IRS funding targeted as lawmakers push tax extenders

Lawmakers from both sides are making a final push to add tax priorities to the next spending deal, while House Republicans are looking to cut IRS funding.

Congress faces two urgent spending needs, with government funding set to expire on Nov. 17 and the White House requesting more than $60 billion in special funding for Israel, Ukraine and border security. Spending agreements may provide one of the last opportunities to move tax legislation, and the upcoming deadlines will provide an early test of the leadership of new House Speaker Mike Johnson, R-La. He was elected following two weeks of Republican infighting after former House Speaker Kevin McCarthy, R-Calif., was deposed over his own agreement to extend government funding.

The House last week voted 226-196 to approve a $14.3 billion Israel aid package that would rescind IRS funding in an equal amount. Senate Democrats immediately criticized the bill for separating Israel aid from Ukraine and border security spending, and for cutting IRS funding, which the Congressional Budget Office estimated would increase the deficit by $12.5 billion. Lawmakers will have to negotiate on the issue while simultaneously working to avoid a government shutdown in less that two weeks.

House Republicans are still considering several options to address government funding. Tax writers and other lawmakers are pushing to add several key tax provisions, but the spending options may offer limited opportunities.  Johnson has discussed moving either a continuing resolution until Jan. 15, or a series of continuing resolutions with differing expiration dates for various sectors of the government. It is unclear what the Democratic-led Senate is willing to accept, and either option could make it difficult to attach a tax package.

Year-end spending deals are often used as vehicles for tax provisions, but it is usually a full, long-term omnibus spending agreement. There is less precedent for using a short-term continuing resolution to carry a tax package. A series of smaller, staggered spending deals would be even less likely to carry tax provisions. The best opportunity remains a full long-term spending deal, which might not come together until April, when a 1% cut from previous debt limit legislation is scheduled to take effect. There are a handful of other priorities that must be addressed before year-end, such as the reauthorization of the Federal Aviation Administration, and it is possible for them to carry tax provisions.

Tax writers must first reach agreement on the underlying tax priorities for any hope of a tax deal. Progress has been elusive despite more than a year of discussions on a potential deal to trade child tax credit enhancements for restoring research expensing under Section 174, reinstating 100% bonus depreciation, and providing relief for the Section 163(j) limit on interest deductions. House Ways and Means Committee Chair Jason Smith, R-Mo., and Senate Finance Committee Chair Ron Wyden, D-Ore., continued to talk last week, but no breakthroughs were reported. Business groups are relaunching an aggressive lobbying campaign to push lawmakers to come to an agreement in what may be one of the last opportunities.

The prospects could also be affected by a pledge from Johnson to several Republican members not to bring a tax package to the floor unless it addresses the cap on the state and local tax (SALT) deduction. There would likely be enough votes to roll both Democratic and Republican SALT cap holdouts for a bipartisan government funding and tax agreement, but it unclear if bringing the bill to the floor would violate Johnson’s pledge.

The political situation remains fluid and is rapidly evolving. Taxpayers should monitor it closely over the next several weeks to see if tax provisions are ultimately addressed.