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House tax package a major move on extenders, TCJA fixes

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LGBT family photoThe House Ways and Means Committee approved a package of bills on June 20 that would extend expired tax provisions, provide disaster-relief tax incentives, and repeal a provision requiring tax-exempts to pay tax on employee transportation and parking benefits.

The package also includes $100 billion in enhancements to the Earned Income Tax Credit (EITC), the child tax credit, and the child and dependent care tax credit. Democrats only included a single revenue offset intended only to cover the cost of the “extender” provisions. It would raise $37 billion by accelerating the expiration of the increased estate and gift tax exemption.

The legislation, which is divided into three bills, passed on mostly party-line votes and is not expected to survive the Republican-controlled Senate in its current form. But many of the provisions share bipartisan support, and there is hope that Congress can eventually agree on a compromise tax package carrying the extenders and some fixes to the Tax Cuts and Jobs Act (TCJA). Democrats have long indicated they will have policy demands if they agree to any TCJA changes. The Ways and Means bills represent an important marker of Democratic priorities, and a significant first step toward negotiations.

The bills may get votes on the House floor, but the most important step will be negotiating a compromise with Senate Republicans. Senate leaders remain reluctant to allow floor time or an open amendment process for a stand-alone tax bill, so any eventual tax agreement will probably need another legislative vehicle to carry it. The most likely scenario involves attaching a tax title to legislation that will be needed near the end of September to raise the debt limit, address sequestration budget caps, and extend current government funding.

LGBTQ protections The Promoting Respect for Individuals Dignity and Equality (PRIDE) Act of 2019 (H.R. 3299) would extend the statute of limitations for lawfully married same-sex couples to amend their returns to change their filing status back the year of their marriage. It would also scrub the tax code of gender-specific reference to marriage. It was approved by voice vote, and its low $57 million cost makes it a good candidate for eventual enactment.

Extenders and disaster relief The Taxpayer Certainty and Disaster Relief Act of 2019 (H.R. 3301) would extend through 2020 nearly all of the tax provisions that expired at the end of 2017, including:

  • Alternative fuel and biofuel credits
  • Energy-efficient new home credit
  • Energy-efficient commercial building property credit
  • Nonbusiness energy property credit
  • Empowerment Zone incentives
  • Oil Spill Liability Trust Fund financing tax
  • Short-line railroad track maintenance credit
  • Expensing for advanced mine safety equipment
  • Exclusion for debt forgiveness on principal residence
  • Deduction for mortgage insurance premiums
  • Above-the-line deduction for tuition
  • 7.5% adjusted gross income threshold for deducting medical expenses

The bill would clarify that liquefied petroleum gas, compressed or liquefied natural gas, and compressed or liquefied gas derived from biomass do not qualify for the alternative fuel mixture credit. The bill generally would postpone the beginning construction deadline for the Section 45 credit from Dec. 31, 2017, to Dec. 31, 2020. Wind property is currently eligible by 60% for construction beginning in calendar year 2019, and the bill would extend this deadline through 2020 at the same reduced rate. Taxpayers would also continue to be able to elect to claim the 30% credit under Section 48 in lieu of the Section 45 credit (at a reduced rate for wind). The credits under Section 48 themselves are not extended under the bill. The Section 48 credit for solar property is already available at the full rate for construction beginning in 2019, at a 26% rate for construction beginning in 2020, and 22% for construction beginning in 2021.

The bill would also extend for one year a number of incentives scheduled to expire at the end of 2019, including:

  • New Markets tax credit
  • Work Opportunity Tax Credit
  • Employer credit for paid family and medical leave
  • Tax benefits for beer, wine and distilled spirits enacted by the TCJA
  • Health coverage tax credit
  • Look-through treatment for payments between related controlled foreign corporations under the foreign personal holding company rules

The bill does not include any further delay of two unpopular taxes scheduled to take effect again in 2020, the “Cadillac” tax on high-value health plans and the medical device excise tax. These taxes are unpopular enough in both parties that there is still a good chance for a further delay to be added later in the legislative process.

The bill would also provide a number of tax incentives for areas declared a presidential disaster between 2018 and 30 days after the date of the bill’s enactment. The bill includes provisions often provided for disaster areas in past legislation, including:

  • Allowing penalty-free disaster-related withdrawals from retirement accounts
  • Providing an employee retention credit of 40% of wages paid to employees when the business was inoperable
  • Relaxing limits on certain charitable gifts
  • Providing an exception for the AGI threshold for deducting personal casualty losses
  • Extending filing and payment deadlines
  • Increasing the California low-income housing credit cap
  • Offering relief for private foundation excise taxes for certain distributions

The extenders generally enjoy bipartisan support in both chambers, and their passage in the Ways and Means Committee is an important step toward potential enactment. But there are significant differences between the House bill and companion legislation introduced by Senate Finance Committee Chair Chuck Grassley (R-Iowa) and ranking minority member Ron Wyden (D-Ore.). The version from Grassley and Wyden would extend only provisions expiring at the end of 2017, and only through the end of 2019. Still, there should be significant Senate support for the House’s more generous bill. With so little movement on extenders more than halfway into the year, Grassley and Wyden have recently indicated a preference for addressing the 2020 extenders as well, preempting similar uncertainty for the taxpayers who rely on them. However, cost remains a major issue.

The House bill pays for the extenders by accelerating the expiration of the increased estate and gift tax exclusion by three years so that the current exemption would halve beginning in 2023. This offset is unpopular with Republicans, and may be difficult to sell on the Senate. At the same time, many House Democrats are reluctant to extend all the expired provisions without any revenue offsets.

Expanded benefits for low-income taxpayers and families Cost will also be the most significant issue with the Economic Mobility Act of 2019 (H.R. 3300). The bill would make approximately $100 billion of tax changes to the earned income tax credit, the child tax credit, and the child and dependent care tax credit. Republicans and a handful of Democrats in the committee opposed moving these tax cuts without offsets. Before the hearings, Democrats were reported to be considering a 1% increase in the corporate tax rate, but this tax increase was not actually added to the bill. However, Neal has indicated he is amenable to adding “pay-fors” before the bill makes it to the House floor.

Senate Republicans have privately acknowledged that they will need to support some of Democrats’ tax priorities to get Democrats to agree to fix some issues in TCJA. The tax cuts in H.R. 3300 can be viewed as a statement of top Democratic tax priorities and an opening marker for beginning negotiations. How much of these tax cuts Republicans are ultimately willing to allow without cost offsets, and how many changes to TCJA Democrats offer in exchange, will be subject to intense negotiations.

The bill currently includes only a single change to the TCJA. The bill would repeal a provision that require tax-exempt entities to include the cost of transportation and parking fringe benefits in unrelated business taxable income and pay tax on it. The change would be retroactive to the enactment of TCJA, and is popular with both parties. It appears likely to be enacted as part of any final tax package. Other changes to TCJA are unlikely to be added on the House side, but would be considered when a tax package is eventually attached to a must-pass legislative vehicle. Democrats have not yet indicated how many fixes they will entertain, but a fix for the omission of qualified improvement property from bonus depreciation is likely at the very least because of broad Democratic support.



Contacts:
Dustin Stamper
Head of Tax Legislative Affairs
Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T +1 202 861 4143


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