This transcript has been edited for length and clarity.

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

As summer yields to fall, the August congressional recess comes to an end, leading to a busy legislative season. The Senate and House are due back in the next few weeks, and the legislative body has a lot to cover. From an essential budget bill to funding for the IRS, there's a sharp divide between Republican and Democratic expectations.

So what tax policy and legislation can we expect from Congress this fall? Here to talk more about this are Tax Notes Capitol Hill reporters Cady Stanton and Doug Sword. Cady, Doug, welcome back to the podcast.

Cady Stanton: Thanks for having us.

Doug Sword: Hey, Dave.

David D. Stewart: Why don't we start off with some of the basics here. What is the budget process that we're looking forward to, and why is the timing so difficult to predict this year?

Doug Sword: First of all, Dave, Congress has a September problem. For 27 years in a row it has failed to pass its 12 spending bills by the September 30 deadline, and I feel confident that streak is going to stay alive this year. We're going to go to a 28th year, and there's a few reasons for that.

The House managed to pass just one of its 12 spending bills, and then it took off for six weeks. The House is coming back September 12 with 12 legislative days left before the end of the fiscal year, and there's no way they're going to finish their bills by then.

And even if they did, the Senate has passed none of its bills and there's a $115 billion gulf between what the two chambers want to spend in fiscal 2024, even though there was a budget agreement and the debt deal, but that's been ignored.

So the main thing to be resolved in September will probably be whether they can pass a CR. That's a continuing resolution that continues funding past the end of fiscal 2023, which ends September 30. And if they don't pass a CR, you go into a partial government shutdown, not on October 1 since that's a Sunday this year, but they'd start sending federal workers home by noon on October 2.

The question is, can House Speaker Kevin McCarthy [R-Calif.] get a CR passed? Will the Freedom Caucus help him, even though the Freedom Caucus has been very cantankerous on all budget matters? He may have to turn to Democrats for votes to get a CR through, and complicating that is Democrats feel they always want shutdowns.

So even if there is a shutdown now, I mean the longest one has been 35 days, and this is the beginning game, not the end game, which particularly for us, since that's when the tax deal occurs, that's the part that we'll be focused on.

David D. Stewart: So we're expecting some manner of action, whether it's a no action shutdown or some sort of kicking the can down the road. When can we expect this to be resolved, and will there be a tax aspect to the final bill?

Doug Sword: Yeah, I mean, the first question I think to unpack there is whether or not there'll be an omnibus bill. Typically, there's an omnibus bill.

For fiscal 2023, all 12 spending bills were wrapped together and passed just before Christmas with 20 other laws thrown on top and a bunch of tax provisions, including on conservation easements and retirement savings thrown in for good measure.

A year before there was a great big omnibus, but McCarthy and House Majority Leader Steve Scalise [R-La.] and other House Republican leaders have insisted that there will be no omnibus this year, that they're going to do things the old-fashioned way and pass bills one at a time. And like I said, they have passed one bill. But most of the Congress watchers I talk to think there probably will be an omnibus or at least some sort of minibus with six bills on it, something like that.

Regardless of whether there's an omnibus, if there's a tax deal done, then somebody's going to find a vehicle because the problem in tax talks hasn't been the lack of a vehicle. It's been — a deal has alluded members for more than a year now.

But as for the question of when will the budget process be done, the debt ceiling deal that became law in June gave some incentives, particularly for Republicans, to get the budget done before the end of the year because if any part of the budget is CR'ed into next year, then the defense spending number gets marked down by $36 billion and the nondefense figure actually gets marked up.

Now, it's not permanent. As long as there's a deal by April 30 — and yes, that's a scary date — as long as there's a deal by April 30, the $36 billion goes back. But if they don't get a deal by April 30, there is a real $36 billion sequestered out of the defense budget. That's the real hammer in all this, so this could be a very long slog.

David D. Stewart: Now Cady, what would we expect in terms of tax in an ultimate resolution to this? I know that there's been discussion of issues that related to child tax credit and Tax Cuts and Jobs Act extenders. So what are you looking to see?

Cady Stanton: We obviously don't have a full sense of what will be in that final package yet, but we do have this one large segment of tax legislation that was coming from the Ways and Means Committee from House Republicans.

It's a package of three bills that passed through the committee a few weeks ago. That package has been by and large panned by House and Senate Democrats and really just serves as a starting point for negotiations going into the fall, but what is in that set of bills still gives us a sense of what we might expect by the end of the year.

So that package includes, in a major way, fixing three expired business tax provisions from the 2017 Tax Cuts and Jobs Act. So that's full research and development expensing, net interest expensing, and bonus depreciation. Since those provisions have already sunsetted and R&D especially has received bipartisan support, they're the most likely to make it into an end-of-year vehicle and have been the main focus so far.

But on the other side of the aisle, Democrats in both the House and the Senate have made it clear that they want some kind of support for working families in any legislation fixing those three expired provisions, primarily in the form of an expansion of the child tax credit [CTC] as you mentioned.

So obviously the American Rescue Plan expanded the CTC up to $3,600 for young children and $3,000 for kids 6 and over. And that money was also available in monthly installments and fully available to those with little to no income, which is a change from what it is now, which is $2,000 for children under 17. 

Republicans have pointed to the TCJA, which expanded the CTC from $1,000 to $2,000, as proof of their support for families with children and of their support for the CTC in general. Ways and Means Committee Chair Jason Smith [R-Mo.] has also voiced he's open to enhancement of the CTC for a tax package, but only if that's alongside changes to work requirements for the credit. And members of the House Problem Solvers Caucus have also created a working group on creating compromise around the CTC.

So with those two aspects together, a solution does seem possible, and progress is being made toward a middle ground, but the smoke hasn't really cleared yet on what a final arrangement might look like.

Something else to pay attention to is what pay-fors could be decided upon to cover the cost of fixing those three big business tax provisions alongside other tax cuts.

Democrats are unlikely to be open to cutting the clean energy tax incentives created in the Inflation Reduction Act. That was the method that House Republicans used as a pay-for in their initial tax package.
They cut some of those incentives. So it'll be really interesting to see what other creative ideas might come out to cover costs overall. The debate over the debt ceiling this Congress has really put a new pressure in that area.

David D. Stewart: Now, are there any other issues out there looming that might get bundled into this omnibus or minibus?

Doug Sword: Well, the main show is over the child tax credit and the three TCJA provisions that Cady was talking about. There are a handful of other items that are very bipartisan that could be tacked onto any deal or maybe could float by themselves if there's no agreement on those big four tax provisions.

First would probably be some sort of solution to the 1099-K problem. The American Rescue Plan created a requirement for platforms like Lyft and Uber to send 1099-Ks to the IRS and to their contractors for anybody who makes more than $600 a year from them. And that was supposed to go into effect this year, but the IRS, despite having no legal authority whatsoever to do so, put that off for a year, and most people I talk to don't think they can get away with doing that a second time. So there'll probably be some push to increase that $600 threshold.

And also the Treasury needs to fix a couple problems with the retirement bill that was tacked into the last year's omnibus because there's some errors in it. And the four corners of the taxwriting committees, the Senate Finance and House Ways and Means committee, the chairs and ranking members, are all in agreement that if Treasury can't fix this administratively they'll work on Congress making those corrections in a bill.

And then lastly, I think there's a lot of support for some sort of reform expansion of the low-income housing tax credit.

David D. Stewart: Now, one of the issues that's been out there ever since the TCJA has been the limitation on the state and local tax deduction. Is there any more discussion about that?

Cady Stanton: Absolutely. So like we said, Ways and Means advanced that trio of tax bills in this big marathon markup back on June 13, but those bills have yet to see a full floor vote in the House.

That could be for a lot of different reasons, including, like Doug mentioned, divisions within the Republican Party and fights between the House Freedom Caucus and Speaker McCarthy, but the largest hurdle to a floor vote for those bills has been House Republicans in the SALT Caucus.

As you mentioned, they're advocating for a raise in the cap on the state and local income tax deduction. Members from high-tax states, including New Jersey, New York and California, have met with Smith and told him they want to see a lift on that cap, which is currently set at $10,000, from the TCJA before they show their support for the package.

Since Democrats are expected to wholly oppose the package in that floor vote and Speaker McCarthy can only afford to lose five votes in his majority, the demands have led progress on the package to just screech to a halt right now.

Caucus members have told both Doug and myself that negotiations on including some change to that cap in the package are ongoing, as of going into recess. Proposals include raising the cap to $20,000 for married couples and raising the cap to $100,000 or even just eliminating the cap together.

That was also a problem for former House Speaker Nancy Pelosi, who had an even narrower majority in 2021. She was forced to postpone votes on Democrats' giant Build Back Better tax package because of revolts by moderates and by the SALT Caucus's Democratic members. So this isn't the first time that SALT has served as a hurdle to advancing a tax package.

David D. Stewart: Now, one major issue that goes just beyond the U.S. is the OECD's work on the two-pillar solution for updating the taxation of multinationals. What are we hearing from Congress about those proposals?

Cady Stanton: House Republicans and GOP Ways and Means members especially have been quite outspoken in taking issue with the Biden administration's negotiations as part of the OECD's global tax deal.

In particular, they've actually introduced two pieces of legislation pushing back on that global tax deal. One would require Treasury to identify extraterritorial and discriminatory taxes that other countries levy on U.S. companies and urge those countries to repeal the measures or face a reciprocal or basically retaliatory tax.
The legislation doesn't explicitly specify the kind of tax that would go under that scope, but the release does highlight the UTPR — undertaxed profits rule, part of the pillar 2 of OECD's global tax deal — as an example. They also introduced legislation called the Unfair Tax Prevention Act, which would leverage the U.S.'s base erosion and antiabuse tax to impose a reciprocal tax on countries that implement the UTPR.

Chairman Smith and others have also even made plans to travel to Europe to share their complaints directly with OECD leaders. That could occur sometime this recess, and they had planned to do so earlier in the year, but debt limit negotiations delayed that trip.

Outside of Ways and Means, the House Appropriations Committee, as Doug reported, voted to zero out the U.S. funding of the OECD in its state foreign operations and related program spending bill in July, a move that the top committee Democrat Rosa DeLauro [D-Conn.] called a return to isolationism.

But aside from House Republicans, there have also been some criticisms thrown at U.S. participation in the OECD's global tax deal from Democrats. They've been relatively lukewarm in their support for some of those areas, especially around the deal's treatment of the U.S.'s nonrefundable tax credits, including the domestic research credit.

Members of both parties have also told Treasury officials and the White House that they're pretty disappointed with a lack of consultation with Congress on the negotiations for the tax deal, as Congress ultimately has to approve the international agreement.

David D. Stewart: Now another major issue out there is the IRS funding. The IRS received a major bump in funding under the Inflation Reduction Act, but that doesn't seem particularly popular with Republicans in Congress. So where is that?

Doug Sword: Yes, it's very, very, very unpopular with Republicans. House Republicans have set their sights on two parts of the IRS budget, and the IRS budget is actually very central to the gulf between the House and the Senate budgets that are forming, so it's going to be interesting how that plays out.

House appropriators advanced the bill to cut the IRS's annual discretionary budget by 9 percent. As Dave mentioned, the IRS separately got $79 billion in the Inflation Reduction Act. They get that over 10 years — that's referred to as mandatory funding. So the House also has targeted that pot of money that they have $67 billion in cuts spread throughout their budget on the IRS mandatory dollars, pretty much wiping those out.

Now over in the Senate, the head of the subcommittee that oversees the IRS budget argues that their bill included a flatline of the IRS's budget, the annual budget. It was a very bipartisan bill. It was unanimously advanced by the Senate Appropriations Committee, and that the House bill is tremendously partisan, the 9 percent cut. So he says the bipartisan part will win.

But I would point out Republicans have been surprisingly adept at slashing away at both the IRS discretionary and mandatory funds. They got a 2 percent cut in IRS fiscal 2023 budget last December. And in the debt limit deal, Joe Biden agreed to take $21.4 billion out of the Inflation Reduction Act money. So it's going to be interesting to see how that plays out.

David D. Stewart: We've recently seen some movement on tax treaties in the U.S. Senate. One of the major ones out there right now is the tax agreement with Taiwan. Cady, could you give us an update on that?

Cady Stanton: Absolutely. You've picked a very complicated topic in Congress, but when the Senate returns from recess in September, talks around a tax agreement with Taiwan are likely to restart.

Senate Finance Committee Chair Ron Wyden [D-Ore.] and ranking member Mike Crapo [R-Idaho] sent an announcement just before summer recess that the committee will hold a markup of a tax agreement between the U.S. and Taiwan that was written by the heads of Senate Finance as well as the heads of the House Ways and Means Committee. But a few weeks prior to recess, the Senate Foreign Relations Committee advanced a separate piece of tax agreement legislation with Taiwan.

So we've got two different attempts at an agreement going on at the same time, and neither party is being particularly transparent about coming to a compromise.

The final version of the legislation from those tax committees hasn't been shared, but the draft accomplished basically the same goals as the Senate Foreign Relations text. It eliminates double taxation and would implement measures to limit the risk of tax evasion or avoidance.

Chairman [Robert] Menendez [D-N.J.], who is the head of the Senate Foreign Relations Committee, has argued his legislation is broader than the tax committee's legislation. Menendez and Wyden have been tight-lipped about the progress of resolving this kind of jurisdictional dispute on the agreement, but Menendez is a member of the Senate Finance Committee, and as the chair of the Senate Foreign Relations Committee is involved on both sides of this.

Both chairs have voiced their intention to move forward with their respective legislation, so it'll be something to pay attention to in the fall to see how that plays out.

David D. Stewart: Well, there is a lot to keep track of over the next coming months, but Cady and Doug, I'm sure you'll keep us up to date on all of it. Thank you for being here.

Cady Stanton: Thanks for having us.

Doug Sword: Thanks, Dave.

David D. Stewart: And 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 do you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Justin Schwegel argues that the IRS's intentional destruction of information returns likely led to many low-income taxpayers being audited. Shannon Jemiolo and Ian Redpath examine a recent Senate report detailing online tax return preparation companies' sharing of taxpayer data with Meta Platforms, and they wonder if it's ethical.

In Tax Notes State, Michael Semes and Matthew Sommer examine consequences and questions that stem from an Arizona appeals court holding that canned software is perceptible to the senses so it's taxable as tangible personal property. David Shipley and Aliza Sherman provide an insider's perspective regarding New Jersey's recent corporation business tax changes.

In Tax Notes International, Steven Rasch and Benedikt Winzel explain how recent updates to Germany's transfer of functions regulations failed to provide clarity for some taxpayers. Three KPMG practitioners explain the challenges of developing an arm's-length transfer pricing range for North American retailers.

In featured analysis, Nana Ama Sarfo explains how the example of foreign tax authorities could help the United States as it plans to pilot a direct electronic-filing system.

And finally, on the Opinions page, Sarfo also examines the recent trend of social-media-based tax fraud schemes.

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. And 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.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.

All content in this broadcast is protected under U.S. and international laws. Copyright © 2023 Tax Analysts Inc. Unauthorized recording, downloading, copying, retransmitting, or distributing of any part of the podcast is strictly prohibited. All rights reserved.