New CBO estimates could complicate extenders, debt limit negotiations

The Congressional Budget Office (CBO) recently published updated estimates showing that, barring Congressional action, the U.S. could reach its debt limit as soon as July. Negotiations over raising the debt limit have made little progress, but the issue is still dominating Capitol Hill and making it more difficult for any other legislative priorities to gain traction.

President Joe Biden met with House Speaker Keven McCarthy, R-Calif., several weeks ago to discuss the debt limit, and both sides said the meeting was productive — though the talks did not appear to involve much substance. The White House said Biden simply reiterated his position that the debt ceiling is not subject to negotiation, while McCarthy refrained from laying out any specific demands besides reiterating a general desire to curb government spending without cuts to Medicare or Social Security funding. There have been few notable updates on debt limit negotiations since that initial meeting, but lawmakers are back in session this week, so further updates could come at any time.

In addition to updating its estimates on the debt ceiling, CBO’s updated estimate also show federal budget deficits growing to historically high levels — in addition to estimating that future budget deficits will grow faster than previously forecast.

The updated deficit figures could complicate another major set of ongoing Congressional negotiations: a smaller tax extenders package.

Democrats and Republicans have been discussing trading enhancements to the child tax credit for key business provisions, including retroactively restoring expensing of research and experimental costs under Section 174, extending 100% bonus depreciation (which reverted to 80% for property placed in service after 2022), and retroactively providing relief from the limit on interest deductions under Section 163(j).

One of the biggest issues plaguing extenders negotiations has been matching the costs of proposals on both sides to a package that both parties can stomach. The Joint Committee on Taxation estimated last year that a full extension of the enhanced child tax credit would cost roughly $1.4 trillion over the next decade, while other groups estimate an extension of notable Republican priorities could cost north of $600 billion.

Tax increases appear unlikely to be part of negotiations, meaning the existing proposals from both parties in any extenders package would further add to the deficit over the next 10 years without providing any budgetary offset — potentially creating political problems.

Any extenders deal also would likely need a broader legislative vehicle. There is some speculation that a technical correction needed for the SECURE 2.0 legislation enacted on Dec. 29, 2022, via the omnibus spending bill (H.R. 2617), could be one option to move a tax title. The legislation contains a drafting error that may bar individuals from making any catch-up contributions (pre-tax or Roth) beginning in 2024. While it is not yet certain if a legislative fix for the SECURE 2.0 error will be necessary, there would be major bipartisan support for such a technical corrections bill in the event it is needed. Such a bill likely would be attractive as a larger tax vehicle, potentially providing an avenue for an extenders deal.

There is also bipartisan interest in providing relief from the new Form 1099-K reporting changes. For more information about the 1099-K requirements, see our prior story, “IRS delays $600 threshold for 1099-K reporting.”

Neither the catch-up contribution fix nor Form 1099-K relief needs to be addressed immediately, however. Congress could wait until late this year to address them, which would rob lawmakers of a potential near-term vehicle to move other tax priorities.

Some are holding out hope that lawmakers will include a tax package as part of the upcoming “farm bill” (the reauthorization of the Agriculture Improvement Act of 2018), but the bill does not typically carry a tax title and lawmakers thus far have seemed reticent to include such a title this year. Others are holding out hope lawmakers include a tax title in the annual reauthorization of the Federal Aviation Authority (the “FAA bill”), which does typically carry a tax title and could do so once again this year.

The biggest issue for both of these bills is timing. Neither the FAA bill nor the farm bill needs to be passed before Sept. 30 — when federal government funding is also set to expire. Thus, there does not appear to be a major benefit in including a tax title in either the FAA bill or the farm bill when lawmakers could instead simply push to include a tax title in government funding legislation with the same deadline.

Negotiations on the debt limit are likely to intensify in the coming months, conversely — especially in light of the updated forecast from the CBO. Businesses should remain attuned to negotiations on Capitol Hill, as additional updates on both a potential tax extenders package and a debt limit agreement are expected in the coming weeks and months.