Senators Renew Efforts to Reverse R&D Tax Modification. Last Friday, a bipartisan coalition of 12 senators introduced the American Innovation and Jobs Act to increase incentives for businesses that invest in domestic research and development (R&D). Spearheaded by Sens. Maggie Hassan (D-NH) and Todd Young (R-IN), the legislation would significantly boost a pair of R&D credits under Internal Revenue Code sections 174 and 41. Lawmakers had previously pursued similar legislation to enhance these incentives in the 117th Congress—resulting in a partial victory with the significant expansion of the section 41 R&D credit through the Inflation Reduction Act (IRA).
The primary focus of the new bill is to reverse a provision included in the Tax Cuts and Jobs Act (TCJA) that required businesses to begin amortizing section 174 R&D expenditures over five years after 2021. Before this, taxpayers could choose to deduct these expenditures immediately, capitalize the expenses and amortize them over five years or elect a 10-year amortization of expenditures under the alternative minimum tax rules. If enacted, this new bill would retroactively reverse the restrictions imposed by TCJA, again allowing taxpayers to immediately deduct any qualified R&D expenses incurred in tax years 2022 or later.
Several bipartisan attempts were made to restore immediate R&D deductibility in the 117th Congress, although they were all ultimately unsuccessful due to various political roadblocks. Last December, section 174 relief was left out of the 2023 omnibus budget after Democrats and Republicans could not reach mutually agreeable terms on a tax-extenders compromise.
Outside of modifications to section 174 amortization, the Hassan-Young bill would significantly expand the section 41 payroll tax credit currently provided to small businesses that engage in qualified R&D activities. Specifically, the bill would annually increase the current $500,000 credit amount cap to reach a maximum of $750,000 by 2033. In addition, the bill would triple the current eligibility phaseout threshold to allow businesses with up to $15 million in annual gross receipts to qualify for the credit, among other changes.
In the 118th Congress, some Democratic lawmakers may continue to insist on the inclusion of Child Tax Credit (CTC) expansion before offering support for business incentives like the R&D tax credits. Sen. Michael Bennet (D-CO), for example, recently stated his intention to “continue to oppose cutting taxes for corporations without passing an expanded CTC.” Ultimately, standalone tax legislation is unlikely to receive serious consideration in the coming months. Instead, businesses’ best hope for section 174 or 41 expansions will probably emerge when discussions begin later in the year on the fiscal year 2024 omnibus budget deal.
Yellen Defends 2024 Budget Proposals before Senate Tax Writers. On March 16, Treasury Secretary Janet Yellen appeared before the Senate Finance Committee to testify on President Joe Biden’s fiscal year 2024 budget proposal. Lawmakers on both sides of the aisle also questioned Yellen on the Treasury Department’s ongoing role in stabilizing the U.S. banking sector in the wake of the high-profile collapses of Silicon Valley Bank and Signature Bank earlier this month. On the budget, lawmakers sparred over proposals to fund new refundable tax credits with $4.7 trillion in additional federal revenue over the next decade.
In the hearing, senators focused on several changes to the tax code that were addressed in the budget proposal. Sen. Todd Young (R-IN) noted that the budget request would effectively raise taxes on individuals with less than $400,000 in annual income by failing to extend any of the Tax Cuts and Jobs Act provisions currently scheduled to sunset after 2025. He said this represented a failure in the Biden administration’s pledge not to increase taxes on low- and middle-income individuals. Countering this argument, Senate Finance Committee Chairman Ron Wyden (D-OR) claimed that the budget proposal would more than offset these tax hikes with an increase in the value of the current Child Tax Credit and Low Income Housing Tax Credit.
Despite the lack of significant new climate provisions in the budget proposal, several lawmakers raised questions concerning the ongoing implementation of Inflation Reduction Act (IRA) energy proposals. Sens. Sherrod Brown (D-OH) and Catherine Cortez Masto (D-NV) noted that the IRA created new tax incentives to support domestic solar production and asked Yellen to ensure that China’s solar industry could not profit from these credits. Yellen agreed, noting the Treasury Department’s forthcoming guidance on this issue. Sen. Tom Carper (D-DE) also requested that the Treasury Department expedite guidance on several other clean-energy incentives to ensure taxpayers were fully aware of benefits for which they may qualify.
Ranking Member Mike Crapo (R-ID) highlighted his opposition to the ongoing implementation of the global minimum tax deal negotiated through the Organisation for Economic Co-operation and Development (OECD). He accused the Treasury Department of supporting the efforts of foreign nations and the OECD to tax the profits of U.S. companies. In response, Yellen defended the tax agreement and said it provided a way to impose a floor on the taxation of multinational corporations. Sen. Steve Daines (R-MT) echoed Crapo’s sentiment, asserting that the OECD’s efforts benefit state-owned enterprises at the expense of private businesses.
As expected, GOP lawmakers continued to raise concerns over the $80 billion in above-baseline funding allocated to the Internal Revenue Service (IRS) through the IRA. Yellen said the IRS had already spent approximately 1% of these new funds to reduce the paper return backlog significantly. She committed to providing the committee with a comprehensive operational plan for spending the new funding in “the near future.” Notably, Yellen had previously imposed a deadline on the IRS to furnish this plan by Feb. 17.
On Thursday, Yellen will justify the budget request before the House Appropriations Financial Services and General Government Subcommittee along with Office of Management and Budget Director Shalanda Young and Council of Economic Advisers Chair Cecilia Rouse.
CBO Report Furthers Partisan Rift on Deficit Reduction Approaches. On March 14, the Congressional Budget Office (CBO) issued an analysis comparing two possible spending paths to balance the U.S. federal budget over the next decade. This report was requested by Senate Finance Committee Chairman Ron Wyden (D-OR) and Senate Budget Committee Chairman Sheldon Whitehouse (D-RI) as part of Democratic lawmakers’ broader efforts to frame the GOP budgetary agenda as economically unfeasible.
CBO first analyzed a budget path that would allow for the expiration of several temporary tax relief provisions provided by the Tax Cuts and Jobs Act (TCJA), including changes to individual income tax provisions and higher estate and gift tax exemptions. In this case, CBO estimated that the budget deficit could be entirely eliminated if lawmakers gradually reduced noninterest federal outlays by a total of 29% over the next decade. If federal spending reductions did not include Social Security or Medicare, as most lawmakers have indicated, applicable noninterest outlays would require a decrease of 57% by 2033.
In comparison to this budget strategy, CBO also analyzed a second path that accounted for the possible extension of all expiring TCJA provisions. In this scenario, federal outlays would need to be reduced by an additional 6% over the coming decade for a total cut equal to 35% of all current federal expenditures by 2033. The report also noted that if TCJA was made permanent and no spending cuts were levied against Social Security, Medicare, defense or veterans’ programs, all other federal spending would need to be reduced to zero. Wyden and Whitehouse explicitly requested this figure because it seems to mirror certain promises made in budget proposals offered by some Republicans.
In the wake of this report, Democrats have touted CBO’s findings as proof that spending cuts alone are insufficient to balance the deficit—especially if TCJA tax cuts are extended. In a press release on March 14, Wyden accused House Speaker Kevin McCarthy (R-CA) of having articulated a budget proposal that “made impossible promises,” which are “seriously alarming with a catastrophic default getting closer every day.”
However, Republican lawmakers have generally not advocated for proposals to completely eliminate the deficit, as outlined in this report. A recent proposal from the House Freedom Caucus, for example, would instead only reduce the 10-year deficit by $3 trillion—about 15% of the total projected deficit increase between 2022 and 2033. In another case, McCarthy has recommended freezing federal spending at fiscal year 2022 levels, without necessarily cutting any additional specific agency spending.
In opposition to the GOP’s proposed cuts to federal spending, many Democratic lawmakers have advocated for tax increases to reduce the deficit. The Biden administration also embraced this strategy, offering $4.7 trillion in new tax increases over the next decade as part of its fiscal year 2024 budget proposal.
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