board game Candy Land as a guide to help taxpayers navigate the corporate AMT [alternative minimum tax] system. Raffaele Petruzzi and Dhwani Mainkar give an overview of the tax issues related to international remote work arrangements.
And finally, in Featured Analysis, Robert Goulder critiques a proposal for renewed tariffs.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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