Well, they did it. Despite lingering resentment between Democrats and Republicans after the passage of the Tax Cuts and Jobs Act (P.L.115-97), Congress was able to pass tax legislation that was overwhelmingly supported by members from both parties. Following the House’s lead, on June 13, the Senate approved the Taxpayer First Act (H.R.3151), which President Trump is expected to sign in the coming days. Let’s quickly recap how we got here.
After the House originally approved the Taxpayer First Act in April with overwhelming bipartisan support, prospects for Senate passage were looking good. However, as news of the Free File scandal broke, senators grew uneasy about codifying the program into law. House lawmakers reintroduced the measure without the Free File provision—after which it sailed through both chambers. President Trump is expected to sign the bill as early as this week.
Now that we’re all caught up, what does this mean for tax legislation going forward? The tax writing committees have thus far displayed an ability to pass bipartisan legislation—something that is becoming increasingly rare in Washington. Enactment of the Taxpayer First Act is a positive sign that lawmakers will be able to pass additional tax legislation addressing retirement security, extenders and technical corrections to the TCJA.
Like the Taxpayer First Act, the Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R.1994) enjoys strong bipartisan support, though a few lawmakers have objected to various provisions, causing the bill to temporarily stall. If Senate Finance Committee Chair Chuck Grassley (R-IA) can address their concerns without losing many supporters in the process, there is a good chance it will also reach President Trump’s desk this session. Negotiations remain ongoing.
Similarly, the fate of legislation addressing the temporary tax provisions known as extenders looks promising. In February, Grassley and Senate Finance Committee Ranking Member Ron Wyden (D-OR) introduced the Tax Extender and Disaster Relief Act of 2019 (S.617) to retroactively extend 29 business and individual tax breaks. Although the bill has not moved much since then, the committee has recently refocused its efforts by establishing task forces to consider potential options for the temporary tax benefits. Those groups are currently hard at work deciding which provisions to make permanent, extend or eliminate.
What about technical corrections? Although not impossible, technical corrections are the least likely of the three to become law. Unless attached to a larger vehicle—such as an appropriations bill—there is only a small chance they will advance very far. However, lawmakers are under increasing pressure from the private sector to reach an agreement.
In order for Congress to realistically have a shot at passing any of these measures, it must happen before the 2020 presidential campaign truly kicks into full gear. Specifically, the nearer Congress gets to the 2020 election, the more likely Democrats will become increasingly opposed to handing the president any form of legislative victory.
On Tuesday afternoon, the House Ways and Means Committee introduced its long-awaited tax extenders package that includes four bills and over 50 individual tax provisions. Initial Joint Committee on Taxation (JCT) analyses have scored the package at a cost of roughly $106.6 billion, with the Child Tax Credit’s full refundability costing $50.7 billion and the extenders provisions clocking in at $33.2 billion.
The package now moves to a full committee markup on Thursday at 9:30 a.m. Our full analysis of the major components of each bill is below.
Tax Relief And Support For Families And Individuals Act of 2019
Title I – Extension of Certain Expiring Provisions
Subtitle A – Tax Relief and Support for Families and Individuals
This subtitle includes five sections previously introduced in the Senate version, with two notable differences. First, all provisions in the House bill are to be renewed through 2020 instead of 2019 in the Senate bill. Moreover, the only substantive difference was with the black lung liability trust fund excise tax (Sec. 105); the House version removed Senate language that would reduce the per ton tax rate on coal from underground and surface mines after 2018.
Subtitle B – Incentives for Employment, Economic Growth, and Community Development
This subtitle includes eight sections that were also introduced in the Senate version. Like Subtitle A, all House provisions are extended through 2020 instead of 2019, while two sections modified language from the Senate bill. First, Sec. 118—the American Samoa economic development credit—removes a distinction in the Senate bill that mandates eligibility for the credit only to domestic corporations that claimed the now-expired Sec. 936 possession tax credit before January 1, 2006. Second, the House’s empowerment zone tax extenders (Sec. 117) provision includes one additional geographic area designated as an empowerment zone, bringing the total from 40 to 41.
Subtitle C – Incentives for Energy Production Efficiency, and Green Economy Jobs
This subtitle of the House bill contains 14 extenders provisions. While varying in order, most credits in the House bill are the same in the Senate version introduced earlier this year, but are extended a year longer than the Senate version. The House version extends credits for renewable resource electricity by three years—except wind energy, which was only extended by one year—with certain preconditions for construction deadlines and the renewable production tax credit (PTC). The Senate bill only extended this credit for two years. The modification from the Senate bill to the alternative fuel mixture credit was carried over in the House version.
Subtitle D – Certain Provisions Expiring at the End of 2019
This subtitle includes a handful of new provisions not included in the Senate extender package. All of these credits will expire at the end of 2019: New Markets Tax Credit (NMTC), Employer tax credit for paid family and medical leave, Work Opportunity Tax Credit (WOTC), certain provisions related to beer, wine, and distilled spirits, look-through rule for related controlled foreign corporations, and credit for health insurance costs of eligible individuals.
Title II – Estate and Gift Tax
This section is new to the House bill. It would accelerate the planned increase of the estate tax from Jan. 1, 2026 to Jan. 1, 2023 to offset the cost of the Title I extender provisions.
Title III – Disaster Tax Relief
The sections concerning definitions (301), special disaster-related rules for use of retirement funds (302), temporary suspension of limitations on charitable contributions (304(a)), and special rules for qualified disaster-related personal casualty losses (304(b)) are identical to corresponding sections in the Senate bill. The following sections are largely also identical to existing provisions but contain minor changes: the ending date in the definition of “eligible employer” is extended to the enactment date of the Act (303), and a second definition of “qualified individuals,” specifically for persons impacted by Hurricane Sandy, is added to the special rule for determining earned income (304(c)). Additionally, the treatment of certain possessions section includes a tax mirroring provision.
New to the bill are sections establishing automatic 60-day extensions of any filing deadline for individuals in disaster areas (305), a simplification to the excise tax on private foundations intended to encourage post-disaster donations, and additional low-income housing credit allocations for the 2017 and 2018 disasters in California (307).
Promoting Respect for Individuals’ Dignity and Equality (PRIDE) Act of 2019
The PRIDE Act would allow legally married same-sex to change their filing status back to their year of marriage in order to qualify for credits and refunds. Currently, the tax code allows for revisions back to 2010, but the PRIDE Act would allow for a change in filing status beyond that. The bill would also ensure that language in the tax code referring to married couples uses only gender-neutral terminology.
Child Care Quality and Access Act of 2019
The bill would increase fiscal year 2020 and 2021 funding for child care by $1 billion, from $2.9 billion to $3.9 billion.
The Economic Mobility Act of 2019
The Economic Mobility Act of 2019 includes the Earned Income Tax Credit, Child Tax Credit, and Dependent Care Assistance Program. The Earned Income Tax Credit (EITC) is expanded for workers without children, taxpayers eligible for childless earned income credit in the case of qualifying children that don’t meet identification requirements, and credits for separated spouses. For workers with no qualifying children, the minimum age to qualify for the EITC will be dropped from 25 to 19, and the upper age limit will be increased from 65 to 66. The childless EITC percentage and phase-out percentage are increased from 7.65 to 15.3, bringing the earned income amount to $9,570 and increasing the phase-out amount to $11,310.
The Child Tax Credit (CTC) expands the child tax credit for 2019 and 2020. The refundability threshold is reduced from $3000 to zero. In addition, a permanent federal match for the CTC is granted for Puerto Rico and the other territories.
The Child Care Development Fund (CCDF) expands the child and dependent care tax credit and expands dependent care flexible spending accounts. The maximum credit rate is increased to 50 percent and the phase-out threshold is adjusted to begin at $120,000, raising it from $15,000. Childcare and dependent care expenses are doubled to $6,000 for individuals and $12,000 for two or more qualifying individuals. The exclusion amount for employer-provided dependent care is increased from $5,000 to $10,500 for 2020 and 2021.
How the Extenders Markup Will Unfold: With the extenders package now released, House Ways and Means Committee Chair Richard Neal (D-MA) has announced a markup on the four bills for Thursday. Committee Democrats spent three months crafting a package of short-term tax cuts they could all agree on. It was a grueling process, but they finally succeeded. Here is how the markup likely will play out.
- Extenders. This section will include all of the Grassley-Wyden provisions, plus at least three more that expire at the end of 2019: work opportunity tax credit (WOTC), new markets tax credit (NMTC) and craft brewing tax package. It also may include the controlled foreign corporation (CFC) Look-Through Rule. Cost: Between $30 and $40 billion.
- Working Families. This section will include expansions and extensions of three tax credits for working families: the EITC, the Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCTC). Most of the Democrats on the committee insisted on this package in order to send the signal that they are more concerned about working families than they are business in industries with targeted tax incentives. Presumably, these will be extended through 2020 as well. Cost: Depending on how they are drafted, $80 billion or more.
- Offsets. The bill will include an early sunset to the Tax Cuts and Jobs Act (P.L.115-97) provision that doubles the exemption amount for the estate tax from $5.5 million to $11 million. Originally scheduled to expire in 2025, it will be backed up to 2022 or thereabouts. This will raise about $30 billion. In addition, some committee members urged that the mark raise the corporate tax rate from 21% to 22%. This could make the bill revenue neutral over 10 years. However, we understand that Neal objected to this provision. It is unclear what, if any, other offsets will be included.
Amendments — Democrats will not offer amendments. They will praise Neal for putting together a good bill and vote against any amendment the Republicans offer. Even if the GOP offers an amendment Democrats support, such as the Qualified Improvement Property (QIP) technical correction, Democrats will vote no. New members to the committee will complain behind the scenes, but all will vote no on each amendment. Republicans will seek to strike the offsets, or strike and replace them with something else. They will argue that these tax increases will hurt farmers and family-owned businesses. Republicans will use the markup to defend the TCJA and the good economy. It is not clear how they might react to the family tax credit expansions.
Passage and Beyond — The vote to report the bill will likely be party-line. However, the bill will not immediately be ready for consideration on the House floor. The decisions made by Democrats over the past three months (i.e. keeping all the extenders, including offsets, the choice of working family tax credits) are not fully supported by the entire House Democratic caucus. The members will, at minimum, need time to be educated, and the bill may need to be modified to get enough votes to pass the House. It may never see action on the House floor separately. Instead, the package might be negotiated against the Grassley-Wyden bill (that bill has not been considered in the Senate) as part of a budget deal in the fall.
Landing at Your Doorstep
The Senate Finance Committee’s top two lawmakers—Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR)—sent three letters last Monday to the attorneys representing individuals wrapped up in tax-advantaged land conservation deals that have proven controversial. The three letters specifically look to garner more information on so-called “syndicated conservation easements” agreed upon by the individuals. These deals were the target of an Internal Revenue Service (IRS) inquiry in 2016 when the IRS flagged some of these land conservation agreements as potentially fraudulent and lacking transparency. Typically, syndicated conservation easements are deals where numerous individuals claim tax deductions for donations of property that are protected from future development under Sec. 170(h) of the tax code. The probing letters—found here, here and here—follow over a dozen letters sent at the end of March asking these individuals to provide more information on the nature of the deals. If the individuals fail to respond to the new inquiries by June 21, the letters signal that the committee may move forward to determine if these deals inflated property valuations to generate fraudulent tax deductions.
If You Had… One Opportunity
Would you capture it, or let it slip? In order to push the Tax Cuts and Jobs Act (P.L.115-97) (TCJA) over the finish line, Republicans used the budget reconciliation process, which limits debate and requires legislation to gain only a simple majority to pass. However, because of this, lawmakers were only allowed to include provisions that affect revenues and spending. In other words, Congress was unable to add bipartisan language directing the Treasury Department to collect and analyze public information on the popular opportunity zone program.
Now, in response to complaints from the private sector that there isn’t adequate information to invest in these zones, the Treasury Department is asking the public how the administration can provide this information to potential investors. Answering the call were nearly 70 organizations that argued the department can unilaterally impose reporting requirements. If that approach fails, there is a legislative angle that could work. Sens. Tim Scott (R-SC) and Cory Booker (D-NJ), who sponsored the original opportunity zone language, have introduced legislation (S.1344) that would require the Treasury Department to collect and issue a report on the program. In addition to Scott and Booker, the legislation is currently cosponsored by Sens. Maggie Hassan (D-NH) and Todd Young (R-IN).
1111 CONSTITUTION AVENUE
As expected, the House Appropriations Committee passed the FY 2020 Financial Services and General Government appropriations package last Tuesday by a 30-21 vote. Changes between the final bill and the subcommittee version were minimal, with the exception of two amendments being adopted by the full committee. Both amendments—one making noncontroversial technical changes and the other ensuring capacity at land ports of entry for processing of asylum seekers—were adopted by voice vote. The spending bill now awaits full chamber consideration, and it appears likely to be attached to one of two appropriations “minibuses” expected in the coming weeks. If passed, the bill would allocate $12 billion to the Internal Revenue Service (IRS) and increase the agency’s appropriations by $697 million (or 6.2%) from FY 2019. The bill would provide $5.2 billion for IRS enforcement activities—a $297 million increase—while nearly $400 million would be allocated for closing the persistent tax gap. Moreover, taxpayer services and operations support received funding boosts of $67 million and $4 billion, respectively, while the agency’s information technology infrastructure would receive nearly $300 million for modernization efforts.
A SALT(y) End
Federal Regulations published by the Treasury Department on Tuesday ended the hopes of high tax states, like New York and New Jersey, to find ways to work around the $10,000 cap on federal deductions for state and local taxes (SALT) established by the Tax Cuts and Jobs Act (P.L.115-97). The SALT cap led some states to design programs intended to help taxpayers skirt the deduction ceiling by allowing residents to donate to state-created charitable funds. Individuals would receive a state tax credit for a certain percentage of their donation; taxpayers would also receive a federal tax deduction for their charitable contributions.
In response to the regulations, New York Governor Andrew Cuomo said, “The federal government is continuing its politically motivated economic assault on New York. We will pursue all options, including litigation, to resist this attack on our state and our taxpayers.” Treasury also released guidance clarifying that if an individual donates to state-backed charities, including school choice programs like vouchers, which are popular in Republican states, those donations could be used as write offs up to the $10,000 cap. Education Secretary Betsy DeVos stated the protections for taxpayers who contribute to local programs are “one of the most important aspects of the final rules and additional guidance.”
On the Hill, House Democrats continue to wage their own war on the SALT cap. The next battle: a Ways and Means Select Revenue Measures Subcommittee hearing on June 25 entitled, “How Recent Limitations to the SALT Deduction Harm Communities, Schools, First Responders, and Housing Values.”
Hurrah for HRAs
On June 13, the Internal Revenue Service (IRS), Labor Department, and Health and Human Services Department (HHS) finalized rulemaking on health reimbursement arrangements (HRA) that would enable employers to offer subsidies to their employees to buy individual market coverage on or off of the Obamacare marketplaces. Effective January 2020, the regulations would further mandate that all firms offering HRAs would need to offer them by classes of employees and would bar employers from offloading their sickest employees into the Obamacare marketplace. The administration has championed HRAs—employer-funded and tax-advantaged accounts to help cover the costs of qualified medical expense—as a mechanism for assisting small and mid-sized businesses in offering health coverage to their employees.
While the administration estimates that upwards of 11.4 million workers would gain coverage through HRA expansion—800,000 of which are currently uninsured—there appears to be legal trouble on the horizon resulting from the rulemaking. Notably, the Attorneys General of California, Illinois, Maryland and Rhode Island all wrote to the IRS in December urging the agencies to withdraw the rule given prospective contradictions with existing laws under the Affordable Care Act (ACA) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The Federal Register is expected to have the final rules posted by Thursday, June 20.
Another Warren Proposal
Democratic presidential contender Sen. Elizabeth Warren (D-MA) announced on Thursday she intends to introduce legislation with House Majority Whip James Clyburn (D-SC) that will tackle student loan debt. The proposal outlines a few specifics that were absent from her original campaign promise in April. The bill would eliminate $50,000 in student loan debt for those making below $100,000, and those with incomes from $100,000-$250,000 would see a diminished benefit as their income neared $250,000. Those making more than that would be ineligible for the benefit. Warren claims her proposal would benefit 42 million Americans, or 95% of student borrowers. According to a cost estimate of the proposal, the program would cost about $640 billion. In order to pay for the breaks, Warren would dedicate funds raised from increased taxes on the wealthiest taxpayers in the U.S.
AT A GLANCE
- Tax Treaties? Who Knew! As many as seven delayed tax treaties will be considered in the Senate Foreign Relations Committee markup later this week, according to Committee Chair Jim Risch (R-ID). For nearly a decade, these bilateral treaties have been withheld from consideration largely by Sen. Rand Paul’s (R-KY) privacy concerns, however, Risch claims there is growing bipartisan support to advance the provisions. The treaties were historically established to help calibrate corporate tax regimes so multinational firms would not be subject to double taxation.
- The Alcatraz Special. Private prison companies would be exempt from receiving any tax breaks under a new bill introduce by Senate Finance Ranking Member Ron Wyden (D-OR) on Thursday. Specifically, the legislation would bar private prison companies from organizing as real estate investment trusts (REITs) and qualify for a special exemption that allows them to be taxed at the individual – not corporate – rate.
- Enough With These Fringe Benefits. The House Ways and Means Subcommittee on Oversight canceled a hearing, originally scheduled for Wednesday, to explore the 21% tax on transportation-related fringe benefits to nonprofits. Many churches, universities, and charities have criticized the application of the tax since its creation under the Tax Cuts and Jobs Act (115-97) (TCJA). The busy appropriations week spurred concerns there will not be time for the hearing, and the subcommittee is tentatively considering a reschedule before the August recess.
- Opportunity Zone Regulations. Our Nicole Ament discusses how investors can take advantage of the opportunity zone regulations.
- President Trump's Tax Returns. On Friday, the Justice Department backed the Treasury Department’s assertion that Secretary Steven Mnuchin could not reasonable satisfy the House Ways and Means request to acquire President Trump’s tax returns. Read the full 33-page opinion piece here.