Parties to meet as debt limit deadline moved up to June

House Speaker Kevin McCarthy, R-Calif., is scheduled to meet with President Joe Biden on May 9 to discuss the debt limit, which Treasury is now projecting could be breached as early as June 1.

The meeting comes in the wake of House Republicans passing the Limit, Save, Grow Act of 2023 by a narrow 217 to 215 margin. The legislation would pair an increase in the debt limit with spending cuts, a rescission of IRS funding, and the repeal of energy credits from the Inflation Reduction Act (IRA).  

Republicans were forced to preserve some fuel tax credits to secure enough votes for passage, but the bill would still raise more than $500 billion by essentially repealing the rest of the energy credit package from the IRA. The score from the Joint Committee on Taxation is nearly double the original cost estimate of the energy provisions when the bill was enacted last August.

The bill would also rescind $71 billion of the $80 billion in supplementary IRS funding from the IRA. The Congressional Budget Office estimated that cutting the IRS funding would reduce government revenue by $191 billion over 10 years for a net increase in the deficit of $120 billion.

Despite the inclusion of the proposed tax changes in the bill, it would be surprising for tax increases to be part of the final resolution. The legislation was largely designed to give Republicans leverage in negotiations, and the spending cuts in the bill are more likely to gain traction. President Biden is still pledging not to negotiate based on debt limit threats, but lawmakers have been quietly floating a two-track plan that would allow an increase in the debt limit and spending concessions to Republicans to move separately but concurrently. This would allow Democrats to claim they moved a clean debt limit bill as promised, while Republicans could claim victory on any spending cuts secured on the dual track.

House Democrats have also begun procedures on a discharge petition that could force a House vote on a clean debt limit bill. The petition requires 218 signatures, however, so Democrats would need several Republicans to join them.

Negotiations will need to move quickly as a potential default approaches. Economic volatility or market response could force a compromise. Lawmakers could also temporarily suspend the debt limit to give themselves more time to negotiate.

The issue is dominating Capitol Hill, which is preventing other tax priorities from getting the needed attention. House Ways and Means Committee Chair Jason Smith, R-Mo., is reportedly preparing an economic growth package that could include retroactively restoring the 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).

The legislation could also address the Form 1099-K reporting threshold for payment settlement entities under Section 6050W and provide relief under the last-in-first-out method of accounting for car dealers. Smith has also discussed including some sort of retaliatory tax legislation for countries that implement an undertaxed profits rule affecting U.S. companies under Pillar 2. The bill is not expected to include extending other expiring parts of the Tax Cuts and Jobs Act because of the cost.

The bill is unlikely to move with Biden in the White House and the Democratic Senate but could put the spotlight back on the tax issues. A bipartisan breakthrough is likely still needed on the child tax credit for the tax extenders to move.