Update 700 — With Fed Pausing Rate Hikes
Eyes on GOP Tax Package in Ways & Means
Earlier today, The Federal Reserve announced it would pause its longest consecutive set of interest rate hikes in over four decades. This is the first time in 17 months that the central bank hasn’t raised rates, holding steady at 5 – 5.25 percent. Powell indicated the holding of this range “allows the Committee to assess additional information and its implications for monetary policy,” but signaled at least two more hikes are likely to come. The FOMC will next meet on July 25-26.
Meanwhile, on the Hill, the debate on fiscal policy turned towards taxation. With the ink barely dry on last week’s debt limit agreement – which enacted a raft of spending cuts demanded by the House Republican conference to reduce the deficit – GOP members of Ways and Means voted yesterday to send a massive package of corporate giveaways to the House floor. Details follow below.
Best,
Dana
Yesterday, the House Ways and Means Committee marked up and approved a Republican tax package that offers significant tax breaks to corporations and wealthy investors. The package, which Republicans have named the American Families and Jobs Act, consists of:
- The Tax Cuts for Working Families Act, which renames the standard deduction the “guaranteed deduction” and adds a bonus amount to the guaranteed deduction for 2024 and 2025;
- The Small Business Jobs Act, which contains business tax provisions, including reversing changes to 1099-K reporting requirements made in the American Rescue Plan, expanding the exclusion for gain from qualified business stock, increasing limitations on expensing, and creating a Rural Opportunity Zones program; and
- The Build It in America Act, which revives a trio of corporate tax breaks that recently expired or will soon expire under the Tax Cuts and Jobs Act (TCJA), imposes a tax on the purchase of agricultural land by foreign investors from countries like China, and pays for much of the package by rescinding billions in clean energy tax credits.
Some of the major tax breaks included in the package (and their approximate costs for 2024 according to JCT estimates) are summarized below.
- R&E Expensing: Allows businesses to expense their full R&E costs during the year in which they are incurred ($36 billion)
- 100 Percent Bonus Depreciation: Allows companies to fully deduct the cost of certain depreciating assets in the year in which they are purchased ($28.3 billion)
- Bonus Standard Deduction: Renames the standard deduction the “guaranteed deduction” and adds a bonus amount of $4,000 for joint filers, $2,000 for single filers and $3,000 for head of households during taxable years 2024 and 2025 ($28.6 billion)
- Expanded Small Business Expensing: Raises the limits on expensing for certain investments in equipment in a year ($4.6 billion)
- Interest Deduction Changes: Allows businesses to calculate their interest deduction using a more generous accounting method ($4 billion)
- Expanded Exclusion of Gain from Qualified Business Stock: Expands the exclusion to S-corporations and implements a phased increase in the amount of the exclusion (-$71 billion in 2024, costs do not begin accruing until 2027 when the first eligible stock will have been held long enough to qualify)
Some members of Congress, mainly Republicans and more moderate Democrats, had hoped to extend three of the corporate tax breaks – R&E expensing, 100 percent bonus depreciation, and the interest deduction calculation method – at the end of last year. But a contingent of progressive lawmakers and advocates put pressure on Congress not to pass any corporate tax breaks without also passing an expansion of the Child Tax Credit (CTC). This effort prevented the inclusion of corporate tax breaks in a year-end bipartisan deal, pushing the issue into the 118th Congress. Other provisions, like the tax on some foreign acquisitions of agricultural lands, are relatively new ideas.
The bills would do little to help American families but would, instead, largely benefit wealthy Americans and foreign investors, while costing taxpayers billions. When most Americans feel that taxes on the wealthy and corporations are too low, further lowering their taxes is a massive step in the wrong direction. Republicans have spent their time in control of the House demanding deep budget cuts that affect programs designed to help low-income individuals and their families, like housing assistance, public education, job training programs, and food and cash assistance. Instead of skewing the tax code further in favor of corporations and wealthy individuals, Congress must focus on supporting low- and middle-income workers and families through policies like the expanded Child Tax Credit (CTC).
Extending the Trump Tax Cuts an Expensive Giveaway
The tax cuts proposed by House Republicans would largely benefit the richest one percent of Americans. The poorest fifth of Americans would receive an average tax cut of just $40 in 2024 while the richest one percent would receive an average tax cut of $16,550, a point made at the markup by Committee ranking member Rep. Richard Neal (D-MA). According to the Institute on Taxation and Economic Policy, over $60 billion in tax breaks would accrue to the top fifth of Americans next year, while the bottom fifth would receive only $1.4 billion. Foreign investors would also receive $23.8 billion, more than the bottom 60 percent of Americans combined.
Total Tax Change in 2024 from Proposed House Tax Bills
Source: ITEP
Most tax benefits in the bill come from business tax breaks that benefit either corporations – and their shareholders – or the owners of pass-through businesses. Even the “bonus” standard deduction, which is designed to phase out for individuals with incomes above $200,000 or married couples with incomes above $400,000, excludes taxpayers whose taxable income is not large enough to benefit from an increase in the standard deduction.
The bill even attempts to build on the failed Opportunity Zones program, which offered huge tax breaks for wealthy investors at little benefit to the communities they invested in. The program, which was sold as a way to increase jobs and business formation in impoverished communities, instead offered a massive giveaway to wealthy investors who ended up building more luxury hotels and apartments and self-storage units than affordable housing. The bill’s authors now hope to entice investment to more rural areas, though without significant reforms, the new Rural Opportunity Zones Program would surely yield the same disappointing results.
Costs Contradict Debt Limit Demands
Not only are these bills skewed heavily towards the top, but they also come with a heavy price tag of roughly $80 billion in the first year. The bills’ authors have set the largest tax cuts to expire after only two years, but clearly intend for them to be extended or made permanent in the coming years — the same gimmick Republicans used in 2017, when they scheduled phaseouts for full R&E expensing and bonus depreciation to offset the cost of other tax breaks, anticipating that a future Congress would try to restore them. The Committee for a Responsible Federal Budget estimates that the Republican plan would cost over $1.1 trillion through 2023 if all of the temporary tax cuts and extensions were made permanent
Republicans are introducing their massive giveaway mere weeks after insisting that deep spending cuts were needed to protect the country’s fiscal health. Congressional Republicans repeatedly rejected any method of raising revenue during negotiations (except of course for raising taxes on clean energy and domestic manufacturing). Instead they focused on clawing back funding for the IRS to pursue wealthy tax cheats and kicking older adults off of SNAP benefits.
A Progressive Path Forward
Instead of trying to ram through tax breaks to benefit those at the top, Congress should look to proven methods of reducing poverty and improving the lives of working families, like expanding the CTC. The expansion from the American Rescue Plan was wildly successful while it was in effect – Census data shows that child poverty fell by a record 46 percent compared to 2020. Monthly payments lifted nearly 3 million children out of poverty, including over 1 million children under the age of six. It expired at the end of 2021 without even a partial renewal, leaving low-income families without the support that had allowed them to more easily access food, housing, and school supplies.
Advocates for children and families will once again try to use conservatives and moderates’ strong desire to see corporate tax breaks extended as a way to keep the CTC on Congress’s minds. Child poverty is a policy choice, and one Congress needs to reckon with sooner rather than later. A recently introduced Democratic proposal would help 60 million children next year, primarily from families with incomes below $86,000, a stark difference from the GOP tax proposal.
And unlike tax cuts for the wealthy, the CTC is wildly popular. A 2022 survey by Lake Research Partners found that voters overwhelmingly favor the CTC, by a 75-19 percent margin. Additionally, voters agree by nearly six-to-one that Congress should not pass any more tax breaks for big corporations unless there is also support for families. By contrast, in a recent survey, 61 percent of Americans said they were bothered “a lot” by the feeling that some corporations don’t pay their fair share, and 60 percent said the same about the wealthy. More tax breaks for the wealthy and corporations is simply not what the American people are looking for.
Congress must work to make the tax code fairer, not tilt it further in favor of the wealthy. At a minimum, Congress must not pass any tax breaks with corporations without similar support for families, including an expansion of the Child Tax Credit.