Debt limit agreement cuts IRS funding, could unlock tax priorities

Lawmakers last week enacted debt limit legislation that could lead to cutting up to $21 billion in IRS funding and clear the decks for Congress to turn to other legislative priorities.

The deal came together at the last minute after months of political maneuvering. The House passed the bill in a 314 to 117 vote on May 31, and the Senate quickly followed suit in a 63 to 36 vote on June 1. The president signed it into law on June 3 before a potential default on June 5.

The legislation is largely focused on spending and does not include any tax increases or repeal energy tax credits as proposed by Republicans. The bill does rescind $1.4 billion in IRS funding, with an informal “handshake” agreement to cut another $20 billion through the normal appropriations process for fiscal years 2024 and 2025. Although this agreement is not statutorily binding, both sides seemed to support reallocating these funds to prevent cuts in other government programs.

If effectuated, the funding cuts will reduce the $80 billion special allocation of IRS funding in the Inflation Reduction Act (IRA) to less than $59 billion. This clawback represents a victory for Republicans, who have sharply criticized the IRS funding increases. The administration sought to downplay the impact, claiming that the entire $80 billion was never meant to be spent up front and that the funds could be restored in later years. This could prove politically difficult. Either way, the nearly $60 billion of funding retained is still a transformative sum that will lead to significant increases in enforcement in the coming years.

The IRA originally allocated $45.6 billion of the $80 billion in funding to enforcement, leading the Congressional Budget Office (CBO) to estimate that it would increase revenues by approximately $200 billion. It is unclear how the $20 billion of funding cuts will affect the allocations of the remaining $60 billion. The CBO scored only the $1.4 billion funding cut in the actual legislation, estimating that it would reduce revenues by $2.3 billion.

The bill will suspend the debt limit until Jan. 1, 2025, removing the issue for the next year-and-a-half and potentially allowing lawmakers to focus on unfinished tax priorities. Tax issues that could be considered this year include: 

• Extender tax provisions: Negotiations should resume for restoring key business tax provisions, including retroactively reinstating 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). Democrats and Republicans have discussed trading the business relief for enhancements to the child tax credit, but negotiations have been sluggish, and many hurdles remain.
• Housing tax incentives: There is bipartisan interest in housing legislation, which could include enhancements to the low-income housing tax credit and other tax incentives.
• Form 1099-K relief: There is bipartisan support for raising the threshold at which Form 1099-K reporting is required for third-party payment networks under Section 6050W. The reporting threshold is scheduled to be reduced to $600 in 2024 when IRS transition relief expires (see our prior story on IRS relief).
• SECURE Act 2.0 technical corrections: The chairs and ranking members of the tax writing committees in both the House and Senate recently wrote a letter pledging to correct several technical issues with the newly enacted retirement tax package, including a provision which could prevent catch-up contributions in 2024.
• LIFO relief for car dealers: Lawmakers have discussed providing relief to car dealers who experienced unfavorable tax results from the last-in, first-out method of accounting because of supply chain issues.
• GOP economic growth package: House Ways and Means Chair Jason Smith, R-Mo., has discussed releasing an economic growth package that includes many of the tax priorities listed above, and which could also seek to extend some of the individual tax provisions from the Tax Cuts and Jobs Act. The bill may largely be about messaging as any legislation this year will need bipartisan support with Democrats in control of the Senate and the White House.
• OECD retaliation: House Republicans on the Ways and Means Committee have introduced legislation that would create retaliatory taxes for certain foreign taxpayers from countries that implement certain Pillar 1 and Pillar 2 taxes under the overhaul of international tax rules led by the Organisation for Economic Co-operation and Development (OECD). This legislation may also largely be about messaging opposition to OECD implementation (see our prior story for the latest on Pillar 2).
• Tax treaties: There has been recent momentum for ratifying the Chile tax treaty, though hurdles remain. Lawmakers have also discussed law changes that would confer tax benefits similar to a treaty for Taiwan.

With the thorny politics of the debt limit out the way, lawmakers may now have more leeway to begin pursuing some of these bipartisan initiatives. The legislative calendar will be full, however, with both the August and July 4 recesses cutting into the calendar. Republicans and Democrats also appear far apart on some key issues.