David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: 2022 wrap-up.

We're continuing our tradition at the start of the new year of reviewing what happened in U.S. tax policy and looking ahead to what we can expect in the next 12 months. Here to recap the 2022 highlights and make some predictions for 2023 is Tax Analysts Chief Content Officer Jeremy Scott.

Jeremy, welcome back to the podcast.

Jeremy Scott: Thank you for having me. It's good to be back.

David D. Stewart: Well, last time we had you here, we were discussing what was going to happen in 2022. One of your predictions about the prospects for major legislation seems to have played out. Let's go to that clip.

Jeremy Scott: I think the prospects of seeing major legislation other than a revamped Build Back Better next year that has a tax component are pretty small. I think as you get closer to the midterms, they become even more difficult.

David D. Stewart: It does seem that that is what happened. Did any part of the ultimate bill, the Inflation Reduction Act, surprise you?

Jeremy Scott: I think the surprising thing is actually that it happened at all because, as you'll recall, Build Back Better collapsed basically twice during the year. The larger Build Back Better bill fell apart at the beginning over the opposition of Sen. Joe Manchin, D-W.Va., and possibly Sen. Kyrsten Sinema, I-Ariz.

Then later in the year, they attempted to revive it in direct negotiations with Manchin, and Manchin came out and said he was a no-go. That's how the Democrats actually managed to slip a superconductor bill through the Senate because the Republicans had been holding that up for the promise that there wasn't going to be Build Back Better. When Manchin said it was dead a second time, Republicans were confident that it was dead, and they proceeded forward on the superconductor legislation.

Then all of a sudden, over a weekend, an agreement was announced with Manchin on what became the Inflation Reduction Act. This was a much smaller bill than Build Back Better, but it still contained a lot of Democratic priorities, particularly on the environmental side and on some of the revenue-raising side. I think that was the shocking part of the legislation is just how it came about. Was this a trick by Sen. Charles E. Schumer, D-N.Y.? Was it a trick by Manchin?

There's a lot of disagreement over that, but certainly, as you were following things throughout the year, the very fact that there was a bill at all by the middle of the year, the very fact that they passed a bill in August of all times right before the midterm campaigns really stepped up, that was surprising.

In terms of what was in it, a corporate minimum tax had been a part of most Democratic proposals dating back to really the Obama administration, but certainly since President Biden had taken office. That wasn't too surprising.

There were many people who were surprised that they built a corporate minimum tax that probably is not compliant with a lot of the OECD efforts in the pillars that are going on right now. As some Treasury officials explained, getting to an OECD-compliant provision was just too difficult. They couldn't get there in negotiations. They had to try to get what they could, so that wasn't shocking on the superficial level to see a minimum tax. Maybe a little bit surprising that if they were going to do a minimum tax, why not comply with the pillars? But again, they took what they could get.

At the last minute, a stock buyback tax got put in. This is something that had not really ever been discussed in a serious way. It was a provision that had a revenue score. This again, the process maybe is a little more surprising that the Democrats would attempt to discourage stock buybacks.

At the very last minute of voting on the IRA in the Senate, basically what happened is the Republicans put forward an amendment that required a pay-for. The Democrats accepted the amendment, and the pay-for was an extended cap on deductions for state and local income taxes and other taxes.

Then immediately, the main Democratic Party, the main bulk of the caucus, found that pay-for unacceptable, so they added in a stock buyback tax. This was added in so late that many major news outlets including, I have to say, ourselves didn't pick up on it until later the next day, and so this was a tax that did not get a lot of discussion. It did not get a lot of debate, and even now there's a lot of surprise over what it's supposed to do and what it's intended to do.

There are a number of small industries, particularly with special purchase acquisition companies, that are worried about what the implications of this are. No one knows quite how it'll be applied, and again, no one knows what the revenue will be, so that particular provision was a little bit surprising.

Then I guess if you're looking back at it from a macro level, if you're looking to the first two years of administration that has a majority in both houses, this probably was a smaller bill. Then you might expect the first-term president to get through on their economic agenda, but again, they had difficulty getting anything through, so I think the bill was not particularly shocking except in the fact that it existed, and how it came about. But the provisions themselves were pretty standard Democratic fare.

David D. Stewart: A lot of this bill was around environmental tax credits, which to me seems a little bit surprising given that Manchin was the deciding factor in this. What sort of provisions did they get in for that?

Jeremy Scott: Well, I think it is surprising actually that Manchin could be convinced to buy into a package that was primarily focused on green tax policies. I think it's because of the things that weren't necessarily in there. There were credits for buying electric cars that got expanded for some people.

There's not a lot that directly attacks industries like coal. There's not a lot that directly attacks carbon-producing industries. Instead, it's a lot more of incentives to go green. It's tax incentives rather than tax penalties. I think that's ultimately how they got Manchin to buy into it.

They also got Manchin to buy into it on the promise to revisit certain aspects of energy policy later in the year that Republicans blocked, so Manchin did not quite get what he wanted on permits. That's another way they bought his vote.

They also bought his vote by saying it was a deficit reduction bill, that it was going to reduce the deficit by a significant amount. That also did not necessarily turn out to be true once the Joint Committe on Taxation scores come in.

But on the environmental side, they left out some of the more grandiose provisions that we had seen in the Green New Deal. That had been the no-gos for Manchin, and they left out a lot of the stuff directly taxing corporations, more directly increasing taxes to pay for green provisions that had so offended Sinema.

I think that's how you can explain why the deciding vote for a bill that was primarily built on green tax credits got the support of the most anti-green Democrat in the Senate, perhaps the most anti-green senator period, given the state that he comes from and how he's voted in the past, but I think that explains it.

David D. Stewart: Now, the storyline for much of the year had been on rising inflation. Did any tax policies target inflation aside from the name-check in the bill?

Jeremy Scott: Yeah, the most the bill does against inflation probably does concern the name. A deficit-reducing package would theoretically reduce inflation, but this reduced the deficit by such a small amount.

Even the nominal $300 billion over 10 years that it was given credit for would not have had a major impact on inflation. Letting Medicare negotiate drug prices, that can have a small effect on inflation, but again, not likely to happen this year.

Tax policy probably did not do anything to help with inflation. Unlike the previous year, I'm not sure that 2022's tax policy had a lot to do with hurting inflation. In other words, increasing inflation. I think this year's lawmakers were a little more mindful of stimulus provisions and other things that had goosed the economy in the previous year.

Although at the end of the year, the omnibus spending bill was relatively large and some people are worried about the effect that's going to have on inflation, that wasn't really a tax bill.

Inflation influenced tax policy. It influenced the things that were on the table. It helped to bring down Build Back Better at the beginning of the year. Concerns over inflation definitely factored into Manchin and potentially Sinema's opposition to the larger bill, but I don't think tax policy did much to either curb inflation or to goose it beyond again having the bill named after inflation, which again was probably a way to get Manchin's vote.

David D. Stewart: Should we expect inflation to be top of mind for lawmakers going into the new year?

Jeremy Scott: Oh, absolutely. I think inflation is going to be the No. 1 economic issue leading into the new year, leading into the start of the presidential campaign. Already you can see some lawmakers staking out their positions on what the Fed is doing. Sen. Elizabeth Warren, D-Mass., has been criticizing the Fed for essentially trying to choke out unemployment, for trying to increase unemployment.

She's part of a group of lawmakers that are concerned that combating inflation too aggressively is more likely to harm people than to help them. You can reduce the cost of goods being sold, but if that's at the expense of someone's job, they're not likely to be too happy about that.

I think inflation is going to factor into some of the discussions with the new House of Representatives as you try to pass spending bills in the next year. I think inflation is going to factor into some of the pressure lawmakers try to put on the Fed. It's not always effective, but certainly they might continue to try to influence what Federal Reserve Chair Jerome Powell does, or maybe what Powell says.

I think you're going to hear a lot about inflation. You're going to hear a lot about it from both sides. You're going to hear a lot about it in terms of deficit reduction. You're going to hear a lot about it in terms of stimulus. You're going to hear a lot about it in terms of is it causing a recession and what does that mean? What can lawmakers do to mitigate the effects of a potential recession, if anything? Because if inflation's high and you go into recession, you can't really use stimulus because that just makes inflation worse.

David D. Stewart: Now, inflation was a big driver in scaling back Build Back Better, as you mentioned. Part of that loss from Build Back Better was the expanded child tax credit. Have we seen the last of that policy?

Jeremy Scott: I'm not sure. Certainly, the Democrats would tell you no. That tends to be something they try to insert into most any bill. I think at the end of the year, they were hopeful to be able to trade an expanded child tax credit for a number of other tax policies that are more important to Republicans.

What I think you might see on the expanded child tax credit is when we get into discussions about the expiring provisions of the Tax Cuts and Jobs Act, those expiring income tax provisions versus the corporate tax provisions. I think you're going to hear about the expanded child tax credit as being something that Democrats can trade to Republicans in order to get support for a broader bill extending those tax cuts.

I think we're going to see that be mentioned both in the upcoming presidential campaign and in the next series of elections for Congress, so I think it is not likely that an expanded child tax credit is going to slip through in a smaller bill. It's not likely that you're going to see the House take that up as a priority with the change in control, but I don't know that we've heard the last of it.

I think if you were a fan of the policy and you really wanted it to come back, you probably missed the best chance for it when they couldn't get it into the end-of-the-year bill, but I'm not sure that we've heard the last of it.

David D. Stewart: Was there any unfinished business in 2022 that we expect to be taken up early the next year?

Jeremy Scott: Well, the expanded child tax credit is probably the thing that people talk about the most. There's a number of other smaller tax provisions that people were hoping to slip into this spending bill that didn't get in. I don't know that any of that's going to be taken up in the new year. I think you're going to see a legislative slowdown, if I'm using a generous term. I think that anything that didn't get done at the end of 2022 is probably not going to be a focus in 2023 and 2024, but we'll see.

David D. Stewart: Now, the 2022 midterms brought us a somewhat unusual result where the Democrats lost control of the House but expanded their majority in the Senate, though that does come with an asterisk. What does that portend for legislation in the coming year?

Jeremy Scott: I think you're not going to see much legislation in the coming year. I think we're seeing a little bit of that playing out right now in the fight for leadership in the House. The Republican majority is so small that their caucus can essentially be held hostage by a relatively small group.

I think we've seen in the past groups come together to pass bills, like moderates on both sides can come together. That's going to be exceedingly difficult if there isn't strong leadership, particularly within the majority party.

The Senate is more likely to be focused on nominations and things like that particularly, a Senate calendar could be taken up by a Supreme Court nomination if that were to happen and so I don't think you're going to see the Democrats and the Senate focus a lot on tax legislation, particularly with such a small chance of getting it through the House.

I would be surprised if we saw any significant legislation that's not tied to legislation that has to be done, like spending legislation or debt limit legislation. I think both sides are going to have a very difficult time enacting any sort of agenda. It's a 51-49 Senate. That's assuming that Sinema stays caucusing with the Democrats. It's a House majority. I think the Republicans have something like 220 seats to 212. It's a very small majority. You can only afford very few defections, and that makes passing any kind of bill very difficult.

Also, just the climate leading into a presidential year the climate in Washington in general leads to very few compromises. I think they're going to struggle to pass the bills they have to pass, and I think that means passing things beyond that is going to be almost impossible.

David D. Stewart: Do you expect to see any sort of tax provisions to come up as pay-fors in other bills?

Jeremy Scott: You can always see that, but with a Republican House, the emphasis on pay-fors is much lower than with a Democratic House. I think if they pass tax incentives, I would expect them to be unpaid for. I think you could see a few things come in potentially, not so much as pay-fors or offsets, but just because there's things that are overdue. I'm thinking along the lines of Sen. Ron Wyden's, D-Ore., partnership proposals from the previous year.

You might see something like that slip through just because it gets a powerful sponsor or because you can build up support for a need for it, and so that would technically raise revenue. But I'm not sure that you're going to see such an emphasis on paying for provisions because, number one, I'm not sure you're going to see a lot of tax incentives getting a lot of support. Republicans just have not placed an emphasis on pay-fors since 2015.

David D. Stewart: All right. Now, one of the major stories from the very end of the year was the release of former President Trump's tax returns. Did we learn anything interesting from them?

Jeremy Scott: Well, I think in terms of learning about the president's tax position itself, I think we finally had some clarity to what a lot of people suspected. He is a real estate developer. He's someone who's in the business of real estate and licensing his personal image, and that type of income is relatively easy to offset, so I don't think it was too shocking to too many people to see that he did not pay much income tax even though he had a relatively high net worth, even though some years he had a lot of income that could be offset with losses.

I think there were a few interesting things within the returns itself that maybe people had not been completely clear on before. The biggest is the president claimed to be an active real estate developer even while he was president, and so that can run afoul of some of the rules that say the hours you have to put in to be active. But then there are some other rules that he was sort of hiding behind, which is if you're active five years out of 10 as a developer, it means you have active income.

You could do an entire episode on getting into the ins and outs of the Trump tax returns. Maybe you guys will over the course of the year. But I think there's some surprise that some of the positions that Trump's professional return preparers let him take. There's sort of a sloppiness to the returns that both the JCT and some others have commented on.

But was there anything shocking in the returns themselves? I don't think so. When the Democrats were first making noises of seeing these returns, people wanted to see perhaps evidence of ties to foreign countries. There were a lot of interests in foreign investments. That kind of thing was not really in there.

What is surprising, what the biggest takeaway is, what you're seeing a lot of discussion is that the IRS did not audit Trump as it is supposed to do under provisions in the Internal Revenue Manual. A sitting president is supposed to be audited each year he is sitting. Trump was only really audited for one year while he was president. The other years they don't seem to have done anything.

Not only does this rebut some of the former president's claims that he couldn't release the returns because he was being audited, but it shows the IRS wasn't necessarily doing the job that it was supposed to do.
I think that's why Rep. Richard E. Neal, the chair of the Ways and Means Committee, wanted to get the returns. That's the reason he used to win the court cases, and it turned out he was right. They weren't auditing him, and it probably was appropriate for Congress to find that out.

Now, was it appropriate for them to release the returns to the public? I think that's going to be a question that plays out in the future.

David D. Stewart: Well, speaking of how this plays out, did the release of these returns set a precedent that Republicans may use as they take control of the House?

Jeremy Scott: They certainly threatened to use it when they were voting against releasing the returns at the end of 2022. They said that this could set a precedent that they might use to expose the tax positions of other administration officials or other politicians in prominent roles, and that this was not necessarily a good use of the House Ways and Means' power to review taxes. I think Republicans started to make the case, "If you needed to review the returns, why did you not just do it in private? Why did it need to be released to the public?"

I think nowadays anything that one party uses against the other is likely to come back. Leading into the midterm campaign, there are many Republicans making noises, "Should they use impeachment as a way to attack the Biden administration because President Trump had been impeached?" So yeah, I think there's definitely that risk.

There's definitely that risk that you may see this power used in the future, whereas it'd really never been used in the past, and so I think that's the risk that Neal and the Ways and Means Democrats took. Have you set this idea that you can use tax returns as either a political weapon or as more of an oversight weapon than it has traditionally been done in the past?

David D. Stewart: Now, looking further out, you alluded to the expiring provisions of the Tax Cuts and Jobs Act. We just did a three-episode series on the fifth anniversary of that law. When will we start seeing movement to address the expiring provisions?

Jeremy Scott: Well, like everything in Congress, you'll probably see movement the day before they have to do it, and you'll probably see a vote at the very last minute. But I do think this is going to be the tax issue of the next couple of years.

I do think you are going to see some of the presidential campaign tax proposals focus on what to do with these expiring TCJA provisions. I think you're going to see some discussion of which ones of these should be allowed to expire and which ones shouldn't, and I think you're going to see both parties try to use this sort of idea that we're going to roll off the cliff if we don't do anything about this to get some of their priorities through.

In the past, it was Democrats that had the upper hand on this, like when there was a fiscal cliff during the Obama administration and the Bush tax cuts had to be extended. Democrats were able to use that in order to get changes to the estate tax, for example, in order to get debt limit concessions made right at the end of Obama's first term leading into his second term.

This time, it's not clear that one party has the advantage. Republicans very cleverly set the provisions that are expiring to be more focused on individuals. Individuals are not likely to react well to seeing their tax rates increase, particularly if we're creeping into a recession, so there's more pressure, I think, on both parties.

I don't think Democrats can threaten to sit this one out and to say, "Hey, if they expire, they expire," because these rate changes were so broad-based, because the doubled standard deduction is so popular, and because the state and local income tax cap affects Democratic states and Democratic lawmakers much more than it affects red states. I think you're going to see more urgency on both sides to come up with plans.

Now, what those plans will be are likely to differ wildly between the two parties, but I think you're going to see a lot of discussion of what to do about these TCJA provisions in this Congress. I'm just not sure there's going to be a lot of movement because I just think movement is going to come at the very last minute, and I think the presidential campaign and the very narrow majorities each side has in the respective chambers is going to make any compromise very difficult.

I think it's going to make any major bill very hard to pass, but I do think now this is going to become a topic of discussion. It's something that both parties have ignored for a number of years, but now I think they're going to have to address them.

David D. Stewart: Well, it's definitely something that we'll be checking on in future years. Jeremy, it's always a pleasure having you. Thank you for being here.

Jeremy Scott: Thank you very much for having me. I always enjoy it.

David D. Stewart: Now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Marty Sullivan examines how much the Inflation Reduction Act energy credits reduce emissions. John Leavins and Vinita Ramaswamy review the impact of the Taxpayer First Act's changes to the innocent spouse provisions.

In Tax Notes State, Walter Hellerstein and Andrew Applebee review the Internet Tax Freedom Act and consider whether the act is "fit for service" in today's digital economy. Tony Santiago discusses the tax leadership turnover that will occur when the last baby boomers remaining in tax leadership positions retire.

In Tax Notes International, Mindy Herzfeld examines recent tax transparency efforts and considers how these measures could fare in the coming year and Reuven Avi-Yonah explains the interplay between UTPR and tax treaties.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. As always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.