From the Hill: March 14, 2023
Lately on the Hill
On Thursday, President Joe Biden released his $6.8 trillion budget proposal to fund the government for fiscal year (FY) 2024. With Republicans controlling the House, it’s unlikely that the final FY 2024 budget will look anything like what the White House is asking for. Nonetheless, it’s worth knowing what’s in the proposed budget since this is the first step in negotiations for government spending cuts, which Republicans want to tie to debt limit discussions.
Here are some of the tax-related highlights from Biden’s budget proposal (for a full explanation of the proposed policies, see the Treasury Greenbook):
- Reduce the federal deficit by $2.9 trillion over the next 10 years
- Increase the corporate tax rate from 21% to 28%
- Implement a billionaire minimum tax of 25% on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth, e.g., the difference obtained by subtracting liabilities from assets, greater than $100 million
- Increase the tax rate on corporate stock repurchases to 4% (note, currently the Inflation Reduction Act imposes a 1% stock buyback excise tax)
- Change divisive reorganization rules by modifying the two safe harbors for tax-free transfers of a controlled corporation’s boot and securities to a parent corporation’s creditors and prevent tax avoidance through the transfer of contingent liabilities to a controlled corporation
- Reduce the ability of related parties to use a partnership to shift partnership basis among themselves
- Make permanent the excess business loss limitation and treat excess business losses carried forward from the prior year as current-year business losses instead of as net operating loss deductions
- Eliminate the tax benefits associated with “like-kind exchanges”
- Change international tax rules to align with the 15% global minimum tax proposed by the Organisation for Economic Co-operation and Development
- Increase the top marginal tax rate from 37% to 39.6%; this would apply to taxable income exceeding $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for head of household filers, and $225,000 for married individuals filing a separate return
- Increase the net investment income tax (NIIT) rate on income above $400,000 from 3.8% to 5% and expand the NIIT to apply to more types of income from pass-through entities
- Require the donor or deceased owner of an appreciated asset to realize a capital gain at the time of the transfer
- Eliminate the carried interest tax break for private equity fund managers
- Tax long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million at ordinary rates (which would come out a maximum rate of 40.8%, including NIIT)
- Eliminate the ability for cryptocurrency investors to sell assets at a loss, which results in certain tax benefits, and then immediately repurchase the currencies, e.g., a “wash sale”
- Expand the child tax credit to $3,600 for children under 6 and $3,000 for older children, up from $2,000
- Provide the IRS an additional $14.1 billion in funding, which would be a 15% increase from FY 2023
Note, at this point, these are only proposed policies and the chances of these policies becoming law are low.
House Speaker Kevin McCarthy said Republicans are going to release their proposed budget later than expected because the president was late in releasing his budget, and that he does not believe raising taxes is the answer to address the country’s deficit issues. A Republican budget was expected in April, since there is a statutory deadline of April 15 for Congress to adopt a budget resolution. But there’s no real consequences for missing the deadline, so Congress has only met this deadline four times since 1985. Nonetheless, House Minority Leader Hakeem Jeffries is characterizing this delay as: “The House Republican budget plan is in the witness protection program. It’s in hiding.”
Here are a few other updates you should know about:
- Debt ceiling. Now that Biden’s proposed budget is out, expect members of Congress to resume informal negotiations about the debt ceiling, albeit likely at a very slow pace until Republicans release their budget later this spring. Here’s the latest on this front:
- Rep. Scott Perry (R-PA) and members of the House Freedom Caucus (HFC) said they’ll only vote to increase the debt limit if there is $130 billion in federal spending cuts, caps on future budgets for federal agencies, and an “unwinding” of the Biden administration’s economic agenda. The HFC provided a full list of negotiation demands.
- The House Ways & Means Committee marked up the Default Prevention Act, which would authorize the Treasury Secretary to continue to borrow to pay interest and principal due on the debt, even if Congress isn’t able to pass a bill to raise the debt limit. The committee amended the bill to take off the table the risk of default and to prohibit members of Congress, the president, and the vice president from getting paid until all other federal obligations have been met. Sen. Rick Scott (R-FL) introduced a similar bill in January, the Full Faith and Credit Act, which would require the government to keep making payments on Treasury bonds, Social Security benefits, veteran benefits, and military salaries if Congress is unable to increase the debt limit this summer.
- McCarthy is trying to educate members of the House and their staff on budgeting. Last week, at McCarthy’s request, the House received a briefing on the deficit from the Congressional Budget Office.
- New bills introduced. Here are the latest bills introduced in the House and Senate:
- Senators Todd Young (R-IN) and Ben Cardin (D-MD) introduced two tax-related bills: (1) the Modern, Clean, and Safe Trucks Act of 2023, proposing to repeal the federal excise tax on heavy trucks and trailers; and (2) the Neighborhood Homes Investment Act (NHIA), which would create a federal tax credit to cover the cost between building or renovating a home and the price at which they can be sold. Remarks at a recent Senate Finance Committee hearing indicate that housing policy may offer the best chance for a bipartisan tax policy package this year, so keep an eye out on the progress of housing bills like the NHIA.
- Sen. Marco Rubio (R-FL) introduced the Restricting Electric Vehicle Outlays from Kleptomaniac Enemies (REVOKE) Act of 2023, which would restrict Chinese companies from accessing tax credits under the Inflation Reduction Act.
- Rep. Vern Buchanan (R-FL) introduced a bill to increase the income cap for and make permanent the mortgage insurance premium deduction. This deduction has expired, so it is no longer available. Proposed legislative text is not yet available.
- Rep. Gwen Moore (D-WI) reintroduced the Worker Relief and Credit Reform Act, which proposes to reform the Earned Income Tax Credit (EITC) by expanding eligibility criteria, increasing credit amounts, and creating an advance payment regime where the IRS would send out the credit in monthly payments. The bill also would make the EITC available to unpaid caregivers and students.
- Reps. Patrick McHenry (R-NC) and Ritchie Torres (D-NY) reintroduced the Keep Innovation in America Act, proposing to change the digital asset reporting provisions in the Infrastructure Investment and Jobs Act by narrowing the definition of a cryptocurrency “broker” for tax purposes. Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) are expected to release their own cryptocurrency legislation in mid-April.
- Rep. Byron Donalds (R-FL) introduced the Hurricane Tax Relief Act, proposing to provide special rules for casualty losses incurred by victims of Hurricane Ian, Hurricane Nicole, and Hurricane Fiona. A similar bill was introduced by Rep. Greg Steube (R-FL) last week.
IN CASE YOU MISSED IT
- The Senate confirmed Daniel Werfel for a five-year term as IRS commissioner in a 54-42 vote.
- Treasury Secretary Janet Yellen appeared before the House Ways and Means Committee last week, where she encouraged Congress to not wait until the last minute to raise the debt limit, weighed in on recent jobs reports, responded to questions about IRS enforcement and audits, and promised to release a plan soon on how the IRS plans to use its $80 billion in Inflation Reduction Act funding.
- House Republicans are working on a package of more than 20 energy-related bills, the Lower Energy Costs Act, which is expected to be released in late March. The legislation will likely include most of the energy-related polices pitched by Republicans in recent years, including efforts to boost fossil-fuel production on federal lands and ease environmental reviews of energy and mining projects.
- In Notice 2023-23, the IRS provided guidance to financial institutions for reporting required minimum distributions (RMDs) for 2023 because of a change to RMD rules made by the SECURE 2.0 Act that delayed the required beginning date for RMDs.
- The IRS issued Notice 2023-24, providing general rules for determining the credit for production from advanced nuclear power facilities under Section 45J.
- The IRS released a revised version of Form 8915-F, which is used to report a retirement plan distribution due to a qualified disaster in tax year 2020 or later.
- The IRS also issued another reminder, urging taxpayers to review the Employee Retention Credit (ERC) guidelines before claiming the credit, as promoters continue to encourage ineligible companies to file and claim the credit. The IRS Office of Professional Responsibility also issued a bulletin to tax professionals regarding ERC eligibility.
This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein.