Tax extender negotiations sputter as potential shutdown looms

House Republicans descended into infighting last week with a Sept. 30 spending deadline looming, increasing the potential for a government shutdown and putting tax priorities on the backburner.

Congress will almost certainly need to pass a short-term continuing resolution (CR) to fund the government when the current spending agreement expires on Sept. 30. Lawmakers are weeks and maybe months away from a broader long-term spending deal.

The prospects for keeping the government funded in the near-term are complicated by divisions among House Republicans. Many hardline members are vehemently opposed to a short-term CR and are demanding deep cuts and policy concessions that are non-starters in the Senate. House Speaker Kevin McCarthy, R-Calif., last week twice failed to get enough votes to advance Republican-only spending bills after several of his own members rebelled and voted with Democrats to block the bills. McCarthy could roll conservatives by securing Democratic support for a moderate bipartisan short-term CR, but risks losing his leadership in the blowback. Launching impeachment proceedings on President Joe Biden may placate some of his caucus. Congress still has time to avert a shutdown, but McCarthy must reach a resolution on way or another with the holdouts.

It is unclear how the IRS would be affected by a broader government shutdown. An operational plan from 2022 indicated the IRS would continue to operate at full capacity regardless of any government shutdown because it can fund operations out of the $60 billion in supplemental funding from the Inflation Reduction Act. Treasury has since removed that plan from its website and has not yet indicated whether it will cease any operations or furlough employees in the event of a shutdown.

The spending fight could, however, have an impact on the prospects for a tax extenders deal. Republican and Democratic lawmakers continued to quietly engage in negotiations over a potential deal to trade child tax credit (CTC) 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 Chair Jason Smith, R-Mo., last week expressed confidence in his ability to broker a deal before the year-end, saying he is actively in discussions with Senate Finance Committee Chair Ron Wyden, D-Ore. Wyden appeared more downcast, pledging to continue to work toward a deal but lamenting that he had yet to see a proposal where the CTC relief was proportional to the business tax relief. Lawmakers have been discussing a compromise for more than a year with little progress in negotiations. Republican demands for work requirements and a focus on the deficit could also make a deal difficult.

Any tax agreement will likely need a legislative vehicle to carry it. The outcome of the spending fight could be important. A long-term omnibus spending deal could be a prime candidate to carry a tax package. A series of short-term CRs, drawn-out partisan fighting, and an impeachment process could hurt the chances of a tax deal.