Tax outlook murky after spending reprieve, speaker fight

The government narrowly avoided an Oct. 1 shutdown with a last-minute 45-day continuing resolution (CR) to fund the government, but the outlook for a tax package only became more complicated due to the fallout.

Former House Speaker Kevin McCarthy, R-Calif., was deposed after hardline conservatives, unhappy with his spending compromise, revolted. McCarthy had shepherded a relatively “clean” 45-day extension of government funding through the House late on Sept. 30 with the help of 209 Democrats and 126 Republicans. The move infuriated a handful of conservatives, and McCarthy lost his speakership when eight Republicans voted against him in a 216-210 vote on Oct. 3.

The House is currently without a leader as Congress faces another imminent spending deadline and negotiates  a potential year-end tax package. It remains unclear who will emerge as the new speaker. House Majority Leader Steve Scalise, R-La., and Freedom Caucus Founder Jim Jordan, R-Ohio, are both running. The winner could be critical in determining whether or not the government shuts down when the 45-day CR expires.

Before the shutdown was avoided on Sept. 30, the IRS had released a shutdown plan that would furlough two-thirds of its workforce and cease all audits, return examinations, non-automated collections, and taxpayer call lines. The IRS would keep working on Inflation Reduction Act (IRA) guidance, as well as mail processing, criminal law enforcement, and income verification for mortgage lenders, banks, and others.

The shutdown plan breaks sharply from one released previously, which would have used the $80 billion in special IRA funding to maintain full operations. The IRS confirmed it could still use that money on normal operations, so it is unclear why the IRS decided to furlough so much of its workforce. If the government shuts down in November, it could create large processing backlogs at the IRS.

Discussions over a tax extenders 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 were largely subsumed by the spending negotiations and Republican in-fighting. A deal is certainly still possible, but prospects appear to be worsening. Congress will be consumed with another spending deadline for weeks, and the Republican infighting and partisan finger-pointing will only make negotiating more difficult.