Congress is returning to Washington to confront an immediate government funding crisis that could affect the prospects for tax legislation.
The Senate is scheduled to reconvene Sept. 5 while the House plans to come back Sept. 12. That will give lawmakers only a few weeks to reach agreement on government funding before it expires on Sept. 30. Lawmakers do not appear likely to reach agreement on a broad omnibus bill (or finish individual all the individual appropriations bills) by the deadline. A continuing resolution (CR) seems more likely, but the Freedom Caucus is demanding difficult concessions in order to agree. A government shutdown remains possible.
The timing and content of a spending agreement changes the outlook for tax policy because any spending deal will be one of the only legislative vehicles that could carry a tax package. If lawmakers pass a short-term CR and then reach a broad agreement on spending before the end of the year, such a year-end deal could carry tax priorities. If only smaller spending agreements are reached and a partial or full CR is needed until well into 2024, it dampens the hope for a tax package.
Lawmakers must first also reach a compromise on the tax package itself. The two sides appear no closer to an agreement to trade child tax credit enhancements for restoring research expensing under Section 174, reinstating 100% bonus depreciation, and providing relief for the Section 163(j) limit on interest deductions. Republicans have signaled they are open to child tax credit relief and Democrats have acknowledged this relief must be proportional to the business provisions. But there are still many hurdles that could scuttle a deal. Many Republicans are insisting on work requirements for any new child tax credit benefits, which are unpopular with Democrats, and the recent emphasis on deficits makes it difficult to move an expensive tax compromise without revenue offsets.
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