The annual tax policy cycle and current state of play

The federal government began the new fiscal year under a continuing resolution that provides appropriations through Nov. 17. The threat of a government shutdown looms in the absence of a budget agreement before that mid-November deadline.

Congress extended its streak of passing at least one continuing resolution each year since 1998. The process of doing so, however, brought to the surface fissures among House Republicans, which led to a change in the speaker of the House that required 22 days to complete.

That transition was partly characterized by questions about Republicans’ willingness to compromise with Democrats on federal spending issues—to which tax policy issues generally are connected to some degree.

As those questions remain, there is doubt about whether Congress will advance any significant tax legislation before the end of 2023, including that which addresses prominent issues that have dominated the tax policy conversation for months: the tax treatment of research and development expenses, the limitation on the deduction of business interest expense, bonus depreciation, and the state and local tax deduction limitation.

The likelihood of year-end tax legislation appears to be diminished by ongoing intra- and interparty disagreements about federal spending. As that applies to the tax policy conversation at large, the costs of certain proposed changes continue to serve as an obstacle. Specifically, as discussions continue to link the expanded child tax credit with favorable changes to some business taxes, the cost of expanding the child tax credit has been prohibitive to advancing legislation.

As the end of the year approaches, the business community continues to focus on the tax treatment of research and development expenses (section 174); the deductibility of business interest expenses (section 163(j)); regulations governing bonus depreciation of qualified property; and the state and local tax deduction limitation.

The longer those issues are left unaddressed, the more likely they will remain as they are, as the focus shifts in 2024 to the presidential election and provisions in the Tax Cuts and Jobs Act that expire in 2025.

President Joe Biden noted two tax policy objectives—a billionaire minimum tax and the quadrupling of the 1% tax on stock buybacks—when he laid out his administration’s agenda in his State of the Union address before a joint session of Congress on Feb. 7.

His proposed billionaire minimum tax and the quadrupling of the 1% tax on stock buybacks are designed to make “the wealthiest and biggest corporations begin to pay their fair share;” help fund “investments in our future,” such as clean energy and health care initiatives; and reduce the federal deficit, Biden said. The enactment of such proposals in a divided government is highly unlikely.

The billionaire minimum tax that the White House proposed in March 2022 would require households with a net worth exceeding $100 million to pay a tax rate of at least 20% on their full income, including unrealized capital gains income on unsold investments.

Biden also proposed increasing the tax on corporate stock buybacks from 1%, as established by the Inflation Reduction Act of 2022, to 4%. He hopes an increased rate would incentivize large companies to make long-term investments instead of repurchasing its own stock.

Biden also made passing mention of a few additional tax items. In saying to Congress, “Let’s restore the full child tax credit,” the president referenced a Democratic priority that has affected long-running negotiations to reverse the unfavorable change in tax treatment of research and experimental costs (section 174) beginning in 2022. He also touted a pair of tax items in the Inflation Reduction Act—clean energy credits and increased funding for IRS enforcement.

Again, the tax proposals Biden discussed have limited prospects of passage, but his mention of them helps frame the tax policy dialogue in 2023. These and other tax proposals that were part of his FY23 budget could be proposed again in the FY24 budget that Biden will submit to Congress, as well as the accompanying “Green Book” explanation of provisions from Treasury. The president’s FY24 budget is expected to be released in March.

Days after Congress in mid-June passed bipartisan legislation to prevent the U.S. from defaulting on its debt obligations, the House Ways and Means Committee introduced a legislative package that includes a bill addressing three tax rules affecting middle market businesses: tax treatment of research and development expenses (section 174), the limitation on the deduction of business interest expense (section 163(j)), and bonus depreciation.

Although this tax legislation in its initial form does not have a realistic chance of becoming law in a divided Congress, it may kick off a protracted series of tax policy debates and discussions among lawmakers that could continue to at least the end of December.

Generally, companies did not realistically expect section 174 to be addressed as part of the debt ceiling negotiations, understanding all too well that this hot-button tax issue invokes deeper divides on matters such as an expanded child tax credit, cost, and retroactivity considerations, among other things. And despite continued bipartisan support for relief, the search for a legislative vehicle remains elusive, with most factors suggesting year-end action as the most likely scenario.

In the meantime, with default averted, lawmakers could shift their summertime focus to the appropriation process and decide how the government spending cuts will be allocated across the various governmental agencies. That process must be completed by Oct. 1, the beginning of the government’s new fiscal year.