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Last week, the House came out in strong support for the tax relief package negotiated by Chairmen Ron Wyden (D-OR) and Jason Smith (R-MO). Less than two weeks after sailing through the Ways & Means Committee, the bill passed the full House 357-70 and now heads to the Senate. Below is a look at what’s inside the bill, its prospects in the upper chamber, and what it means for the Main Street business community.
Bill’s Provisions
The Tax Relief for American Families and Workers Act (H.R. 7024) is centered on reversing several of the TCJA’s key revenue raisers. The bill allows for immediate expensing of R&E costs, which businesses must currently amortize over several years; reinstates the less punitive “EBIT” cap on interest expense deductions; and restores 100-percent bonus depreciation, which is currently being phased out.
The relief is retroactive and stretches back to tax years starting in 2022, meaning many businesses will be able to claw back some taxes levied in prior years. On the other hand, the changes only run through 2025, meaning the “fiscal cliff” fight we know is coming will be even more consequential.
For families, the headline is a more robust Child Tax Credit. The bill increases the cap on the credit’s refundability, loosens its eligibility requirements, and indexes its value to inflation. Other provisions include tweaks to the Low Income Housing Tax Credit, higher 1099 reporting thresholds, and targeted relief for victims of recent natural disasters. Again, much of the individual relief sunsets in 2025, setting the stage for a major tax battle next year.
While the business provisions enjoy general bipartisan support, the CTC changes have sharply divided conservative groups, with a vigorous debate taking place at Heritage, AEI, and other think tanks. The Speaker’s support and the strong vote last night come despite these concerns.
Offsets
According to the Joint Committee on Taxation, virtually all of the bill’s $78 billion price tag is offset by ending new filings for the Employee Retention Tax Credit (ERC) and ramping up enforcement of “promoters” who may be engaged in encouraging fraudulent claims. As with the CTC, this offset has generated lots of angst in the conservative tax world, and some in the small business community dislike the optics of pairing tax relief that primarily benefits bigger companies with tax hikes generated by ending a small business program.
The SALT caucus also made itself heard, but their objections appear to have been resolved by the promise of a House-vote on a separate SALT relief package next week. We’ll be interested to see how successful that effort will be, as the SALT cap enjoys support from both the right and the left.
Prospects
So where does the bill go from here? As noted, the legislation was passed out of the House in a broad bipartisan vote – in the end, 188 Democrats backed the measure, alongside 169 Republicans.
The big show of support was critical because its fate in the Senate is far from assured. While Finance Chair Ron Wyden is pushing hard to get the package across the finish line before we get too deep into the 2023 tax filing season, key Republicans are demanding a full markup and an opportunity to offer amendments, which could result in a modified product being sent back to the lower chamber for another contentious vote.
Opportunities to delay the bill in the Senate are abundant – a motivated minority can force up to seven cloture votes on a single bill – so it’s really a question of how much time the Majority Leader is willing to expend verses how committed members of the minority are to amendments and full consideration.
That also presumes they want a bill – Senator Grassley was quoted saying “I think passing a tax bill that makes the president look good mailing out checks before the election, means he could be reelected and then we won’t extend the 2017 tax cuts.” Senator Tillis has expressed similar concerns, stating he is “not gonna make it easy” for the bill to move in the Senate.
Bottom Line
Despite the remaining obstacles, the odds of tax legislation passing this quarter have increased with the impressive vote in the House. Companies have been hammered with surprise tax hikes resulting from the tighter interest expense caps and R&E amortization rules for several years now and a fix is long overdue. On the other hand, these breaks are temporary and our number one priority – Section 199A permanence – remains to be addressed. Safe to say that once the Tax Relief Act is disposed of, we’re going to hit the ground running on 199A permanence.
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