House Republicans last week rejected an offer from the White House to repeal like-kind exchanges and impose wash-sale rules on digital assets as part of a deficit reduction package to resolve the debt limit stand-off.
The offer on tax increases came as part of broader negotiations with Republicans, who have been seeking policy concessions in exchange for raising the debt limit. Both sides have recently expressed optimism that a deal would come together, though no major breakthroughs were reached last week. Treasury continues to warn that the debt limit could be breached as early as June.
Taxes have not been a large part of negotiations, and the new offer from the Biden administration is their first real attempt to counter Republican spending demands with proposed tax increases. The administration reportedly offered only a narrow package that would raise approximately $40 billion with two provisions from the President’s budget — expanding wash sale rules to apply to digital assets and repealing like-kind exchanges under Section 1031, which are already limited to real property under the Tax Cuts and Jobs Act. Republicans quickly rejected the offer, saying any deal should focus on spending and not revenue.
The House Republican debt limit bill, however, would raise over $500 billion in new revenue by repealing energy tax credit enhancements. Some Republicans argued that those changes should not be viewed as tax increases because a portion of the credits are transferable or refundable.
The Republican bill and the Democratic offer are elevating tax issues as part of the discussion. The chances of tax increases being included in the final deal may have slightly increased but would still be somewhat surprising. Biden has contrasted Republican priorities against his tax proposals in public comments and on Twitter but does not appear to be pushing the issue hard in private negotiations. Republicans also remain firmly opposed to tax increases.
Negotiations should proceed quickly as a potential default approaches in June. Better than expected tax receipts could push out the deadline, and lawmakers could also temporarily suspend the debt limit to give themselves more time to negotiate.
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