Keeping Up With Congress: This Fall’s Tax Legislative Preview

Tax Notes Capitol Hill reporters Doug Sword and Frederic Lee examine the record-breaking budget and infrastructure legislation advancing on Capitol Hill and preview potential tax policy proposals coming this fall.

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: catching up with Congress.

As summer comes to an end, so too does the short and somewhat unusual break Congress took this year. Initially, the legislative body had scheduled a lengthy recess for much of August and September, but with $3.5 trillion in new spending, tax cuts, and tax increases to sort through and a September 15 deadline, members had their typical summer break cut short.

What did Congress accomplish this summer? What does this fall hold for tax policy and legislation? Here to talk about this are Tax Notes Capitol Hill reporters Doug Sword and Frederic Lee. Doug, Frederic, welcome to the podcast.

Doug Sword: Thanks for having us.

Frederic Lee: Thank you so much.

David D. Stewart: Now, I understand that there were two big bills — the $3.5 trillion budget bill and the $550 billion infrastructure bill — and that both passed the Senate and hit the House during its two-day late August session. Let’s start with the budget resolution. Could you give our listeners some background on that?

Doug Sword: The budget resolution is a two-step process. You have a budget resolution, a $3.5 trillion measure that has to be passed by both the House and the Senate, that gives directions for both bodies to go ahead and write the mammoth $3.5 trillion reconciliation bill.

The advantage to doing reconciliation is that the Senate can pass it with a simple majority. The Senate is currently divided 50/50 between Democrats and Republicans with Vice President Kamala Harris breaking any tie. This is the Democrats’ one chance to get a major tax reform through during this Congress.

This is very similar to what Republicans did in 2017 when they got the Tax Cuts and Jobs Act passed. They jammed that through without a single Democrat vote. Democrats are now returning the favor.

David D. Stewart: What did we see during the two-day August session?

Doug Sword: The final result after two days of wrangling was that the House passed the budget resolution. The House Democratic Caucus also agreed to bring the bipartisan infrastructure bill up for a final vote in the House by September 27.

But before that happened, nine House Democrats — moderate Democrats — had threatened to pretty much blow up the process. They were going to withhold their support for the budget resolution unless there was an immediate vote on the bipartisan infrastructure bill.

You have to keep in mind that moderates like the infrastructure bill while progressives really like all the things that are in the $3.5 trillion budget bill. House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Chuck Schumer, D-N.Y., have tied those two together to keep both wings of their party in line.

After a day and a night and a morning of negotiations, Pelosi agreed not for an immediate vote on the infrastructure bill, but to have a vote by September 27. Although the rule that was passed is not a binding agreement, we’ll see what happens.

But in the end, all the Democrats were happy, which is a pretty unusual thing for Democrats. All 220 Democrats voted for the budget resolution while all 212 Republicans voted against it.

David D. Stewart: Where does the resolution stand today?

Doug Sword: Like I was saying, it’s a two-step process. The budget resolution is a numbers bill. It’s a top-line number, the $3.5 trillion that everybody’s been talking about.

The resolution divvies that number up between 13 House committees and 12 Senate committees. They will have to write up their sections. That’s the hard part. They’re each writing up their portion of the bill, which will go into this mammoth reconciliation bill. That’s going to take a month or so, and we’ll see how that goes.

David D. Stewart: Let’s turn to the infrastructure bill. Can you tell me about that?

Frederic Lee: We have an infrastructure bill that proposes $550 billion in new spending. That’s for hard infrastructure, so things like roads, bridges, and broadband. There’s almost no tax items in it. A lot of it’s going to be paid for through borrowing.

The one inclusion that’s drawn the attention in tax circles is the expansion of the cryptocurrency information reporting requirements. According to the Joint Committee on Taxation, that’s supposed to bring in $28 billion.

The crypto piece was actually included last minute in the bill. It caught me and other reporters by surprise. It definitely caught the crypto sector by surprise and shook them up quite a bit.

The aim of the crypto provision is to amend federal law on digital asset information reporting by expanding the reporting requirements for brokers. That includes a requirement that businesses report all virtual currency transactions over $10,000.

David D. Stewart: We now have these two giant bills whose fates seem intertwined. What’s next?

Doug Sword: The budget resolution set a September 15 deadline for these committees to write their portions of the reconciliation bill. Historically, when it comes to committees meeting their budget resolution deadlines, they’re not good at that.

So, who knows when this will come together, but September will be a big month. It will at least have a lot of markups, particularly in the House. The Ways and Means Committee will have the biggest one.

Besides having the right to about $800 billion worth of tax cuts, mainly for families with children, they’ll be responsible for coming up with the revenue raisers to pay for however much of this bill that Democrats ultimately decide they are going to pay for. It might not be $3.5 trillion, or it could be $3.5 trillion and they pay for just a portion of it. But the Ways and Means Committee will be where the biggest part of the action is. The healthcare and the commerce committees will have big chunks as well.

These two bills are tied together. It’s very intentional. Schumer calls it the two-track process. Pelosi has said that she will not hold a vote on the bipartisan infrastructure bill until the reconciliation bill gets to its main obstacle and that’s the Senate. The September 27 deadline now sort of muddies that up a little bit, but we’ll see what happens.

Pelosi’s got to keep both wings in line. Progressives just love the $3.5 trillion budget bill because there’s a huge expansion of Medicare, big spending on clean energy and housing, two years of free community college, as well as universal pre-K, paid leave, and the list goes on.

Meanwhile, that bipartisan bill will just sit around waiting to see what happens on the reconciliation.

David D. Stewart: You mentioned the Ways and Means Committee would be dealing with how this bill might be paid for. We’re talking about $3.5 trillion, which seems like quite a lot. Do we have any sense of how that will be paid for?

Doug Sword: Yeah, $3.5 trillion is kind of a showstopper isn’t it? Let’s start with the spending.

A lot of people say that spending number will be determined by the most conservative member in the Senate because all 50 Senate Democrats will have to vote for this. The two conservative Democrats who have already said they don’t support $3.5 trillion are Joe Manchin of West Virginia and Kyrsten Sinema of Arizona.

It remains to be seen what sort of number the Senate will come up with. The nine House moderates that revolted earlier this week have stated that they have concerns about $3.5 trillion, but they haven’t been as absolute about it as Manchin and Sinema have.

Meanwhile, it’s easier to spend $3.5 trillion than to pay for it. The offsets are pretty much where the rubber will meet the road. The Democrats are looking at an array of tax increases. They would roll back an awful lot of the TCJA, increase the corporate income tax rate, increase the top marginal rate on individuals, increase the capital gains rate and step up the basis, and do a complete overhaul of the international tax regime.

Manchin says that the reconciliation bill has to be completely paid for. House Budget Chairman John Yarmuth, D-Ky., has equivocated on whether it would all be paid for. Pelosi has cryptically said, “We’ll see.” Sen. Bernie Sanders, I-Vt., doesn’t think you have to pay for all of it.

David D. Stewart: Looking forward, what kinds of tax legislation or policy changes can we expect from Capitol Hill this fall? Are there any bills we should keep an eye out for?

Frederic Lee: The reconciliation bill is going to be the biggest target for most members of Congress who have any kind of tax proposal. There are two other bills that have to pass coming up that lawmakers will try to also attach their bills to.

Congress won’t finish its spending bills by the end of the government’s fiscal year, which is September 30. To avoid a government shutdown, there’s going to have to be some type of continuing resolution. At some point there’s probably also going to be an omnibus for many, if not all, the 12 spending bills. That will be a big target for lawmakers also.

On another front, there could also be a separate measure to raise the debt limit. There’s a lot of different elements we’re working with. Without the authority to borrow any more money, though, the federal government is projected to be not able to fully meet its obligations beginning in October or November.

The debt limit increase could be spun into a reconciliation or omnibus. But Republicans are insisting on a standalone measure, but standalone must-pass bills tend to attract a lot of company in Congress. So, that’s also another area to watch.

David D. Stewart: Earlier this year, during his first 100 days in office, President Biden unveiled two large plans, the American Jobs Act and the American Families Plan. Both included some major tax policy changes. Where do those stand today?

Frederic Lee: If you look at how things actually shook out in Congress, the bipartisan infrastructure bill has very similar language to the American Jobs Plan. On the other side, the budget reconciliation item has a lot of elements stemming from the American Families Plan. There were tax increase items included in both of those bills from corporate to individual tax hikes and others.

Naturally, a lot of the tax provisions that were mentioned in both plans have migrated over to the reconciliation bill since tax increase legislation tends to be a very partisan item, especially in this political atmosphere. The reconciliation bill is being drafted to pass with only Democratic support.

To add those two up, the budget and the infrastructure bills add up to $4.1 trillion. There will probably be a lot of changes along the way as the legislation shakes out.

Doug Sword: These two plans are basically what we’ve been looking at all along. If you look up the value as the president proposed them, they add up to $4 trillion. It’s no coincidence that the budget and the infrastructure bills add up to $4.1 trillion.

We’ve been largely working off of Biden’s game plan. But now that we’re moving into the reconciliation process, this is when Congress will be doing a lot of rewriting of the president’s proposals.

David D. Stewart: Democrats have been fairly outspoken in their desire to repeal parts of the TCJA. One item that keeps coming up is the state and local tax deduction cap. Is there any movement on that front?

Doug Sword: There’s definitely been movement on that front. Although a full repeal is pretty much out of the question; it would be too expensive even for this bill.

All year there’s been bills floating around to boost the $10,000 cap to $15,000 for single filers or $20,000 for joint filers. There’s a possibility of a larger number short of a full repeal.

Interestingly, SALT may have been the subtext of this past week’s drama in the House. The leader of the nine moderate Democrats was north New Jersey Democrat Josh Gottheimer. He is also one of the leaders of the “No SALT, no deal” caucus.

There’s been some speculation that when Pelosi asked him behind closed doors what he wanted to get the budget resolution passed, he may have talked about his favorite topic, which is SALT.

David D. Stewart: Another tax issue we’ve been tracking has been the international tax framework championed by Senate Finance Committee Chair Ron Wyden, D-Ore. What’ve we seen on that lately?

Doug Sword: A lot of activity. Wyden was joined by Senate Finance Committee Democrats Sherrod Brown of Ohio and Mark Warner of Virginia in putting out a 37-page draft. They’ve taken their framework from April and turned it into legislative language. They’ve put it out publicly and asked for comments by September 3. That would be in time for their plan to be rolled into Senate Finance’s portion of the reconciliation bill, which those three will be major authors of.

It’s important to keep in mind that their plan keeps more of the existing architecture of the international tax regime. It’s less of a complete overhaul than Biden’s proposal is. It would probably raise substantially less money than Biden’s proposal would, which is another consideration.

Another thing is that the timing should be pretty interesting on this. The reconciliation process is occurring almost simultaneously with the international negotiations on a global minimum tax. There are House Democrats who have expressed some anxiety over this. They want to make sure that the negotiations aren’t derailed by some preemptive legislation from Congress.

David D. Stewart: Recently the White House and Treasury announced that tax increases on businesses are coming, but that small business owners have nothing to fear. What’s been the reaction to that on Capitol Hill?

Doug Sword: Well, the reaction has been completely partisan. I’m sure you’re surprised by that.

Republicans would say small business owners have a lot to fear. But Democrats absolutely want to increase corporate income tax rates. They’ve always been a target for Democrats ever since they were cut from 35 percent to 21 percent in the TCJA four years ago.

But when it comes to small businesses, this Treasury report estimates that just 3 percent of small businesses will see tax increases. Most of the 97 percent that don’t see tax increases will actually see tax cuts. That said, Republicans point to small business income as passthrough income. It goes to people who make less than $400,000 a year.

If you’re going to increase taxes on a business, somebody has to pay. That’s somebody who’s going to be either middle-income employees or middle-income business owners who take a profit wage or benefit. I would point out that the think tanks that specialize in tax say that the indirect hits on people making less than $400,000 from the Biden proposals are generally more than made up through a really large increase in the child tax credit and other tax cuts and savings on drug prices, which will be a key part of this bill too.

David D. Stewart: Well, Frederic and Doug, this has been great. Thank you for being here. I’m sure we’ll have to have you back when we see how all this shakes out this fall.

Doug Sword: We’ll be glad to be back. Thanks, Dave.

Frederic Lee: Thank you very much.