Legislative Lowdown
Senators Renew Efforts to Reverse R&D Tax Modification. Last Friday, a bipartisan coalition of 12 senators introduced the American Innovation and Jobs Act to increase incentives for businesses that invest in domestic research and development (R&D). Spearheaded by Sens. Maggie Hassan (D-NH) and Todd Young (R-IN), the legislation would significantly boost a pair of R&D credits under Internal Revenue Code sections 174 and 41. Lawmakers had previously pursued similar legislation to enhance these incentives in the 117th Congress—resulting in a partial victory with the significant expansion of the section 41 R&D credit through the Inflation Reduction Act (IRA).
The primary focus of the new bill is to reverse a provision included in the Tax Cuts and Jobs Act (TCJA) that required businesses to begin amortizing section 174 R&D expenditures over five years after 2021. Before this, taxpayers could choose to deduct these expenditures immediately, capitalize the expenses and amortize them over five years or elect a 10-year amortization of expenditures under the alternative minimum tax rules. If enacted, this new bill would retroactively reverse the restrictions imposed by TCJA, again allowing taxpayers to immediately deduct any qualified R&D expenses incurred in tax years 2022 or later.
Several bipartisan attempts were made to restore immediate R&D deductibility in the 117th Congress, although they were all ultimately unsuccessful due to various political roadblocks. Last December, section 174 relief was left out of the 2023 omnibus budget after Democrats and Republicans could not reach mutually agreeable terms on a tax-extenders compromise.
Outside of modifications to section 174 amortization, the Hassan-Young bill would significantly expand the section 41 payroll tax credit currently provided to small businesses that engage in qualified R&D activities. Specifically, the bill would annually increase the current $500,000 credit amount cap to reach a maximum of $750,000 by 2033. In addition, the bill would triple the current eligibility phaseout threshold to allow businesses with up to $15 million in annual gross receipts to qualify for the credit, among other changes.
In the 118th Congress, some Democratic lawmakers may continue to insist on the inclusion of Child Tax Credit (CTC) expansion before offering support for business incentives like the R&D tax credits. Sen. Michael Bennet (D-CO), for example, recently stated his intention to “continue to oppose cutting taxes for corporations without passing an expanded CTC.” Ultimately, standalone tax legislation is unlikely to receive serious consideration in the coming months. Instead, businesses’ best hope for section 174 or 41 expansions will probably emerge when discussions begin later in the year on the fiscal year 2024 omnibus budget deal.
Yellen Defends 2024 Budget Proposals before Senate Tax Writers. On March 16, Treasury Secretary Janet Yellen appeared before the Senate Finance Committee to testify on President Joe Biden’s fiscal year 2024 budget proposal. Lawmakers on both sides of the aisle also questioned Yellen on the Treasury Department’s ongoing role in stabilizing the U.S. banking sector in the wake of the high-profile collapses of Silicon Valley Bank and Signature Bank earlier this month. On the budget, lawmakers sparred over proposals to fund new refundable tax credits with $4.7 trillion in additional federal revenue over the next decade.
In the hearing, senators focused on several changes to the tax code that were addressed in the budget proposal. Sen. Todd Young (R-IN) noted that the budget request would effectively raise taxes on individuals with less than $400,000 in annual income by failing to extend any of the Tax Cuts and Jobs Act provisions currently scheduled to sunset after 2025. He said this represented a failure in the Biden administration’s pledge not to increase taxes on low- and middle-income individuals. Countering this argument, Senate Finance Committee Chairman Ron Wyden (D-OR) claimed that the budget proposal would more than offset these tax hikes with an increase in the value of the current Child Tax Credit and Low Income Housing Tax Credit.
Despite the lack of significant new climate provisions in the budget proposal, several lawmakers raised questions concerning the ongoing implementation of Inflation Reduction Act (IRA) energy proposals. Sens. Sherrod Brown (D-OH) and Catherine Cortez Masto (D-NV) noted that the IRA created new tax incentives to support domestic solar production and asked Yellen to ensure that China’s solar industry could not profit from these credits. Yellen agreed, noting the Treasury Department’s forthcoming guidance on this issue. Sen. Tom Carper (D-DE) also requested that the Treasury Department expedite guidance on several other clean-energy incentives to ensure taxpayers were fully aware of benefits for which they may qualify.
Ranking Member Mike Crapo (R-ID) highlighted his opposition to the ongoing implementation of the global minimum tax deal negotiated through the Organisation for Economic Co-operation and Development (OECD). He accused the Treasury Department of supporting the efforts of foreign nations and the OECD to tax the profits of U.S. companies. In response, Yellen defended the tax agreement and said it provided a way to impose a floor on the taxation of multinational corporations. Sen. Steve Daines (R-MT) echoed Crapo’s sentiment, asserting that the OECD’s efforts benefit state-owned enterprises at the expense of private businesses.
As expected, GOP lawmakers continued to raise concerns over the $80 billion in above-baseline funding allocated to the Internal Revenue Service (IRS) through the IRA. Yellen said the IRS had already spent approximately 1% of these new funds to reduce the paper return backlog significantly. She committed to providing the committee with a comprehensive operational plan for spending the new funding in “the near future.” Notably, Yellen had previously imposed a deadline on the IRS to furnish this plan by Feb. 17.
On Thursday, Yellen will justify the budget request before the House Appropriations Financial Services and General Government Subcommittee along with Office of Management and Budget Director Shalanda Young and Council of Economic Advisers Chair Cecilia Rouse.
CBO Report Furthers Partisan Rift on Deficit Reduction Approaches. On March 14, the Congressional Budget Office (CBO) issued an analysis comparing two possible spending paths to balance the U.S. federal budget over the next decade. This report was requested by Senate Finance Committee Chairman Ron Wyden (D-OR) and Senate Budget Committee Chairman Sheldon Whitehouse (D-RI) as part of Democratic lawmakers’ broader efforts to frame the GOP budgetary agenda as economically unfeasible.
CBO first analyzed a budget path that would allow for the expiration of several temporary tax relief provisions provided by the Tax Cuts and Jobs Act (TCJA), including changes to individual income tax provisions and higher estate and gift tax exemptions. In this case, CBO estimated that the budget deficit could be entirely eliminated if lawmakers gradually reduced noninterest federal outlays by a total of 29% over the next decade. If federal spending reductions did not include Social Security or Medicare, as most lawmakers have indicated, applicable noninterest outlays would require a decrease of 57% by 2033.
In comparison to this budget strategy, CBO also analyzed a second path that accounted for the possible extension of all expiring TCJA provisions. In this scenario, federal outlays would need to be reduced by an additional 6% over the coming decade for a total cut equal to 35% of all current federal expenditures by 2033. The report also noted that if TCJA was made permanent and no spending cuts were levied against Social Security, Medicare, defense or veterans’ programs, all other federal spending would need to be reduced to zero. Wyden and Whitehouse explicitly requested this figure because it seems to mirror certain promises made in budget proposals offered by some Republicans.
In the wake of this report, Democrats have touted CBO’s findings as proof that spending cuts alone are insufficient to balance the deficit—especially if TCJA tax cuts are extended. In a press release on March 14, Wyden accused House Speaker Kevin McCarthy (R-CA) of having articulated a budget proposal that “made impossible promises,” which are “seriously alarming with a catastrophic default getting closer every day.”
However, Republican lawmakers have generally not advocated for proposals to completely eliminate the deficit, as outlined in this report. A recent proposal from the House Freedom Caucus, for example, would instead only reduce the 10-year deficit by $3 trillion—about 15% of the total projected deficit increase between 2022 and 2033. In another case, McCarthy has recommended freezing federal spending at fiscal year 2022 levels, without necessarily cutting any additional specific agency spending.
In opposition to the GOP’s proposed cuts to federal spending, many Democratic lawmakers have advocated for tax increases to reduce the deficit. The Biden administration also embraced this strategy, offering $4.7 trillion in new tax increases over the next decade as part of its fiscal year 2024 budget proposal.
FASB Publishes Draft Modified Tax-Reporting Standards. The Financial Standards Accounting Board (FASB), a private-sector organization that oversees accounting standards, released a proposed Accounting Standards Update on March 15 that would modify the Topic 740 income tax disclosure requirements for publicly listed companies. This proposed amendment to generally accepted accounting principles (GAAP) would increase corporate transparency by ensuring companies make public additional disaggregated data regarding their exposure to global tax risks.
Under the proposal, companies would be required to report the individual tax implications of eight data categories—instead of simply disclosing their aggregate financial effects. This would include specific disclosures of the total income tax implications (in both currency amounts and percentages) relating to issues like newly enacted tax laws, tax credits claimed, foreign tax laws, changes in unrecognized tax benefits and cross-border tax laws, among others. Additionally, the proposed changes would require all entities to disclose the year-to-date amount of income taxes paid—disaggregated by domestic, state and foreign categories on both an interim and annual basis.
The proposal would require additional disaggregation within specified categories for individual reconciling items that exceed an established quantitative threshold. The threshold would be set at 5% of an amount equal to the pre-tax income (or loss) from continued operations multiplied by the applicable federal income tax rate. Notably, in the case of reconciling items in the foreign tax effects category that exceed the threshold, companies would be required to disclose the jurisdiction to which the payment was made.
Despite growing pressure from progressive stakeholders, FASB ultimately elected not to align the U.S. accounting standards with the Organisation for Economic Co-operation and Development’s country-by-country tax reporting requirements. The document explains that such disclosures are “beyond the objective of general-purpose financial reporting.” Still, the proposed disclosure standards represent a significant effort to increase investor transparency regarding multinational corporations.
If adopted, the proposed changes are expected to be applied to companies retrospectively, although the exact effective date is currently unknown. The proposal also raises several unresolved questions where FASB requires additional clarity from stakeholders to address properly. Comments on questions or other aspects of the proposal are due on May 30, and there is no specific timeline for the completion of the project.
At a Glance
Biden Vetoes Efforts to Overrule ESG Investment Rulemaking. Yesterday, President Joe Biden issued the first veto of his presidency, rejecting lawmakers’ resolution to overrule his administration’s recent investment rulemaking. In a statement on Twitter, Biden argued that Congress’ efforts to repeal this rule would “put at risk the retirement savings of individuals across the country.” The House and Senate approved this Congressional Review Act resolution on Feb. 28 and March 1, respectively, to overturn the Department of Labor investing rule. The Biden administration guidance at issue allows retirement plan fiduciaries to consider environmental, social and governance (ESG) factors when making decisions related to retirement investments and proxy voting, among other shareholder rights. In the House, Rep. Jared Golden (D-ME) was the sole Democrat to vote in favor of passage (216-204), while Sens. Jon Tester (D-MT) and Joe Manchin (D-WV) broke rank and voted with Republicans in the Senate (50-46).
House GOP Introduces Sweeping Energy Reforms. On March 14, House Majority Leader Steve Scalise (R-LA) introduced the Lower Energy Costs Act, incorporating myriad Republican proposals to increase domestic energy production and lower costs for U.S. consumers. The proposal generally focuses on expediting the permitting process and expanding the use of fossil fuel resources, without significantly modifying the tax code. However, one proposal in the bill would repeal a portion of the Clean Air Act that currently imposes a tax of at least $900 per ton for methane emitted by certain taxpayers after 2023. The bill would also repeal $27 billion in funding for the Greenhouse Gas Reduction Fund enacted through the Inflation Reduction Act. While this partisan package is unlikely to gain sufficient support to pass in a divided Congress, Republicans will use these proposals as a baseline for possible negotiations around energy legislation later this year.
GAO Previews Extensive IRS Oversight Agenda. In a statement before the Senate Appropriations Committee Subcommittee on the Legislative Branch, Comptroller General Gene Dodaro informed lawmakers of ongoing efforts concerning Internal Revenue Service (IRS) oversight. Specifically, Dodaro highlighted that the Government Accountability Office (GAO) has “32 audits ongoing or planned on [Inflation Reduction Act (IRA)] spending through 2025, with more audits expected in the future.” Dodaro said that many of these GAO audits are expected to investigate the IRS’ long-term spending plans for the $80 billion in additional funding it received through the IRA. In written testimony provided by Dodaro, he also highlighted that the IRS had adopted 68 of the 120 recommendations made by the GAO, resulting in significant protections for U.S. financial operations and individual taxpayer data.
Brownstein Bookshelf
White House Advances Superfund Tax Rulemaking. On March 14, the White House Office of Information and Regulatory Affairs completed its review of the proposed modified Superfund Excise Tax Rules that went into effect in July.
Collins Requests IRS Funding Redistribution. In a blog post on March 16, National Taxpayer Advocate Erin Collins requested that Congress redirect certain mandatory Internal Revenue Service (IRS) appropriations to fund information technology modernization instead of taxpayer enforcement and operations support.
Senators Push for Modifications to Corporate Transparency Implementation. On March 16, a bipartisan group of lawmakers sent a letter to the Treasury Department’s Financial Crimes Enforcement Network to request that the agency modify current rulemaking to better align with congressional intent related to the Corporate Transparency Act.
Hearings and Events
House Ways and Means Committee
On Friday, the full committee will hold a hearing entitled “Hearing on the Biden Administration’s 2023 Trade Policy Agenda,” in which the following witness will testify:
- Katherine Tai, United States Trade Representative
Senate Finance Committee
On Wednesday, the full committee will hold a hearing entitled “The President’s Fiscal Year 2024 Health and Human Services Budget,” in which the following witness will testify:
- Xavier Becerra, Secretary, Department of Health and Human Services
House Appropriations Committee
On Thursday, the Financial Services and General Government Subcommittee will hold a hearing entitled “Budget and Oversight Hearing – President Biden’s Fiscal Year 2024 Budget Request and Economic Outlook,” in which the following witnesses will testify:
- Cecilia Rouse, Chair, Council of Economic Advisers
- Janet Yellen, Secretary, Department of the Treasury
- Shalanda Young, Director, Office of Management and Budget
Senate Appropriations Committee
On Wednesday, the Financial Services and General Government Subcommittee will hold a hearing entitled “Review of the FY 2024 Budget for the Department of the Treasury,” in which the following witness will testify:
- Janet Yellen, Secretary, Department of the Treasury
Administration
Tuesday, March 21
Office of Public Engagement
EV Acceleration Challenge Webinar
Tuesday, March 28
Small Business Administration
Choosing Your Legal Structure
Private Sector
Friday, March 24
National Bureau of Economic Research
International Finance and Macroeconomics Program Meeting, Spring 2023
Tuesday, March 28
Peterson Institute for International Economics
Global Economic Prospects: Spring 2023
