Tax Legislative Update

House Republican Leaders are considering the introduction of an economic package designed in part to provide support in the form of tax relief primarily to small businesses and farmers, two groups that are a high priority for Ways and Means Committee Chairman Jason Smith (R-Missouri).  The legislation is still in the drafting stage, and it is not clear at this time when it will be introduced.  However, House Leadership staff indicate that the House is not expected to send the legislation to the Senate immediately after it passes the House.  As of this writing the House has not sent any tax bills to the Senate (which cannot originate tax legislation) and does not want to do so in order to block the Senate from sending a tax bill back to the House with amendments.  The timing of a House-Senate tax discussion will depend on the resolution of a number of outstanding issues.

Perhaps the most important outstanding issue is an agreement on the debt ceiling, the authority of the United State to borrow.  The Treasury Department advised Congress in January that the debt limit had been reached and that it had begun a series of “extraordinary measures” to preclude a default by the United States but that those measures would likely run out in the summer.  Treasury is reporting regularly to Congress on the progress in avoiding a default and the pace of tax collections this Spring will have a major impact on the ability of Treasury to delay a debt crisis; if tax collections are robust Treasury will have more time.  In any event, it is unlikely that an agreement on any other fiscal matters, including tax provisions, can be reached prior to a debt ceiling deal and recent reports suggest that House Republican Leaders and the Administration are a long way from agreement on the debt ceiling.  As of now House Republican Leaders are seeking spending cuts as part of a debt ceiling deal while Senate Majority Leader Schumer (D-New York) has taken the position that a clean increase on the debt ceiling is the only acceptable approach and has refused to negotiate a deal on any other terms.  The President has indicated a willingness to meet with and discuss Speaker McCarthy’s (R-California) proposals for a debt deal, but so far indications are that the White is seeking to force the Speaker to reveal the budget cuts he would propose while avoiding serious negotiations.  Some key Democrats have commented that the closer the US gets to a potential default without a deal in Congress the more likely the Speaker will be under pressure from a bipartisan group of Senators, the White House, and the business community to agree to a clean debt ceiling increase.

Business groups remain highly concerned over the failure of Congress last December to include a number of modifications to the 2017 Tax Reform measure (the return of R&D expensing, a delay/elimination of the phase-out for bonus depreciation, a modification of the corporate interest deduction) and the extension of almost forty popular tax provisions (extensions) and are searching for possible vehicles for these items.  The House economic package could become a vehicle for negotiations with the Senate, as could the Farm Bill., which traditionally has contained some tax provisions, as well as the FAA reauthorization bill, which is likely to contain a tax package renewing some aviation related taxes and fees.  The debt limit extension itself could become a tax vehicle, although Democratic Leaders, especially Senate Majority Leader Schumer (D-New York) take the position that the debt limit should be clean and without any extraneous provisions.

Democratic tax writers continue to take the position that they will not support tax breaks for business absent an agreement to expand the Child Credit, essentially the issue that was largely responsible for Congress’ failure to include a tax title in last December’s year-end omnibus spending bill.  There are indications, however, that Chairman Smith may be willing to negotiate a Child Credit deal that would also contain a work requirement of some type and that some Democrats may be willing to accept that approach.  Given that the divided Congress is unlikely to agree on a budget reconciliation bill that could pass the Senate with a simple majority, any fiscal legislation in this Congress will need to be bipartisan and Democrats may have to accept a work requirement on the expanded Child Credit that they rejected when they controlled the House and Senate last year.

While the new Congress is still young and organizing its agenda there are indications that Members on both sides of the aisle in both chambers have some tax priorities in this Congress and some of these, such as the R&D expensing proposal, have strong bipartisan support.   Because this is divided government the issue of when and how much will get done will depend on how much both Parties are wiling to compromise and most importantly, put aside their most partisan proposals.  The outcome of the debt ceiling debate, which has top priority, will help to determine the extent to which Party leaders can reach agreement on other issues on the tax agenda.