Keep An Eye On These Tax Proposals, Despite Congressional Gridlock

Tax legislation might be hard to pass this year in a closely divided Congress, but that doesn’t mean that tax proposals will be in scarce supply. Recent hearings in the Senate Budget Committee and the House Ways and Means Committee offered the usual congressional grandstanding on taxes, but also served up a smorgasbord of possibilities. Even if those proposals are mostly fantasy in the short term, they’re worth paying attention to because tax ideas never really die — they just hang around until a motivated legislator finds a way to advance one of them.

There was limited movement on tax legislation in the House in April. The Limit, Save, Grow Act (H.R. 2811) passed in that chamber, but has no likelihood of passing the Senate and President Biden announced that he wouldn’t sign it even if it did. The debt ceiling legislation would have repealed some of the energy tax provisions in the Inflation Reduction Act (IRA, P.L. 117-169) and rolled back others, but they aren’t in grave danger. The bill would also have rescinded about $71 billion of the $80 billion the IRA granted to the IRS, according to the Congressional Budget Office estimate.

Congress is under pressure to pass a debt limit bill soon, but whether and what tax provisions might be attached to it are questions that may not be answered until the bill is nearly up for a vote. This is how Congress works now. Unlike last year’s budget bill, any tax changes will probably arrive before the flight to your summer holiday destination departs.

Finding a Unicorn Through REINS

Of course, legislation affecting administrative law can affect the tax world just as much as, or even more than, tax-specific legislation. The House-passed debt ceiling legislation would flip a feature of administrative law on its head by preventing any final federal rule that is considered a major rule from an administrative agency from taking effect unless Congress enacts a joint resolution of approval. Right now, major rules take effect unless Congress enacts a joint resolution of disapproval. The proposal isn’t a new idea.

The same bill was introduced by Kentucky Sen. Rand Paul in the Regulations From the Executive in Need of Scrutiny Act of 2017, when it garnered the support of 39 of his fellow Republicans. It’s still called the REINS Act in 2023, and it still has the same objective: heightened scrutiny and congressional accountability for the content of laws. The approval vote requirement is supposed to “result in more carefully drafted and detailed legislation, an improved regulatory process, and a legislative branch that is truly accountable to the American people for the laws imposed upon them.”

While requiring an approval vote would be a big change for tax regulations that are affected, many are not major rules, so most tax regs would remain unaffected. The Congressional Review Act defines a major rule as a rule that is likely to result in an annual effect on the economy of $100 million or more; a major increase in costs or prices for consumers, industries, government agencies, or geographic regions; or significant adverse effects on economic markers or the ability of U.S.-based businesses to compete with foreign-based businesses. In cases like the final foreign tax credit regulations from December 2021 (T.D. 9959), which were a major rule, the REINS Act might give us substantive floor debates on their merits. It will be interesting to find out if Congress really wants to do that. The CBO has maintained for the past six years that scoring the procedural change is impossible, but that it “would have significant effects on direct spending and revenues.”

Senate Proposals

The Senate Budget Committee hearing on April 18 featured no bombshells. Committee Chair Sheldon Whitehouse, D-R.I., pointed out that he’d reproposed the Paying a Fair Share Act (S. 1173), which would codify the “Buffett rule” and define high-income taxpayer as anyone other than a corporation with an adjusted gross income over $1 million. The sense of the Senate portion of the bill characterizes proposed section 59B as an “interim step that can be done quickly and serve as a floor on taxes for the highest-income taxpayers, cut the deficit by billions of dollars a year, and help encourage more fundamental reform of the tax system.”

Whitehouse’s Medicare and Social Security Fair Share Act (S. 1174) would change section 3121(a) to build in Biden’s $400,000 tax pledge. The wage base for taxes funding Social Security would exclude income above the current contribution and benefit base up to $400,000. Income above $400,000 would be taxed at an additional 1.2 percent under the hospital insurance tax in section 3101(b). Similar changes would be made to the definitions, and taxes imposed on self-employment income, in sections 1401 and 1402, and the net investment income tax.

Whitehouse also highlighted the No Tax Breaks for Outsourcing Act (S. 357), which has a companion bill in the House sponsored by Ways and Means member Lloyd Doggett, D-Texas. The pair has proposed this legislation multiple times. It would repeal the deduction for foreign-derived intangible income, apply the global intangible low-taxed income tax and the minimum tax on foreign profits on a country-by-country basis, and eliminate the tax-free return on foreign tangible assets. Kimberly A. Clausing of the University of California, Los Angeles said in testimony that the bill would “completely level the tax playing field for U.S. multinational corporations.”

On the other side of the aisle, Senate Finance Committee member Chuck Grassley, R-Iowa, heaped scorn on the IRA’s “novel new tax features,” by which he meant the direct pay and transferability provisions in sections 6417 and 6418. “We had a deal with that in the 1980s, and it tended to be a really bad policy that two years later we changed,” he said. In Grassley’s view, the ‘80s version made it easier for wealthy investors and corporations to pay little or no tax.

At one point, Whitehouse and Sen. Mike Braun, R-Ind., found themselves in a nearly empty committee room and briefly struck upon common ground on healthcare costs. Braun said he’d like to work with Whitehouse on that topic, which Braun suggested might include some modifications or expansions of health savings accounts, and Whitehouse acknowledged “substantial overlap in our thinking.” Whitehouse touted accountable care organizations as a good model. Healthcare legislation doesn’t inherently have tax implications, but budget bills are how many legislative objectives are achieved nowadays. Everything in those bills needs a revenue score, which often means tax changes.

The Budget Committee hearing also included more discussion of Biden’s billionaire minimum income tax, which was included in the White House budget. Senate Finance Committee Chair Ron Wyden, D-Ore., has a similar proposal. Sen. Tim Kaine, D-Va., noted that there were several bills to equalize the tax rate of carried interest and said it “would be a really efficient way to promote equity and also raise revenue that could be used for valuable priorities like childcare.” William McBride of the Tax Foundation suggested that one way to address carried interest concerns, and to simplify the code, would be to tax all types of income at the same rate.

Sen. Ron Johnson, R-Wis., is not a fan of taxing capital gains before they’re realized, which he says “violates a basic principle of taxation: wherewithal to pay.” But Johnson sees an opportunity on the horizon. He said that “95 percent of American businesses are facing a severe tax increase in 2026” and suggested revisiting his 2017 plan, which he calls a “true Warren Buffett tax,” to convert all business income into passthrough income and tax it at the shareholder level. Johnson said the tax would be based on cash-basis income and would be collected through backup withholding, like payroll taxes. “Wouldn’t that solve the problem?” he asked Daniel Yagan of the University of California, Berkeley. Yagan conceded that taxing all corporate income at the shareholder level in the year it is earned as ordinary income would equalize the tax burdens that the minimum tax is intended to address.

House Proposals

The lowered 1099-K reporting threshold is still a thorn in the sides of both Congress and the IRS. No one likes the idea of having to explain that the Venmo payment to your brother-in-law’s account was only your portion of Grandma’s birthday gift. Republicans at the April 27 House Ways and Means Committee hearing pressed IRS Commissioner Daniel Werfel to agree that a higher threshold would be easier to administer.

Committee Chair Jason Smith, R-Mo., told Werfel that the $600 threshold “gives your agency too much power and in effect creates a surveillance network that would invade Americans’ privacy and squeeze them out of more of their hard-earned dollars.” There is probably bipartisan support for getting rid of the expanded reporting requirement, but finding a bipartisan offset is the challenge. Ways and Means member Carol Miller, R-W.Va., introduced the Saving Gig Economy Taxpayers Act (H.R. 190) in January to return the reporting threshold to $20,000 and 200 transactions.

The expanded funding for the IRS came under heavy scrutiny from Republicans, albeit with concessions that some of it is needed. Smith agreed with Werfel that the IRS should strive to “get the ‘A’” on data security, after Werfel admitted there were areas in which the IRS needed to improve. “Underfunding is one major reason why we don’t have an A on that report card, but with funding under the IRA and renewed purpose around data security and modernization, my objective is to get that A,” he explained. He said that he’s assessing the strengths and gaps of the IRS’s data security measures and is working on mitigating risks.

Improving services for taxpayers occupied plenty of time at the hearing. Lawmaker staffers routinely hear from unhappy constituents on this topic. Ways and Means member Mike Thompson, D-Calif., noted that he fielded a complaint from his wife, who made three phone calls and spent three hours trying to speak to an IRS customer service representative the previous week. “She still hasn’t gotten through,” he said. Werfel acknowledged that “we have more work to do.”

A significant part of what the IRS has to do is implement the IRA. Many questions remain to be answered in guidance, along with processes to be implemented, to make the energy credit changes work.