House Democrats last week released an updated reconciliation bill for potential House passage, but postponed a vote after several moderates refused to support the bill without a full revenue score. The House is now targeting a vote by the week of Nov. 15, and also sent to the president’s desk a related bipartisan infrastructure bill with several narrow tax provisions.
The new version of the reconciliation bill makes several notable changes to the tax title that was unveiled as part of President Joe Biden’s framework agreement on Oct. 28, including an increase and extension of the cap on state and local tax (SALT) deductions and the addition of proposals aimed at individual retirement accounts (IRAs). The Joint Committee on Taxation estimates that the bill’s tax increases would raise nearly $1.5 trillion while its tax cuts would cost more than $500 billion.
The current bill is by no means a finished product, and does not have the endorsement of Senate holdouts Sens. Joe Manchin, D-W.V., and Kyrsten Sinema, D-Ariz. House leadership is pushing ahead toward a vote early as next week anyway—a significant shift in strategy. House Speaker Nancy Pelosi, D-Calif., had pledged for months not to bring a reconciliation bill to the House floor unless she was confident the Senate would pass it. But after disappointing election results for Democrats in Virginia and New Jersey, House Democrats last week pushed for immediate votes on the reconciliation bill.
Six moderate House Democrats scuttled those plans by refusing to vote without a full score from the Congressional Budget Office (CBO). The moderates did commit to voting for the bill “in its current form other than technical changes” no later than the week of Nov. 15 as long as the CBO numbers are consistent with the White House’s top-line revenue estimates.
Democrats did manage to pass the bipartisan infrastructure bill last week by a 228-206 vote (including 13 Republican votes) after most progressives relented and offered their support. Until last week, progressives had vowed not to pass the infrastructure until the reconciliation bill was complete in order to preserve leverage over moderate holdouts on the reconciliation bill. Biden is now expected to sign the infrastructure bill this week. It raises $50 billion in net revenue from a handful of both favorable and unfavorable tax changes, which include:
- Expanding information reporting to cover digital assets like cryptocurrency
- Ending the employee retention credit on Sept. 30, 2021, except for recovery start-up businesses
- Extending the transportation excise taxes that fund highway spending
- Reinstating Superfund taxes
- Extending pension funding relief
- Carving out certain utility water and sewer property from the exclusion from contribution to capital treatment under Section 118
- Increasing the private activity bond cap for transportation projects and expanding private activity bond eligibility to include qualified broadband projects and carbon dioxide sequestration facilities
- Expanding required IRS administrative relief for disasters
The reconciliation bill carries the bulk of the president’s social and tax agenda, and its prospects remain fluid. Manchin and House moderates have both refused to endorse it the without a full CBO score. Surprises in scoring remain possible and could present hurdles to moving forward. The bill relies on as much as $400 billion in new revenue that Treasury expects from IRS funding increases, and it is unclear whether CBO will score IRS funding in the same way. Even if the bill passes the House, it appears unlikely to pass the Senate in its current form. The bill includes specific measures Manchin currently opposes, including paid family and medical leave without new taxes to fund it.
Manchin and other senators may demand significant revisions to the tax title and other areas before enactment is possible. Negotiations will be interesting. The House action will put the pressure on the Senate to act, but also robs leadership of some leverage over Manchin and Sinema. There are no concrete deadlines to drive reconciliation action, but lawmakers will still be pressing for quick action and will certainly want to finish any deal before adjourning for the end of the year.
The new version of the reconciliation tax title—as it stands now—adds several significant tax provisions, including:
- Extending the SALT deduction for six years, through 2031, and raising the cap from $10,000 to $80,000 through 2030 before lowering the cap to $10,000 for 2031
- Adding a number of restrictions to IRAs and other retirement accounts that were dropped from an earlier version
- Increasing the employer-provided childcare credit
- Allowing taxpayers to deduct expenses in contingency fee cases
- Doubling the refundable portion of the research credit for qualified small businesses
- Terminating the employer credit for paid family and medical leave in 2023 instead of 2025
- Providing increased low-income housing tax credit allocations with several modifications to the rules
- Creating a new local journalist compensation credit
- Creating a new neighborhood homes credit
- Creating a new credit for economic activity in U.S. possessions
- Providing above-the-line deductions for employee uniforms and union dues
- Adding a new nicotine tax aimed at vaping
- Adding qualified sound recording to Section 181 expensing
- Expanding Section 139 to exclude certain state-based catastrophic loss mitigation from income
No major provisions were cut from the last version of the bill, although some were modified. The bulk of the revenue would still be raised from:
- Imposing a 15% minimum book tax on corporations with more than $1 billion in net financial statement income
- Creating a 1% excise tax on stock buybacks by publicly traded companies
- Raising the rate on global intangible low-taxed (GILTI) income to 15%, imposing it on a country-by-country basis, and reducing the exemption from a return on tangible property
- Reducing the deduction for foreign derived intangible income (FDII)
- Enhancing the base-erosion and anti-abuse tax (BEAT)
- Imposing a new interest limit based on share of a global group’s total interest
- Implementing significant additional international reform
- Imposing a 5% surtax on adjusted gross income exceeding $10 million, with an additional 3% tax on AGI exceeding $25 million
- Expanding the 3.8% tax on net investment income (NII)
- Making the active loss limitation under Section 461(I) permanent and adjusting the carryforward rules
The bill also retains more than $300 billion new, enhanced, and extended green incentives. It would also postpone for four years the five-year amortization of research and experimental (R&E) expenditures that is currently scheduled to become effective beginning in 2022. On the individual side, there are extensions and enhancements for the child tax credit, the earned income tax credit, and Affordable Care Act premium credits.
The following provides more information on key proposals included in the most recent version of the bill.
Corporate minimum tax
The bill would impose a 15% minimum “book” tax on corporations that report three-year average annual adjusted financial statement income in excess of $1 billion (with a $100 million threshold for certain foreign-parented corporations if the international reporting group has $1 billion in income). It includes both public and private C corporations, but not S corporations or real estate investment trusts or regulated investment companies. Lawmakers claim only about 200 companies would meet this threshold.
The 15% rate would apply against “net income” from an applicable financial statement (defined under Section 451(b)(3)) with many significant adjustments, including several international items. General business credits would be subject to the same limit applying under the old corporate alternative minimum tax. Newly defined “financial statement” net operating losses could offset up to 80% of financial statement income. Any tax paid would be creditable against regular tax in future years.
The proposal would be effective for tax years beginning after Dec. 31, 2022. The JCT estimates the tax would raise roughly $318 billion from 2022-2031.