Update 393 — Tax Priorities and Possibilities:
Congress’ 2019 Tax Dash; Warren’s 2020 Plan
Today, Sen. Elizabeth Warren released a $20.5 trillion proposal consisting of revenue raisers to pay for her Medicare for All plan. The comprehensive proposal would make substantial changes to an array of tax titles, ruling out a direct tax increase on the middle class and relying heavily on capital taxation. In our next update, we will reprise and weigh the progressivity and viability of the options laid out in the Warren proposal.
Next week and for the remaining two months of the year, Congress will confront several key tax policy choices involving retirement, the extenders, corrections to the error-riddled cut of 2017, and maybe even another Trump tax cut. We preview the tax bill road ahead to year-end…
Good weekends all,
On November 21, the current Continuing Resolution funding the government expires. Members of Congress are turning to end-of-year tax legislation priorities that could attach to a new CR or another FY 2020 budget package. With Senate Republicans eager to pass corrections to their rushed 2017 tax bill, Democrats will have a chance to bargain for significant concessions and have a wish-list of their own. What can and will get done?
TCJA Corrections: Must-Pass?
Many but mostly Republicans in Congress consider “technical corrections” to the 2017 GOP tax law (TCJA) must-pass legislation. In their haste to pass the bill, GOP and K Street drafters made mistakes and omissions necessitating supplemental legislation to function. What qualifies as a technical correction rather than a substantive policy change is debatable, but Democrats are not eager to help the other side fix their own mess of a bill.
First came the “grain glitch,” a TCJA loophole whereby farmers could pay much lower tax rates when selling grain to co-operatives as opposed to standard C-Corps. In exchange, Democrats secured an expansion of the Low-Income Housing Tax Credit. Republicans are hoping to address other mistakes as well, including:
- Changes to QIP and Bonus Depreciation: Traditionally, businesses that made certain improvements to their property could take advantage of favorable tax treatment. TCJA introduced Qualified Improvement Property (QIP) rules, replacing existing, similar structures. Due to drafting errors, TCJA did not align QIP’s lifespan to rules on bonus depreciation, and as a result, QIP is not eligible.
- Carry Forward of NOL: TCJA changed NOL rules so that companies may not adjust any past year’s tax filings to “carry back” losses, but may now “carry forward” their business losses indefinitely. The problem? Bill drafters wrote the law to to say that the change applies to tax years ending after Dec. 31, 2017, rather than beginning at that time.
- Church Parking Lots: TCJA subjects churches and other nonprofit transportation fringe benefits (such as reserved employee parking spots and maintenance to lots) to a 21 percent federal income tax levy. The revenue-raising provision equalizes tax treatment between nonprofits and C-Corps. It also adds administrative complexity, so Republicans are hoping to fully repeal it.
- The “Widows’ Tax” and “Kiddie Tax”: Gold Star families are enrolled in two programs, the Dependency and Indemnity Compensation program and the Survivor Benefit Plan. Both programs pay out a yearly stipend, and families are subjected to an offset — an insurance forfeiture known as the “widows’ tax.” This offset costs them around $1000 a month in payouts. To avoid these offsets, gold star spouses often put the benefits in the name of their children. TCJA treats these benefits as a trust or estate, taxing them as high as 37 percent. Republicans seek to remedy this tax code provision
With Democrats now in control of the House of Representatives, attempts by Republicans to make TCJA corrections will be met with additional demands.
Achievable Tax Bills
- Retirement: In May, the House of Representatives passed H.R. 1994, the “Setting Every Community Up for Retirement Enhancement Act of 2019” (SECURE Act) by a near unanimous 417-3 vote. The bill would enable workers to increase retirement savings through tax incentives, and is a worthwhile but modest approach to solving the retirement problem. Despite strong bipartisan support, it remains doubtful whether the Senate can approve the bill before year’s end. One issue is securing floor time — with so few days left on the legislative calendar, other priorities might crowd out lawmakers’ attention.
- Pensions: In July, the House passed H.R. 397, the Rehabilitation for Multiemployer Pensions Act, aka the Butch Lewis Act. 29 Republicans joined Democrats in sending the bill to the Senate. Butch Lewis would authorize Treasury to make loans to pension plans in either critical or declining funding status. Despite some bipartisan support in the Senate, opponents criticize the bill as a “bailout” for pensioners and chances of Senate passage remain dim. Congress must also address the United Mine Workers of America pension fund covering 90,000 coal workers and their families, expected to become insolvent in 2022. Thereafter, the Pension Benefit Guaranty Corporation would provide relief, though beneficiaries would receive pennies on the dollar.
- Tax Extenders: As budget negotiations stall, the temporary tax provisions narrowly tailored for certain industries known as “tax extenders” may fall victim to Congressional paralysis. In June, House Ways and Means approved a reauthorization of tax extenders. Senate Finance Chairman Grassley and Ranking Member Wyden have introduced their own extension bill. Without a short-term extension, most extenders will have been unauthorized for nearly two years, making it even more difficult to make the (already weak) economic case for reauthorization.
Democratic Tax Wish List
- Tax Credits: Democrats will likely seek expansions of refundable and partially-refundable tax credits like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), as well as to the Child and Dependent Care Credit. House Ways and Means approved legislation in July expanding the EITC for childless workers, making the CTC fully refundable and increasing the CTC amount for young children. Sens. Brown and Bennet are leading the charge on enhancing EITC and CTC respectively, but GOP opposition to tax breaks for the non-millionaire class has proven unified.
- O-Zone Reporting Requirements: The TCJA established a program that provides tax breaks for investments in lower income areas known as Opportunity Zones. TCJA was passed through reconciliation, so non-budgetary portions, such as OZ reporting requirements, were stripped from the final bill. Sens. Booker and Scott and Reps. Kind and Reed have introduced S.1344 and H.R. 2593 to add reporting standards for OZ fund managers and require Treasury to report to Congress on the effectiveness of OZs and manadates collection of transaction-level data on OZ investments. Sens. Young and Hassan, as well as Reps. Kelly, Sewell, Filemon, and Wenstrup are co-sponsors of the respective Senate and House bills.
- Carried Interest: The Carried Interest loophole permits investment fund general partners and managers to call income capital gains and pay the lower tax rate. The Carried Interest Fairness Act, reintroduced this Congress by Sen. Baldwin and Rep. Pascrell, would close the loophole. The TCJA included small changes to carried interest, codifying the break. The Pascrell bill may get a symbolic vote by House Democrats, à la H.R. 1, despite the Republicans in Congress and Trump who have campaigned against the loophole.
Lots to Do, Little Time
With the 2020 campaign entering full-swing, it will be increasingly difficult for lawmakers of both parties to set aside adversarial impulses and work together. The ongoing impeachment inquiry in the House also figures in the calculus, adding even more fuel to partisan fires. But many in the GOP are doubling down on tax cuts and floating trial balloons for a TCJA 2.0. Of course, this would be DOA in the House. Should any tax-related legislation pass before the calendar year ends, it will likely by tacked onto must-pass CRs or other budget bills, or an end-of-year tax package. More on this later in the month.