The voices of Tax Policy Center's researchers and staff
The ink on the Inflation Reduction Act is barely dry, but already there are reasons to think Congress may take up more tax issues once it returns for a post-election session. Business taxes and the Child Tax Credit (CTC) will lead the way.
The annual tradition of tax extenders and temporary tax policy may prompt some action before the end of this calendar year. For the unfamiliar, Congress often approves tax changes for a temporary period, then extends them. Again. And again.
In some cases, Congress may actually intend to let a statute expire. More often, lawmakers phase in or phase out a tax proposal to make the budget math work in the 10-year window used by official scorekeepers. In either scenario, lobbyists descend on Capitol Hill around expiration time to tout an extension of their preferred tax subsidy.
Normally, these debates involve a handful of targeted business-related tax changes and a few odds and ends. This year will be different for two reasons. One, a few major business tax deductions have recently – or will soon become – less generous, as part of scheduled changes in the 2017 Tax Cuts and Jobs Act (TJCA). Two, several congressional Democrats say they’ll refuse to back extending or restoring business tax breaks unless Congress also backs additional tax benefits for families with children.
Pairing the CTC with Business Tax Breaks
The most obvious bargaining chip would be immediate expensing for research and development costs. The TCJA permitted this more generous tax treatment, but only until the beginning of 2022. Now, firms must again deduct their research costs over several years. Many members of both parties are willing to restore immediate expensing for at least a few years.
The TCJA made two other temporary changes that may get Congress’s attention in a lame duck session.
The 2017 law allowed firms to immediately deduct investment costs for new equipment and machinery. But after this year, this bonus depreciation (paywall) will begin phasing down until reverting back to prior law at the start of 2027.
The TCJA also limited the ability of firms to deduct all their interest expenses, capping the amount at 30 percent. The limit started to become more restrictive this year.
For their part, Democrats want to see the 2021 version of the CTC restored. That means increasing the credit amount, distributing the funds monthly and, most important, making the credit fully refundable so families with low- or even no-income could still receive the full amount.
Both Democrats and Republicans will point to the potential benefits of their ideas.
Democrats will say the 2021 version of the CTC put a solid dent in child poverty and food insecurity last year. These gains have faded as the CTC expansions (and other aid) expired.
Backers of restoring or extending the business breaks will say the pandemic showed the importance of supporting research that helped deploy vaccines and therapeutics. And with economic uncertainty and high inflation ahead, they’ll say it is more important than ever to support private sector investment.
The Democrat-controlled House agreed to continue until 2026 full expensing of research costs as part of the Build Back Better Act. But it will be tougher to win Democratic support for the other investment changes since many Democrats prefer raising business taxes.
Sen. Mitt Romney (R-UT) is pushing for a compromise CTC, though few Republicans currently support his plan. But Rohit Kumar, a former aide to Senate GOP leader Mitch McConnell (R-KY), said on TPC’s webcast The Prescription that Republicans might back an increase in the size of the credit as part of a compromise. They are less likely to support full refundability and monthly advanced payments, however.
Tax extenders usually move without much controversy because lawmakers don’t bother to pay for them. But a grand bargain with the CTC and TCJA-related business tax changes won’t be cheap. Congressional scorekeepers estimate the 2021 version of the CTC would cost about $1.6 trillion over a decade, while the business investment tax breaks would reduce federal revenues by another $400 billion (there currently isn’t an official estimate for making the net interest deduction cap less restrictive).
Are there ways to offset that $2 trillion or a slightly smaller compromise? Sure. But the demise of the Build Back Better Act and the balancing act required to get the IRA enacted show how hard it is to put together a large tax proposal, even with the votes of one party.
One other tax issue may get attention in a lame duck session: A bipartisan bill to expand tax breaks for retirement savings. That measure passed the House last March and has strong support in the Senate. It could serve as a vehicle for more modest tax changes on the congressional to-do list. But doing something big and bipartisan in a short lame duck session will be extremely difficult.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Photo by Martin Falbisoner