Update 790: SCOTUS Rules Less in Moore

September 24, 2024 | Update, Weekly Round Up | By

Update 790 – SCOTUS Rules Less in Moore,
CBO’s Deficit Score, Lead Weekly Round-Up

A split Supreme Court ruling on Moore v. U.S. leaves intact the repatriation provision of TCJA, the 2017 Trump tax cut, saving the nation hundreds of billions of dollars and disallowing a means by which wealthy individuals could game the tax code, but denying a broader basis for taxation of unrealized gains or a wealth tax — a complex decision which we explain below.

The week also saw an increase in the CBO’s projected federal deficit for 2024 from $1.5 to $1.9 trillion, adding fiscal pressure to next year’s review of the expiring individual TCJA provisions, themselves totaling $4.6 trillion over ten years. Positive news came from the U.S. manufacturing output report for May. These developments and key financial regulatory news this week are covered below.

Good weekends, all…

Best,

Dana

Headline

Supreme Court Delivers Narrow Ruling in Moore v. U.S

Yesterday, the Supreme Court delivered its decision in Moore v. U.S., upholding the constitutionality of the mandatory repatriation tax (MRT) in a 7-2 ruling. The MRT was passed in the Tax Cuts and Jobs Act (TCJA) in 2017 and required individuals who own shares in foreign companies to pay a one-time tax on their foreign investment earnings, regardless of whether or not they had “realized” those gains. The ruling side steps making a definitive ruling on taxing unrealized gains and its implication for a wealth tax, punting that discussion to a future decision.

Moore v. U.S. was brought by a couple in Washington state who had invested $40,000 in a foreign corporation, KisanKraft, which realized but in turn reinvested its profits back into the company instead of distributing dividends to investors like the Moores, who challenged their associated $15,000 tax bill arguing that they themselves never realized the gains from their investment. They argued that taxing undistributed foreign corporate earnings without apportionment among states contradicts the constitutional requirement for direct taxes under the 16th Amendment authorizing federal income taxation. 

The government had a twofold argument, asserting that the 16th Amendment grants Congress broad authority to define and tax income, including unrealized gains in certain circumstances, and that the MRT is constitutional on similar grounds as dozens of other provisions in the Code, such as Subpart F, that tax undistributed foreign corporate earnings. They also noted that the Moores, as 13 percent shareholders, had sufficient control or “constructive realization” of the earnings to justify the tax as one on income. 

When the Supreme Court agreed to hear Moore v. U.S. last year, many were worried about the implications for Congress’ ability to levy certain taxes. Supreme Court Justices were hesitant to address broader questions of whether unrealized gains qualify as income during oral arguments and reiterated in their majority opinion that such a ruling could have implications for “vast swaths of the Internal Revenue Code,” which “would deprive the U.S. Government and the American people of trillions in lost tax revenue.” 

The majority opinion, delivered by Justice Kavanaugh and joined by Justices Sotomayor, Kagan, and Jackson stuck instead to a narrow basis for the ruling, stating that “the MRT does tax realized income— namely, income realized by the corporation, KisanKraft. The MRT attributes the income of the corporation to the shareholders, and then taxes the shareholders (including the Moores) on their share of that undistributed corporate income.”

Justice Barrett, joined by Justice Alito, filed a concurring opinion that argued in favor of upholding the MRT but noted that Congress does not have the right to tax unrealized gains. The dissenting opinion, which was led by Justice Thomas and joined by Justice Gorsuch, labeled the MRT as a tax on unrealized gains outside the scope of income outlined in the 16th Amendment. 

While the Supreme Court’s ruling should be considered a good outcome by Democrats hopeful of instilling greater equity in the tax code, the ruling did not give Congress the authority to tax unrealized gains, a central feature of wealth tax proposals. The Court concluded that it “need not resolve” the parties’ disagreement over realization, leaving those “potential issues for another day.” But portions of the majority opinion, as well as two separate opinions, signal that a majority of the justices would disapprove of an unapportioned tax on wealth or federal taxation of unrealized asset appreciation.

Other Developments

CBO Increases Projections for the Deficit 

This week, the Congressional Budget Office (CBO) released an update to its budget and economic projections for 2024-2034, revising the projected deficit for 2024 up by 27 percent in just four months. In its initial report released in February of this year, the CBO projected a $1.5 trillion deficit in 2024 and a cumulative deficit of $21 trillion for 2024-2034. Due to the passage of supplemental funding for Ukraine and Israel and student debt relief, as well as clawbacks to IRS funding that would otherwise lead to a net gain in federal revenues, these estimates have been revised up slightly, with the projected deficit for 2024 increasing by $400 billion to $1.9 trillion and cumulative deficit for 2025-2034 increasing by $2.1 trillion to $23.1 (10 percent). A surge in immigration that began in 2021 and is expected to continue through 2026 will expand the labor force and boost economic output, offsetting the effect of spending increases and revenue losses. 

Under the CBO’s new projections, federal debt held by the public will surpass its post-WWII peak of 106 percent of GDP as early as 2027, with debt equaling 122 percent of GDP by 2034: 

Source: The Washington Post

The upward revision in projections could frame major fiscal policy debates on the horizon for next year, when Individual and estate tax provisions from former President Donald Trump’s landmark Tax Cuts and Jobs Act (TCJA) expire. Resolution of what promises to be a heated debate carries huge fiscal consequences, as across-the-board extensions would add upwards of $4 trillion to the national debt. To increase the stakes further, Trump has doubled down on his intent to enact another round of tax cuts, proposing lowering the corporate tax rate from 21 to 20 percent and exempting tip wages from the federal income tax – costly priorities that are completely separate from expiring provisions. 

By contrast, President Biden’s FY 2025 budget proposal published this spring offers important revenue-raising provisions that would decrease deficits by around $3 trillion over 10 years while creating a more fair and progressive tax code. Republicans will continue to attribute our poor fiscal health to high levels of government spending while crippling our ability to collect revenues by pushing tax cuts that primarily benefit those with the least need. Their vision for the future would do nothing more than exacerbate wealth inequality and reward corporate greed at the price of policies and programs that help even the playing field for working- and middle-class Americans. 

US Manufacturing’s Modest Recovery in May

US factory output increased more than expected in May, according to the Federal Reserve. After two months of decline, Manufacturing output spiked by 0.9 percent last month, producing a 0.1 percent year-over-year increase. This recovery follows a 0.4 percent drop in April. US manufacturing considerably outperformed economists’ expectations, who estimated more modest growth of 0.4 percent. Specifically:

  • motor vehicle and parts output jumped by 0.6 percent after falling 1.9 percent in April
  • durable goods manufacturing saw an increase of 0.6 percent
  • nondurable manufacturing production jumped by 1.1 percent overall. 

Economists and industry experts had expressed doubt that manufacturing would continue to show strength in the face of economic headwinds, such as elevated input prices and inconsistent consumer demand in addition to borrowing costs. So May’s numbers are sanguine signs for a sector that accounts for 10.4 percent of the US economy. 

SEC Commissioner: Ban Risky Bank-Exec Compensation  

On Monday, Securities and Exchange Commission (SEC) Commissioner Jaime Lizárraga called on relevant agencies, including the SEC, to promulgate and finalize a rule banning executive compensation plans that incentivize inappropriate risk-taking at financial institutions: “I think it’s time that we come together and finally get this rulemaking past the finish line.” The May 2011 deadline set by Congress passed almost fourteen years ago.

Speaking at a webinar hosted by organizations including Americans for Financial Reform and Public Citizen, Commissioner Lizárraga discussed the importance of finalizing Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandated that bank executives’ compensation packages not incentivize them to make reckless decisions that could risk the safety and soundness of the firms they lead. 

Section 956 required that six federal regulators – the SEC, Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), National Credit Union Administration (NCUA), and Federal Housing Finance Agency (FHFA) –  jointly promulgate a rule concerning incentive-based compensation practices at certain financial institutions. Most recently, the six agencies proposed such a rule in 2016. 

Early last month, all six agencies except the Fed and SEC re-proposed the 2016 rule, along with proposed alternatives and questions for public comment. As Commissioner Lizárraga noted, considering the SEC’s mandate under Section 956 is on the agency’s short-term agenda and as he highlighted, implementing this rule would build into the SEC’s mission to protect investors by helping to avoid the next preventable financial crisis.

Sen. Brown Calls for Update of Bank Merger Review 

Senate Committee on Banking, Housing and Urban Affairs Chair Sherrod Brown (D-OH) called for a stricter bank merger review process in a letter to Office of the Comptroller of the Currency (OCC) Acting Comptroller Michael Hsu last Friday. 

The letter comes after the OCC issued a notice of proposed rulemaking to adjust to its business combination regulation early this year. The proposal would remove the expedited review procedures which allow qualifying bank merger filings to be automatically approved 15 days after the close of the comment period unless the OCC notifies the applicant that the filing is not eligible for expedited review, or the expedited review process is extended. 

Chair Brown urged the OCC to “quickly adopt a strong final rule and Policy Statement to ensure that bank merger transactions receive adequate scrutiny” and outline “opportunities for refinement.” Brown called for the Policy Statement to go further and for the OCC, other banking regulators, and the Department of Justice (DOJ) to collectively complete a comprehensive update of the bank merger review framework. 

Sen. Warren to Powell: Finalize Basel III Endgame Rule

Senator Elizabeth Warren (D-MA) urged Federal Reserve Chair Jerome Powell to allow the Federal Reserve Board of Governors to convene for a vote on bank regulators’ Basel III Endgame proposal by June 30 in a letter sent on Monday. 

Senator Warren’s letter followed reports that the Fed, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) are moving towards a plan that would require capital requirements for banks like JPMorgan and Goldman Sachs to be increased by on average about half as much as originally floated in the regulators’ proposal. Warren described these reports as “a highly disturbing turn of events.”

In her letter, Senator Warren called on Powell to act on behalf of the American people who bear the brunt of financial crises without precipitating them and not in the interest of the CEOs of the nation’s biggest banks. Warren noted, “…it now appears that you are directly doing the bank industry’s bidding, rewarding them for their extensive personal lobbying of you.”

Importantly, Senator Warren noted that Fed Vice Chair of Supervision Michael Barr supports the current iteration of the Basel III Endgame proposal and said that “your actions to overrule him are not consistent with the intent of the law—or your testimony before the Senate in November 2021,” adding “it appears that you are treating the Fed as your personal fiefdom and are stepping in to overrule Vice Chair Barr’s views on the Basel III rules.”

Regulators’ Basel III Endgame proposal would increase capital requirements for the 37 biggest banks in the United States. We continue to encourage bank regulators to finalize a strong rule. 

Look Ahead

Wednesday, June 26

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