‘Tis the tax season as Americans across the country file their tax returns. While Washington, D.C. isn’t experiencing as festive of a tax season like in 2017 with the Tax Cuts and Jobs Act or in 2021-2022 with Build Back Better and the Inflation Reduction Act, there’s still plenty astir for individuals and businesses on tax policy.
Tax Policy Right Now: It’s All About IRA Implementation
The Inflation Reduction Act, enacted last August, included hundreds of billions in clean energy tax credits as well as corporate tax hikes. This included an overhaul of EV tax credits, an expansion of green energy production and investment tax credits, a 1% corporate buybacks tax, and a 15% corporate alternative minimum tax.
But passing the legislation was only the start of the policymaking process impacting individuals and businesses. The Treasury Department and the Internal Revenue Service are working to release implementing guidance on these tax provisions. Implementing hastily written legislation like the IRA leaves the executive branch to put together the pieces, often with far-reaching implications.
For President Joe Biden and congressional Democrats, they want to run in 2024 on a successful implementation of the IRA. Yet it’s a balance of priorities. Democrats want to use the IRA to quickly decarbonize the economy. They also want to use it to promote a domestic supply chain and well-paying jobs, which can complicate the speed of deployment.
Democrats want to make sure corporations pay their «fair share,» but implementing complicated provisions like the CAMT could unintentionally stymie business activity and the use of clean energy tax credits. Those tax credits are also at risk with the 15% global minimum tax agreed to (but not yet implemented) by the Organisation for Economic Co-Operation and Development and the G20.
Poor implementation of the IRA leaves the tax provisions vulnerable to changes by a future Republican Congress and administration. Republicans are already calling to claw back several of the IRA provisions and opposing implementation of the OECD/G20 tax deal.
The onus is on the Biden administration to listen to comments and concerns of industry to ensure they get the implementation right. If done well, it becomes harder politically for Republicans to undo in the future.
Tax Policy This Year: Small-Ball Policies Looking For A Legislative Field
The dynamics aren’t present for a major tax deal in a divided Congress. Democrats feel emboldened by their party’s overperformance in the 2022 midterms to keep their priorities of the enhanced Child Tax Credit and other family-oriented tax breaks tied to business tax breaks. Most Republicans continue to oppose such a deal. Both parties are focused on ways to decrease the deficit, leaving tax breaks in search of painful tax offsets and spending cuts.
But the challenging dynamics aren’t stopping the tax legislation process from proceeding ahead. Already, several pieces of tax legislation that failed to pass last Congress were reintroduced this Congress. This includes providing tax relief for auto dealers using Last-In First-Out accounting, raising the 1099-K reporting requirement threshold, returning to R&D expensing, returning to 100% bonus depreciation, creating a new tax credit for low-income housing development, providing tax relief for federal broadband grants, and eliminating or modifying the $10,000 cap on state and local tax deductions.
Legislation like lengthening the Opportunity Zones program, expanding interest deductibility limits, and imposing carbon tariffs could be reintroduced later this year.
In reintroducing tax legislation, advocates of these individual provisions hope to keep their policies relevant for members of Congress and at the ready if the opportunity presents itself for action this year.
Tax policies can sometimes be attached as policy riders to larger legislative vehicles. The Federal Aviation Administration reauthorization bill, the Farm bill, FY 2024 appropriations, and raising the debt ceiling are all legislative vehicles theoretically open to tax policy riders. A recession later this year could be a catalyst for some sort of fiscal package.
But any tax policy rider requires getting the sign off of tax leadership in Congress, leadership helming the non-tax legislation, and party leadership. Some policies with broad bipartisan support, like LIFO relief, or a looming deadline, like 1099-K reporting requirements, may be able to squeak through.
Right now, tax legislation faces high hurdles with limited time and a looming 2024 election that could complicate the dynamics for tax deal-making.
Tax Policy In 2025: Preparing For A Fiscal Cliff
What doesn’t get passed this Congress will get punted to next Congress. It’s in 2025 when tax policy will receive top billing.
The individual provisions and some business tax breaks from the Tax Cuts and Jobs Act expire at the end of 2025 as do enhanced Affordable Care Act subsidies in the IRA. The scope of what needs to be addressed is substantial. The Tax Policy Center estimated extending the individual TCJA provisions would cost $3.1 trillion from FY 2027 to FY 2036. The Penn Wharton Budget Model estimated extending the expiring TCJA provisions would cost $2.8 trillion from 2023 to 2032.
The direction Washington, D.C. takes on this multi-trillion dollar fiscal cliff hinges on the 2024 election.
If Republicans win control of the House, Senate, and White House, they could pursue a party-line reconciliation bill like they did with the TCJA that requires just a simple majority to pass in the Senate. Margins matter a bit less for Republicans than Democrats, as the GOP is more unified on taxes. But a House GOP that still has a meaningful contingency of members from high-tax districts will once again face a thorny question over the SALT cap. The party is also more populist from five years ago, which could mean some changes to corporate taxes in order to offset the costs of helping individuals and pass-throughs.
If Democrats win control of government, they could pursue a reconciliation bill like they did with BBB and IRA. Biden’s FY 2024 budget proposal provided an early framework of what that could look like. Biden proposed extending TCJA provisions to those making less than $400,000 and bringing back several erstwhile provisions from the BBB agenda. But narrow margins will once again give outsized influence to moderates who could play a decisive role in narrowing the scope of any tax legislation.
If there’s divided government, the two parties will have to engage in some painful horse-trading that leaves some tax hikes on the table, especially if there is an insistence that legislation not increase the deficit. This could make for a prolonged negotiation, with the potential for a temporary extension of expiring provisions.
Whatever the 2024 election outcome, policymakers and lobbyists are preparing for the tax heyday to once again return to Washington, D.C.