Update 347 — Congressional Taxonomy:
Which Tax Bills Can Pass SFC and HW&M?
Roughly 100 million Americans, people and corporations, both prepared or just signed and filed federal tax returns due this past Monday. And now the government wants to go and change the tax code again?
When doesn’t it? So we thought this would be a good time to survey the legislative tax proposals in play in Congress that we regard as most likely to become changes to next year’s code, specifically bills under consideration in Senate Finance and House Ways & Means.
When Congress returns from its current two-week recess, the tax committees of both chambers will deliberate on legislation referred to them since January. Republicans aim to make permanent certain Tax Cuts and Jobs Act provisions, while Democrats call for tax credit expansions and closing loopholes on the wealthy.
All lawmakers are preparing to pass a long-awaited bill modernizing the Internal Revenue Service. Congress is also looking at ways to tweak the tax code in hopes of encouraging retirement savings and giving certainty to businesses in the form of temporary tax breaks, commonly known as “tax extenders.”
Doubling Down on Trickle Down
The 2017 Republican tax law was the most comprehensive tax legislation passed since 1986, and it was passed without any Democratic support. Absent a need to compromise, Republicans were able to secure many of their tax policy objectives; the bill (temporarily) lowered marginal tax rates for individuals and made substantial permanent cuts to corporate taxes. Today, the tax changes are deeply unpopular — Americans see through the GOP’s supply-side talking points and overwhelmingly believe that benefits go to the wealthy and large corporations.
Since the law’s passage, Republicans have outlined more proposals in a tax reform 2.0 package. The bills would have made much of the 2017 law permanent, doubling down on policy that deepens wealth inequality while ballooning federal deficits and debt. Then-Ways and Means Chairman Kevin Brady favorably reported the package of bills out of his Committee, but it was not considered in the Senate.
During the 2018 midterms, Democrats convinced voters that even more giveaways to the wealthiest and most well-connected would be the wrong path forward. Despite its obvious unpopularity and political cost, Republicans still lament their failure to pass tax reform 2.0, knowing that the Democrat-led House of Representatives will not consider it.
Democratic Proposals in Committee
Democratic lawmakers on both sides of the Capitol have proposed their own tax legislation. House Ways and Means Committee Chairman Richard Neal has put middle-class and working families at the top of his agenda. Last year, he introduced a three bill package to expand the Child Tax Credit (CTC), Earned Income Tax Credit (EITC), and American Opportunity Tax Credit (AOTC). The package aimed to reduce the tax burden on lower-and middle-class Americans. In keeping with this focus, the Committee held a hearing on March 27 titled “The 2017 Tax Law and Who It Left Behind,” signalling Chairman Neal’s commitment to middle- and working-class family tax issues.
Rep. Lewis’ Oversight Subcommittee continues to advocate for reducing the complexity of filing for taxpayers, and has held several hearings on the subject this year.
On the Senate side, Finance Committee Ranking Member Ron Wyden is prioritizing tax reform for the wealthiest Americans. Earlier this month, Wyden announced that he would soon be unveiling his plan to eliminate a host of loopholes and ensure the wealthy pay their fair share in taxes.
Senate Finance members Sherrod Brown and Michael Bennet introduced their version of EITC and CTC expansion, the Working Families Tax Relief Act, earlier this year. The legislation would boost the incomes of 114 million Americans, including 43 million children, though it will not likely receive a Committee markup.
Generally a far-fetched proposition in the 116th Congress, bipartisan bills, compromise packages, etc. may yet emerge, in order of viability, in the areas of:
- Reauthorization of Tax Credit Programs
- The Work Opportunity Tax Credit (WOTC) provides businesses tax credits between $1,200 and $9,600 per employee for hiring or retaining people who have a difficult time finding work or are out of the labor force. A bipartisan group of Senators recently introduced a bill to make WOTC permanent; its authorization is set to expire at the end of 2019.
- The New Markets Tax Credit (NMTC) provides tax incentives to individuals who invest in certain businesses and economic development projects within low-income communities. Like WOTC, its champions in Congress have introduced a bill to make NMTC permanent, but absent reauthorization will expire at the end of the year.
- Retirement Security
On April 2, the House Ways and Means Committee unanimously approved the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019, to be voted on by the full House when they return. The SECURE Act is nearly identical to the Retirement Enhancement Savings Act of 2018 (RESA), which was re-introduced this Congress on April 1 by Sens. Grassley and Wyden. The RESA/SECURE Act packages contain tax incentives for increasing retirement savings and have strong bipartisan support.
- IRS Modernization
One of Congress’ priority agenda items is enacting IRS modernization. As a result of funding deficiencies, the IRS is plagued with a severely outdated IT system that deals with 1.4 billion cyberattacks annually and a seven-year-long hiring freeze that lost an entire generation of employees. The House passed the bipartisan Taxpayer First Act of 2019 on April 9, which increases IRS funding, extends low-income tax preparation services, and reduces the role of private debt collectors. Although there are still differences to work out with the Senate, a compromise will likely be forged this year.
- Tax Extenders
Reinstating the temporary tax breaks that expired at the end of 2017 and 2018 is near the top of both chambers’ tax agendas. On February 28, Senate Finance Chairman Grassley and Ranking Member Wyden introduced the Tax Extender and Disaster Relief Act of 2019. The bill would retroactively extend the 26 tax credit provisions that affect mostly energy incentives, but also deal with transportation, housing, and education. Both Sens. Grassley and Wyden expressed the need for Congress to “kick its addiction” to such short-term tax policies, but nonetheless have worked together on the legislation. After some false starts, tax extender legislation is expected to advance sometime this summer.
Old Wounds May Be Healing
Republican insistence on a party-line tax overhaul via reconciliation in 2017 alienated Democrats on the House and Senate tax committees. As a result, Democrats were not willing to help Republicans make technical corrections and minor changes to their hastily-written bill in the following months.
Political and ideological differences remain evident. Earlier this month, Chair Neal officially requested President Trump’s tax returns, prompting outrage from the Republican opposition and setting up a showdown between the Chairman and the White House, likely to be settled in the courts.
On smaller-ticket items, we continue to see progress come out of House Ways and Means and Senate Finance. Retirement security legislation will likely become law this year, and tax extenders are also on the table. Reauthorizations of large tax programs have bipartisan support, and Democrats and Republicans generally agree that the IRS needs modernization (even if they disagree on topline funding levels). With a divided Congress, we will be watching how much work the two committees can accomplish before the 2020 Presidential election season renders efforts at legislative activity futile.