Taxation & Representation, Sept. 27, 2022

Brownstein Hyatt Farber Schreck


Congress Advances Towards CR as Deadline Approaches. Yesterday, Senate Democrats proposed legislation to fund the federal government through Dec. 16 with the use of a continuing resolution (CR). The proposal would fund each agency at current FY 2022 levels until the December deadline, by which point lawmakers would need to pass a set of comprehensive appropriations bills or consider another short-term CR.

While lawmakers and President Joe Biden submitted several requests for supplemental funding in this CR, ultimately, only a short list of proposals were included in the final proposed bill. One such proposal that received bipartisan support for inclusion was additional aid for Ukraine to support the country in its war with Russia. The bill includes roughly $12 billion for assistance, a majority of which is allocated for the purchase of new weapons and intelligence support for the country. The potential CR also includes approximately $3 billion for miscellaneous natural disaster aid.

Previously included in the legislation was a controversial proposal from Sen. Joe Manchin (D-WV) to reform the U.S. energy permitting process through his Energy Independence and Security Act. This was likely included in the bill because of an agreement with Senate Majority Leader Chuck Schumer (D-NY) that was needed to secure Manchin’s vote on the Inflation Reduction Act in August. However, late on Sept. 27, Manchin requested that Schumer pull his permitting reform language from consideration as part of the CR.

Congress must pass a continuing resolution by Sept. 30 to avoid a government shutdown. At the time of this writing, the Senate is expected to vote on cloture of the CR later tonight. If the cloture vote meets the 60-senator threshold, the bill will advance towards a floor vote in the Senate and subsequent House consideration before the end of the fiscal year.

Treasury Slow to Announce Guidance on New Energy Tax Credits. Included in the recently passed Inflation Reduction Act (IRA) is nearly $400 billion in new federal expenditures for a broad range of energy and climate policies. Of this funding, the Joint Committee on Taxation estimated that over half would be spent on new and expanded tax incentives designed to expedite the transition to clean energy generation and increase domestic production. Now, with the bill signed into law, the Treasury Department will be responsible for providing most of the necessary regulations with input from the Department of Energy (DOE), the Environmental Protection Agency and the Department of Labor.

To date, Treasury has released almost no information on a potential timeline for when taxpayers may expect guidance concerning the implementation of the IRA’s energy sections. While many of the energy tax credits are relatively-straightforward extensions of current law, there are several key statutes that will require significant explanation. These include the implementation of completely new hydrogen and advanced manufacturing credits; the development of new rules concerning transferable and direct pay credits, especially those payable to non-taxpayers; and the creation of requirements around new prevailing wage and apprenticeship stipulations attached to some bonus credit amounts.

Furthermore, officials at Treasury have generally deferred most stakeholder requests for energy-related meetings. Reports indicate that Treasury has focused its limited bandwidth on preparing to administer the 15% book profits minimum tax that is scheduled to go into effect in 2023.

The most probable explanation for the absence of communication on energy tax guidance is that Treasury is still understaffed. Though it employs nearly 100,000 staff, about 80% of personnel are dedicated to the operation of the IRS, an agency that is also currently experiencing its own staffing issues. To remedy these shortfalls, the Treasury Office of Tax Policy, currently spearheaded by Assistant Secretary Lily Batchelder, is expediting hiring efforts with a focus on private-sector experts with experience in renewable-energy financing, among other key veterans of the energy industry.

Applications Open for New Hydrogen Hub Project. While the Treasury Department has yet to release significant guidance on energy tax incentives greenlit through the IRA (see above), earlier this week, the Department of Energy (DOE) released new information on ongoing efforts to allocate funding for a novel hydrogen hub project. The DOE regional clean hydrogen hubs (H2Hubs) initiative received $8 billion in total grant funding through the Infrastructure Investment and Jobs Act to develop at least four new hydrogen communities. Each community is expected to include technology to produce, transport and utilize low-carbon hydrogen.

On Thursday, the DOE Office of Clean Energy Demonstrations began to solicit applications for the first $7 billion in H2Hub funding. Of note, the funding opportunity mentions that the DOE is now hoping to, at least partially, fund between six and 10 hubs, and to the maximum extent practicable, it will try to select a wide array of projects that encompass several different feedstocks and end uses for the hydrogen. The first stage of the application process requires the submission of a concept paper outlining the applicant’s proposed project, potential timeline, risk analysis and overview of anticipated total cost and job creation. The deadline for applicants to submit concept papers is Nov. 7, 2022, and full applications for the program are due on April 7, 2023.

In conjunction with the opening of H2Hub applications last week, the DOE released draft guidance concerning the target lifecycle emissions requirements for produced hydrogen to be considered clean. The proposed guidance established a minimum lifecycle emissions target that is in line with the IRA’s new 45V hydrogen production tax credit at 4 kg of CO2e emitted per 1 kg of pure hydrogen produced. While this new Clean Hydrogen Production Standard (CHPS) is not touted as a regulatory standard, it is worth noting that it will likely be the baseline lifecycle emissions standard for any future hydrogen federal funding opportunities in the foreseeable future.

GOP Outlines Economic Agenda for Next Congress. Last Friday, House Minority Leader Kevin McCarthy (R-CA) unveiled the Republican’s new “Commitment to America” agenda. The document is intended to act as a comprehensive policy platform for Republicans running in the upcoming midterm elections, outlining several key legislative priorities that the party intends to pursue in the next Congress—especially if Republicans take control of one or both chambers.

The plan is broken down into four sections:

  • An economy that’s strong, which covers inflation and cost-of-living increases, American energy independence and addressing issues with the supply chain.
  • A nation that’s safe, which addresses border security, public safety and national security matters.
  • A future that’s built on freedom, which includes a discussion of the GOP’s priorities related to healthcare and education, as well as its plans to crack down on Big Tech.
  • A government that’s accountable, which includes a discussion of constitutional freedoms, government accountability and reforming the “proxy voting” system created during the COVID pandemic that allows members to vote without being physically present on the floor of the House.

The first section of the agenda focuses on the GOP’s new economic plan—in particular, the document blames increased government spending under the Biden administration for exacerbating current inflationary pressures. To remedy these economic challenges, McCarthy suggests introducing deregulatory policies and tax cuts, including an extension of several business tax incentives that are currently scheduled to expire in 2025. McCarthy has also continuously rebuked Democrat’s commitment to funding the IRS with $80 billion in new spending, committing to introduce legislation to repeal funding for new auditors on the first day of the 118th Congress if Republicans take control of the House.

The agenda also describes several policies intended to increase domestic energy production. Notably, this includes policies intended to boost both renewable and fossil fuel energy generation methods. To accomplish this, McCarthy suggests the pursuit of policies to reduce the permitting process for new energy projects by 50%, a bipartisan proposal that has long been a top priority for Sen. Joe Manchin (D-WV). McCarthy also advocates for the sale of several new federal sites to oil companies to increase domestic fuel production.

Throughout the agenda, McCarthy notes China’s perceived dominance in the global supply chain, recommending that legislators take steps to cut off the country from U.S. markets and resources. Included in this strategy is a suggestion to bolster domestic manufacturing and increase U.S. global agenda competitiveness.

The agenda also includes several non-economic policy goals including a reduction in crime, increased government accountability and greater freedoms for all Americans.


Senate Finance Republicans Letter to Rettig on IRS Funding. On Sept. 22, all 14 Republicans on the Senate Finance Committee sent a letter to IRS Commissioner Chuck Rettig requesting more information on how the agency will spend the $80 billion it will receive from the Inflation Reduction Act. Led by committee Ranking Member Mike Crapo (R-ID), the group requested detailed information on how the IRS will prioritize taxpayer services, guard against partisan targeting, protect taxpayer privacy, modernize technology and track and publish reports to establish transparency and accountability, allowing for independent oversight. The senators requested a response from the IRS by Oct. 28, 2022.

Some of the items mentioned in the letter are bipartisan priorities. In a recent memo and speech to the IRS, Treasury Secretary Janet Yellen also emphasized areas on which the agency should focus in its spending plan for the $80 billion in funding. Taxpayer services were at the top of Yellen’s list, promising an improvement in phone service to drastically improve the agency’s current rate of 10-15% of service to at least 85%. She also noted that phone wait times will also be cut in half, from an average wait of nearly 30 minutes to less than 15 minutes. Similar to the Senate Finance Committee Republicans’ letter, Yellen also emphasized the need for the IRS to transform its current technology systems. Yellen noted that modernizing technology will allow taxpayers to fully interact with the agency digitally, including responding to notices online and other processes that allow for faster return processing and refunds.


GOP Raises Resolution of Inquiry on Pillar One. Last Tuesday, the House Ways and Means Committee voted down a resolution of inquiry that would have directed Treasury Secretary Janet Yellen to provide her department’s analysis of the effects of Pillar One of the Organisation for Economic Co-operation and Development’s global minimum tax proposal on “reallocating taxing rights from the United States to foreign jurisdictions,” including the effects on U.S. tax revenues. The resolution was introduced by Rep. Kevin Hern (R-OK) and was supported by committee Republicans. As Hern stressed, “Pillar One could be a global surrender of American tax sovereignty and the tax writers of this committee, both Democratic and Republican, deserve to know the details of the unilateral goals of this administration.” Other committee members have voiced concerns about the effect that Pillar One would have on U.S. companies, which would bear most of the tax burden, and the U.S. fisc. While the committee’s Ranking Member Kevin Brady (R-TX) explained at the markup that the tax redistribution would unjustly burden U.S. businesses, Chair Richard Neal (D-MA) urged his colleagues to oppose the resolution.


Buchanan Introduces Bill to Extend TCJA Tax Cuts. Last Tuesday, Rep. Vern Buchanan (R-FL) introduced the TCJA Permanency Act with the support of four other House Republicans, including Ways and Means Ranking Member Kevin Brady (R-TX). The bill would make permanent many of the expiring tax provisions that were originally enacted as part of the Tax Cuts and Jobs Act (TCJA). These provisions include lower individual tax rates, 199A deduction and increased standard deduction, all of which are currently set to expire in 2025. Buchanan is the second-most-senior Republican on Ways and Means and is currently vying to be the top Republican on the committee after Brady’s retirement at the end of the 117th Congress.

NAM Says Changes to 163(j) Could be Disastrous for U.S. Economy. Last week, the National Association of Manufacturers (NAM) published a report on the potential economic effects of the expiration of the TCJA changes to 163(j). Beginning in 2017, the deduction for net business interest expenses was limited to a maximum of 30% of a taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA); this year, the limitation reverts to a maximum of 30% of a taxpayer’s earnings before interest and taxes (EBIT). NAM concluded that if the TCJA provision is not extended, the U.S. economy will lose a total of 467,000 jobs and just under $45 billion in total GDP. Republicans support an extension of the EBITDA calculation and hope to include it in a tax extenders package in December when this Congress ends.

Cost Estimates of Year-End Tax Items. As discussions over a potential year-end tax package continue, the Committee for a Responsible Federal Budget (CRFB) released a budget projection on both the short- and long-term costs of enacting several popular policy priorities. Notably, CRFB estimated that the 10-year costs of extending the pre-2022 net interest deduction limit (see previous paragraph) would increase the federal deficit by approximately $200 billion over the next decade. Two other potential business tax extenders, the reinstatement of full research and expenditure expensing and an extension of 100% bonus deprecation, would cost the government an estimated $400 billion total in the 10-year scoring window. The report also estimated that a permanent extension of the expanded child tax credit (CTC) (see paragraph below) would cost an average of $120 billion annually over the next decade.

Poll Indicates Expanded CTC Among Top Priorities for Voters. Democracy Corps, a left-leaning survey organization, released results of a nationwide poll they conducted earlier this month on voter opinions heading into the midterm elections. As is usually the case, a majority of registered voters cited the economy and cost of living as their greatest concerns. Notably, the poll found that several key voting demographics believed that an expanded CTC should be the top policy priority for Democrats before the elections. This poll emerged as some Democrats renew efforts to restore the increased CTC amounts that were provided to taxpayers during the peak of the COVID-19 pandemic.

IRS Funding Could Lead to Audits on Middle Class and Small Businesses. The National Taxpayers Union Foundation (NTUF), a fiscally conservative advocacy group, published a policy paper last Wednesday on the potential ramifications of the nearly $80 billion in new IRS funding provided by the Inflation Reduction Act. Among other key conclusions, NTUF believed that the influx of funding will lead to overzealous enforcement practices that may negatively affect the middle class and small business owners, despite directives from Treasury Secretary Janet Yellen that the funding may not be used to increase the percentages of audits against taxpayers that make less than $400,000 annually.

Wyden Continues Investigations into Life Insurance Firms. Last week, Senate Finance Committee Chair Ron Wyden (D-OR) sent new letters to three insurance firms in a continuation of his recent investigations into the use of private placement life insurance. These new letters were sent to Prudential, Zurich and the American Council of Life Insurers. Wyden said his inquiry targets wealthy individuals, who he believes use private placement life insurance (PPLI) policies as tax shelters. He noted that investment in these policies is “only available to the wealthiest 1% of Americans,” and accused them of “conceal[ing] assets and avoid[ing] paying U.S. taxes.”

China, Others Warning to U.S. On EV IRA Implementation. The Inflation Reduction Act includes a tax credit of up to $7,500 for the purchase of domestically-produced electric vehicles (EVs). The legislation stipulates that taxpayers are ineligible for the tax incentive if the materials used to produce the vehicle are “extracted, processed or recycled by a foreign entity of concern,” including countries such as China and Russia. China, which supplies much of the world’s battery components, has joined other nations and multinational alliances in criticizing the provision. Qin Gang, China’s ambassador to the United States, stated that excluding China from the EV supply chain could pose severe economic risks. South Korean officials also raised concerns, explaining that the law will negatively impact Korean automobile companies such as Hyundai and Kia. Additionally, a European Commission spokesperson warned that the EV tax credit “would result in new and significant transatlantic trade barriers as they discriminate against EU producers.”


House Financial Services Committee

The committee has no upcoming hearings scheduled for this week.

Senate Banking Committee

On Thursday, the committee will hold a hearing entitled, “Examining Outbound Investment,” during which the committee will consider testimony from the following:

  • Sarah Bauerle Danzman, associate professor of international studies, Indiana University
  • Richard Ashooh, former assistant secretary for export administration, U.S. Department of Commerce
  • Thomas Feddo, former assistant secretary for investment security, U.S. Department of the Treasury
  • Robert Strayer, executive vice president of policy, Information Technology Industry Council

House Ways and Means Committee

The committee has no upcoming hearings scheduled for this week.

Senate Finance Committee

The committee has no upcoming hearings scheduled for this week.


Oct. 11
IRS Open Meetings of the Taxpayer Advocacy Panel’s Tax Forms and Publications Project Committee

Private Sector

Sept. 27
Center for Strategic and International Studies
Is U.S. Infrastructure Ready for Hydrogen?

Oct. 3
American Enterprise Institute
Revising the Tax Treatment of Pass-Through Businesses: A Panel Discussion

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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