Tax Notes Capitol Hill reporters Doug Sword and Frederic Lee examine the record-breaking budget and infrastructure legislation advancing on Capitol Hill and preview potential tax policy proposals coming this fall.
For additional coverage, read these articles in Tax Notes:
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This episode is sponsored by Avalara. For more information, visit avalara.com/taxnotes.
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Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner and Audio Engineer: Jordan Parrish
Guest Relations: Christa Goad
Tax Notes Capitol Hill reporters Doug Sword and Frederic Lee examine the record-breaking budget and infrastructure legislation advancing on Capitol Hill and preview potential tax policy proposals coming this fall.
For additional coverage, read these articles in Tax Notes:
**
This episode is sponsored by Avalara. For more information, visit avalara.com/taxnotes.
***
Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner and Audio Engineer: Jordan Parrish
Guest Relations: Christa Goad
Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: catching up with Congress. As summer comes to an end, so too does the short and somewhat unusual break Congress took this year. Initially, the legislative body had scheduled a lengthy recess for much of August and September, but with$3.5 trillion in new spending, tax cuts, and tax increases to sort through and a September 15 deadline, members had their typical summer break cut short. What did Congress accomplish this summer? What does this fall hold for tax policy and legislation? Here to talk about this are Tax Notes Capitol Hill reporters, Doug Sword and Frederic Lee. Doug, Frederic, welcome to the podcast.
Doug Sword:Thanks for having us.
Frederic Lee:Hi, thank you so much.
David D. Stewart:Now, I understand that there were two big bills, the$3.5 trillion budget bill and the$550 billion infrastructure bill, and that both passed the Senate and hit the House during its two-day late August session. Let's start with the budget resolution. Could you give our listeners some background on that?
Doug Sword:Yeah. The budget resolution it's a two-step process. You have a budget resolution— it's a$3.5 trillion measure that has to be passed by both the House and the Senate— and it gives directions for both bodies to go ahead and write the mammoth$3.5 trillion reconciliation bill. The advantage to doing reconciliation is that the Senate can pass it with a simple majority in the Senate that's currently divided 50/50 between Democrats and Republicans with Vice President Kamala Harris breaking any tie. And so, this is the Democrats' one chance to get a major tax reform through during this Congress. Very similar to what Republicans did in 2017 when they got the Tax Cuts and Jobs Act passed. They didn't have 60 votes, and they jammed that through without a single Democrat vote. And Democrats are now returning the favor.
David D. Stewart:So, what did we see during the two-day August session?
Doug Sword:Well, the final result after two days of wrangling was that the House passed the budget resolution. And the House Democratic Caucus also agreed to bring the bipartisan infrastructure bill up for a final vote in the House by September 27. Though, before that happened, there were two days of wrangling. Nine House Democrats, moderate Democrats, had threatened to pretty much blow up the process. They were going to withhold their support for the budget resolution unless there was an immediate vote on the bipartisan infrastructure bill. And you have to keep in mind that moderates like the infrastructure bill and while progressives really like all the things that are in the$3.5 trillion budget bill. And House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Chuck Schumer, D- NY, have tied those two together to keep both wings of their party in line. After a day and a night and a morning of negotiations, House Speaker Nancy Pelosi agreed not for an immediate vote on the infrastructure bill, but to have a vote by September 27. Although the rule that was passed is not a binding agreement, but we'll see what happens. But in the end, all the Democrats were happy, which is a pretty unusual thing for Democrats. They all voted for the budget resolution, all 220 of them, while all 212 Republicans voted against it.
David D. Stewart:So, where does the resolution stand today?
Doug Sword:Well, like I was saying, it's a two-step process. The budget resolution is a numbers bill. It's a top line number, the$3.5 trillion that everybody's been talking about. And the resolution divvies that number up between 13 House committees and 12 Senate committees. And they will have to write up their sections. And that's the hard part. They're each writing up their portion of the bill, which will go into this mammoth reconciliation bill. That's going to take a month or so, and we'll see how that goes.
David D. Stewart:Alright, so, let's turn to the infrastructure bill. Can you tell me about that?
Frederic Lee:So yes, we have an infrastructure bill that proposes$550 billion in new spending, and that's for hard infrastructure, so that's roads, bridges, broadband. There's almost no tax items that are in it. A lot of it's going to be paid for through borrowing. The one inclusion that's drawn our attention, drawn the attention[of] tax areas, tax circles, is the expansion of the cryptocurrency information reporting requirements. So, according to the Joint Committee on Taxation, that's supposed to bring in$28 billion. Crypto piece was actually included sort of last minute in the bill. It definitely caught me by surprise. It caught other reporters by surprise. It definitely caught the crypto sector by surprise, shook them up quite a bit. And the aim of the crypto provision is to amend federal law on digital asset information reporting by expanding the reporting requirements for brokers. So, that includes a requirement that businesses report all virtual currency transactions over$10,000.
David D. Stewart:Alright, so we now have these two giant bills whose fates seem intertwined. What's next?
Doug Sword:The budget resolution set a September 15 deadline for these committees to write their portions of the next piece of legislation, the reconciliation bill. Historically, I mean it's Congress, so I'm sure you're shocked, but historically when it comes to committees meeting their budget resolution deadlines, the committees are not good at that. So, who knows when this will come together, but September will be a big month. It will at least have a lot of markups, particularly in the House. Ways and Means Committee will have the biggest one, besides having the right to about$800 billion worth of tax cuts, mainly for families with children, they'll be responsible for coming up with the revenue raisers to pay for however much of this bill that Democrats ultimately decide they are going to pay for. And it might not be$3.5 trillion, or it could be$3.5[trillion] and they pay for just a portion of it. But Ways and Means[Committee] will be where the biggest part of the action is. And certainly that the healthcare and the commerce committees will have big chunks too, as well. These two bills are tied together. It's very intentional. Chuck Schumer calls it the two-track process. Nancy Pelosi has said, I don't know how many times, that she will not hold a vote on the bipartisan infrastructure bill until the reconciliation bill gets to its main obstacle and that's the United States Senate. And the September 27 deadline now sort of muddies that up a little bit, but we'll see what happens. She's got to keep both wings in line. Progressives just love the$3.5 trillion[budget] bill, because there's a huge expansion of Medicare, there's big spending on clean energy, on housing, and there's two years of free community college. There's universal pre-K, there's paid leave, and the list goes on and on with the progressive wish list. Meanwhile, that bipartisan bill will just sit around waiting to see what happens on the reconciliation.
David D. Stewart:Alright, so you mentioned that Ways and Means[Committee] would be dealing with how this bill might be paid for. We're talking about$3.5 trillion, which seems like quite a lot. So, do we have any sense of how that will be paid for?
Doug Sword:Yeah,$3.5 trillion is kind of a showstopper isn't it? Let's start with the spending. A lot of people say that spending number will be determined by the most conservative member in the Senate because all 50 Senate Democrats will have to vote for this. And the two conservative Democrats who have already said they don't support$3.5 trillion are Joe Manchin of West Virginia and Kyrsten Sinema of Arizona. So, it remains to be seen what sort of number the Senate will come up with. And the nine House moderates that revolted earlier this week, they have stated that they have concerns about$3.5 trillion, but they haven't been as absolute about it as Manchin and Sinema have. But meanwhile, it's easier to spend$3.5 trillion than to pay for it. And the offsets are pretty much where the rubber will meet the road. I mean, the Democrats are looking at an array of tax increases. They would roll back an awful lot of the Tax Cuts and Jobs Act, increase the corporate income tax rate, increase the top marginal rate on individuals, increase the capital gains rate and stepped up the basis, and do a complete overhaul of the international tax regime. Manchin says that the reconciliation bill has to be completely paid for. House Budget Chairman John Yarmuth, D-KY, has equivocated on whether it would all be paid for. Pelosi has cryptically said,"We'll see." And Bernie Sanders doesn't think you have to pay for all of it.
David D. Stewart:So, looking forward, what kinds of tax legislation or policy changes can we expect from Capitol Hill this fall? Are there any bills we should keep an eye out for?
Frederic Lee:The reconciliation bill is going to be the biggest target for most members of Congress who have any kind of tax proposal. That's pretty much the vehicle right now. There are two other bills that have to pass coming up that lawmakers will try to also attach their bills to. First, Congress won't finish its spending bills by the end of the government's fiscal year, which is September 30. To avoid a government shut down, there's going to have to be some type of continuing resolution. At some point there's probably also going to be an omnibus for many, if not all, the 12 spending bills. And that will be a big target for lawmakers also. On another front, there could also be a separate measure to raise the debt limit. A lot of different elements we're working with. Without the authority to borrow any more money though, the federal government is projected to be not able to fully meet its obligations beginning in October or November. So, the debt limit increase could be spun into a reconciliation or omnibus. But Republicans are insisting on a standalone measure, but standalone must pass bills. They tend to attract a lot of company in Congress. So, that's also another area to watch.
David D. Stewart:All right. Now earlier this year during his first 100 days in office President Biden unveiled two large plans, the American Jobs Act and the American Families Plan, and both included some major tax policy changes. Where do those stand today?
Frederic Lee:So, if you look at how things actually shook out in Congress, the bipartisan infrastructure bill has a very similar language to the American Jobs Plan. And on the other side, the budget reconciliation item has a lot of elements stemming from the American Families Plan. There were tax increase items included in both of those bills from corporate to individual tax hikes and others. But naturally a lot of the tax provisions that were mentioned in both the plans have migrated now over to the reconciliation bill since tax increase legislation tends to be a very partisan item, especially in this political atmosphere. And the reconciliation bill is being drafted to pass with only Democratic support. So to add those two up, the budget and the infra[structure] bills add up to$4.1 trillion, and there will probably be a lot of changes along the way as the legislation shakes out.
Doug Sword:Let me jump in here if I could. These two plans are basically what we've been looking at all along. If you look up the value as the president proposed them, they add up to$4 trillion. And it's no coincidence that the budget and the infrastructure bills add up to$4.1 trillion. We've been largely working off of Joe Biden's game plan, but now that we move into the reconciliation process, this is when Congress will be doing a lot of rewriting of the president's proposals.
David D. Stewart:So, Democrats have been fairly outspoken in their desire to repeal parts of the Tax Cuts and Jobs Act. One item that keeps coming up is the state and local tax(SALT) deduction cap. Is there any movement on that front?
Doug Sword:Oh yes. There's definitely been movement on that front. Although a full repeal is pretty much out of the question. It would be too expensive even for this bill. But all year there's been bills floating around to boost the$10, 000 cap to$15,000 for single filers or$20,000 for joint filers. And there's a possibility of a larger number short of a full repeal. Interestingly SALT may have been the subtext of this past week's drama in the House. The leader of the nine moderate Democrats was a north New Jersey Democrat, Josh Gottheimer. And he is also one of the leaders of the“No SALT, no deal” caucus. And there's been some speculation that when Nancy Pelosi asked him behind closed doors what he wanted to get the budget resolution passed, he may have talked about his favorite topic, which is SALT.
David D. Stewart:Now, another tax issue we've been tracking has been Senate Finance Committee Chair Ron Wyden's, D-Ore., International tax framework. What've we seen on that lately?
Doug Sword:A lot of activity. Wyden was joined by Senate Finance[Committee] Democrats, Sherrod Brown of Ohio and Mark Warner of Virginia, putting out a 37-page draft. They've taken their framework from April and turned it into legislative language. They've put it out publicly, and they've asked for comments by September 3. And that would be in time for their plan to be rolled into Senate Finance's portion of the reconciliation bill, which those three will be major authors of. And it's important to keep in mind that their plan keeps more of the existing architecture of the international tax regime. It's less of a complete overhaul than Joe Biden's proposal is. It would probably raise substantially less money than Joe Biden's proposal would, which is another consideration. And another thing is that the timing should be pretty interesting on this. The reconciliation process is occurring almost simultaneously with the international negotiations on a global minimum tax. And there are House Democrats who have expressed some anxiety over this. They want to make sure that the negotiations aren't derailed by some preemptive legislation from Congress.
David D. Stewart:Recently, the White House and Treasury announced that tax increases on businesses are coming, but that small business owners have nothing to fear. What's been the reaction to that on Capitol Hill?
Doug Sword:Well, the reaction has been completely partisan. I'm sure you're surprised by that. Republicans would say small business owners have a lot to fear. But Democrats absolutely want to increase corporate income tax rates. They've always been a target for Democrats ever since they were cut from 35 percent to 21 percent in the Tax Cuts and Jobs Act four years ago. But when it comes to small businesses, this Treasury report estimates that just 3 percent of small businesses will see tax increases. And most of the 97 percent that don't see tax increases will actually see tax cuts. That said, Republicans point to small business income is pass-through income. It goes to people who make less than$400,000 a year. And if you're going to increase taxes on a business, somebody has to pay. And that's somebody who's going to be either middle-income employees or middle-income business owners who take a profit wage or benefit. I would point out that at the think tanks that specialize in tax, they say that the indirect hits, and they say there are indirect hits on people making less than$400,000 from the Biden proposals, they say those are generally more than made up through a really large increase in the child tax credit, other tax cuts and savings on drug prices, which will be a key part of this bill too.
David D. Stewart:Well Frederic and Doug, this has been great. And thank you for being here. I'm sure we'll have to have you back when we see how all this shakes out this fall.
Doug Sword:Yeah. And we'll be glad to be back. Thanks, Dave.
Frederic Lee:Thank you very much.
David D. Stewart:And now coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?
Paige Jones:Thanks, Dave. In Tax Notes Federal, Amanda Pedvin Varma and Eric Solomon consider how Section 382 might apply under the international tax framework as changed by the TCJA. Richard Ray analyzes Rev. Proc. 2021-11, which provides three methods that specified farmer cooperatives may use in calculating W-2 wages for the wage limitation rule. In Tax Notes State, Eric Hylton discusses how the IRS can bolster its cryptocurrency enforcement efforts. Thomas Clifford and Richard Anklam examine questions posed by a proposed amendment to increase annual distributions from New Mexico’s Land Grant Permanent Fund to early childhood programs and public education. In Tax Notes International, Sharon Katz-Pearlman and Lillie Sullivan explain the OECD’s international compliance assurance program process. Two international tax professionals review the Colombia-Italy tax treaty, focusing on provisions that were implemented in accordance with the BEPS(base erosion and profit shifting) final reports. In Featured Analysis, Benjamin Willis argues that the TCJA continued the trend of imposing new taxes that erode the norms of income and realization. And finally, on the Opinions page, Carrie Elliot examines Benford's law and considers how it can be used to detect tax fraud.
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.