Debt limit fight slows tax momentum


The new Congress is less than a month into its session, but the potential for its first major looming catastrophe—the debt limit—has essentially halted all momentum on any substantive discussions on tax legislation.


Several weeks ago, Treasury Secretary Janet Yellen wrote to House Speaker Kevin McCarthy, R-Calif., noting that Treasury had begun deploying “extraordinary measures” to pay its obligations, with many experts pointing to June or July 2023 as the ultimate date of default for U.S. obligations.


While a debt ceiling breach could lead to widespread economic disruption, including rising interest rates, sinking stock markets, and serious damage to the nation’s financial credibility, there is little indication on progress regarding a potential debt limit deal.


President Joe Biden recently signaled plans to meet with McCarthy on the issue, though the White House is indicating Biden will simply reiterate his current position that the debt ceiling is not subject to negotiation. Conversely, a McCarthy spokesperson indicated McCarthy is looking forward to discussing a “responsible debt ceiling increase” with Biden, and added that Biden should be open to negotiating putting “America on a sounder fiscal path by finally addressing irresponsible government spending.” Similarly, a faction of Senate conservatives—led by Sens. Ted Cruz, R-Texas, Rand Paul, R-Ky., and Ron Johnson, R-Wisc.—recently posited that the debt ceiling debate is the most effective leverage point for securing “fiscal controls” on government spending.


While Democrats believe that cutting discretionary spending will prove deeply unpopular with the public, Republicans appear to believe the White House will eventually drop its “no negotiation” stance and seek a bipartisan resolution.


Further complicating matters, McCarthy may have issues corralling his House Republican caucus around the debt limit fight, given his razor-thin margin in the House, and considering it took McCarthy 15 tries to secure enough votes in his caucus to be elected Speaker.


In addition, using the debt limit as a catalyst for policy changes has been difficult in the past, and some moderate Republicans have already signaled they would potentially try to work with Democrats to undercut any brinkmanship that could threaten the full faith and credit of the U.S. government. Rep. Brian Fitzpatrick, R-Penn., recently noted that “a discharge petition would only take myself and four colleagues on the GOP side to side with Democrats, if that’s necessary to circumvent that,” and more recently, Rep. Rodney Davis, R-Ill., noted, “America’s not going to default on its debt.”


Negotiations on the debt limit are likely to intensify in the coming months—and the focus on the fight has sapped any momentum for a potential tax extenders deal.


Lawmakers continue their discussion on an extension of the enhanced child tax credit in exchange for legislation addressing expiring Tax Cuts and Jobs Act provisions—like retroactively restoring expensing of R&E 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)—but such bipartisan tax legislation has taken a clear back seat to the debt ceiling fight. Republicans also appear intensely focused on tax messaging in front of the 2024 elections, which could make a tax extenders deal more difficult.


Republicans in the House may seek to continue their strategy of passing messaging bills laying their tax agenda (e.g., extending provisions of the TCJA and/or repealing provisions of the Inflation Reduction Act (IRA), even though these bills are likely to flounder in the Democrat-controlled Senate. Conversely, Democrats may continue proposing social spending programs funded by tax increases on the wealthy and large corporations that will likely not pass in the Republican-controlled House.


Given the anticipated lack of major substantive legislative activity, focus likely will remain on the debt limit fight and the administrative guidance process, as major packages of regulations implementing and expanding on provisions of the IRA are expected throughout 2023.



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