Tax

Tax Strategy: Will we get any tax legislation in 2022?

Congress has been working on Build Back Better legislation for over a year now. Currently the focus is on negotiations between Senate Majority Leader Chuck Schumer, D-N.Y., and Senator Joe Manchin, D-West Virginia. The package seems to keep getting smaller, and there are some descriptions around about what remains, but no deal has yet been announced.

Since the legislation is intended to be passed through budget reconciliation, action must be taken by Sept. 30, 2022, when the current budget resolution expires. There also remains concern about whether all of the provisions being discussed will be deemed by the Senate parliamentarian to qualify to be included in a budget reconciliation bill, which can pass with only a bare majority.

There remain a lot of uncertainties with passage: In an election year, compromise is often in short supply; it is not clear whether the reduced proposal has the support of Arizona Democrat Senator Kyrsten Sinema; and, with the Fourth of July recess and the August recess, time for negotiations is running out. There is always the possibility of enacting tax legislation in the lame-duck session after the November election, but the chances of that will probably not be known until the outcome of the elections is known.

There are also a number of other tax issues under discussion in Congress. Congress is working on legislation addressing competitiveness with China, with some discussion about including a tax section. Congress is also looking at removing tax breaks for doing business in Russia due to the Ukraine invasion. Several provisions in the Tax Cuts and Jobs Act from 2017 have expired or are scheduled to expire, and there appears to be bipartisan support to extend or make permanent those provisions. Senator Manchin’s top priority is allowing Medicare to negotiate lower drug prices, which would save federal revenue.

Many of the regularly expiring tax provisions expired at the end of 2021, and there is bipartisan support to again extend many of them. There is pressure to enact tax provisions in support of the international tax proposals agreed to by the Organization of Economic Co-operation and Development. There are also continuing efforts to pass a set of tax reforms related to retirement; the legislation has passed the House and the Senate is working on their version.

Congress has a great deal on its plate and is running out of time to accomplish many of its goals, especially in an election year. Still, Democrats realize that this might be their last chance to enact some of the tax provisions that they desire should they lose control of one or both houses of Congress in the fall elections.

There will be a great deal of pressure, therefore, to find the necessary compromises to enact some form of tax legislation and perhaps use that success to improve their chances in the fall elections. There are also a number of tax provisions that could attract bipartisan support that might find a vehicle to pass separately from the reduced Build Back Better bill, which is only likely to pass under budget reconciliation, if at all.

Build Back Better

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Joe Manchin
Andrew Harrer/Bloomberg
The dollar figure associated with Build Back Better has been reduced from $3.5 trillion to under $2 trillion, with only an estimated $1 trillion in new revenue and an additional $400 billion in cost savings.

Sen. Manchin’s priorities are to authorize Medicare to negotiate prescription drug prices and to allocate at least half of the revenue raised by the legislation to deficit reduction, with the other half for increased spending on items such as clean energy and climate change. Sen. Manchin is comfortable with some level of business tax increases, up to around $700 million, such as a corporate minimum tax, but it is not clear the extent to which Sen. Sinema would support tax increases. A corporate minimum tax of 15% would also support Pillar Two of the OECD’s efforts to get worldwide agreement on base erosion and profit-shifting proposals.

Other tax provisions still being discussed include green energy provisions, additional infrastructure provisions after passage of infrastructure legislation in 2021, and extension of some of the individual tax breaks enacted during COVID, such as the Premium Tax Credit, the Child Tax Credit, and the Earned Income Tax Credit.

There is some concern that the drug pricing provision might not pass muster with the Senate parliamentarian as being insufficiently budget-related, and therefore would not be able to be included in a budget reconciliation bill requiring only a simple majority for passage. Additional funding for the IRS could also be projected to provide additional revenue through additional enforcement activity.

Tax Cuts and Jobs Act

A printout of Congress's tax reform bill, "The Tax Cuts and Jobs Act," alongside a stack of income tax regulations
In order to pass the Tax Cuts and Jobs Act under budget reconciliation in 2017, many of the provisions had sunsets. Unless Congress acts, research and development expenses must be capitalized with five-year amortization starting Jan. 1, 2022. Proposals include permanent immediate expensing or delaying capitalization for another four years.

Another provision under TCJA would start the phaseout of 100% bonus depreciation in 2023. Again, proposals would make the provision permanent or at least postpone the phaseout for a few more years.

Under TCJA, the calculation of the interest expense deduction limitation under Code Sec. 163(j) is changed starting in 2022 to be based on earnings before interest and taxes and dropping the inclusion of depreciation and amortization. Many in Congress would like to permanently preserve the inclusion of depreciation and amortization in the calculation.

China competition legislation

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Fred Dufour/AFP/Getty Images
The congressional focus on China competitiveness legislation is to promote domestic production of important goods that Congress does not feel the U.S. should rely on China to supply. There is discussion of including a tax section in the legislation, but there is also concern that a tax section could bog down passage.

Russian invasion of Ukraine

Volunteers tie pieces of fabric while making camouflage nets at the Ivanychuk Library in Lviv, Ukraine, on Tuesday, March 1, 2022. Russia's armed forces will continue their "military operation" in Ukraine until they meet their goals, Interfax quoted Defense Minister Sergei Shoigu as saying. Photographer: Ethan Swope/Bloomberg
Erin Trieb/Bloomberg
Congress is considering tax legislation to remove tax breaks from companies for business activity in Russia and Belarus. This legislation has bipartisan support and just needs the proper legislative vehicle to attach to for passage. These provisions could serve as a revenue-raiser as part of other tax legislation.

SECURE 2.0

The 115th Congress convenes for the first time in 2017
Andrew Harrer/Bloomberg
Since passage of the SECURE Act a couple of years ago, Congress has been working on some bipartisan additional changes to the tax provisions related to retirement. The House overwhelmingly passed SECURE 2.0 in March 2022. The Senate Finance Committee is working on its own version of the legislation.

Expired tax provisions

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Several of the regularly expiring tax provisions expired at the end of 2021. Congress has long extended many of these provisions only temporarily, often extending them retroactively after they have expired. The same could happen again this year.
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