An update on the tax policy landscape against inflation backdrop

It is now over a year since inflation in the United States started to become a dominant economic issue. What was initially described by many policymakers as a transitory issue has proven to be more severe and longer-lasting than they expected.

Tax policy priorities and goals during inflationary times are almost always influenced by the need to address rising prices, including providing targeted relief to certain industries or individuals in need and easing the effects of increased costs to consumers.

The tax policy landscape in Washington remains unsettled as we approach the summer months. A stalled reconciliation measure, designed to advance President Joe Biden’s Build Back Better agenda (inclusive of potential tax law changes) casts a shadow over many of the current legislative initiatives, with the window for action on the reconciliation measure rapidly closing.

As a result, provisions that were included in the most recent version of the measure (which currently resides in the Senate)—such as a deferred effective date for section 174 capitalization, energy and climate proposals, and a series of proposed tax increases to wealthy individuals and corporations—hang in the balance.

Proposed legislation to address supply chain disruption and shortages is slowly progressing through a rare, bipartisan conference process that is expected to last at least several weeks. Prospects for the inclusion of a tax title in that legislation (beyond certain trade provisions) remain unclear. Also unclear is whether the formidable task of reconciling the House and Senate versions of this measure is possible at all.

Other proposed legislation that can be viewed as introduced due to the current inflationary environment include gas tax holidays, a windfall oil profits tax, and legislation that focuses on the so-called bad actors seeking to improperly benefit from the current economic situation. Such measures also face a difficult path, if any, towards enactment.

The approaching midterm election will surface informal and arbitrary deadlines, mostly more aspirational than anything else, as both tax and nontax matters compete for precious floor time in both chambers. The possibility of a year-end bill that bundles together unaddressed matters, such as tax extenders, is also worth watching.

The dynamics of a 50-50 balance of power in the Senate have been on full display throughout the current Congress, illustrating the extraordinary singular power of Democratic senators. Similarly, divergent views among House Democratic moderates and progressives on social spending programs and the scope of revenue-raising measures aimed at taxing the wealthy have repeatedly emerged at critical junctures, affecting the overall course of events.

As a result of the current political, economic and inflationary environment, it is impossible to accurately predict the likelihood of any potential tax changes. That means it will continue to be important to monitor events in Washington. There is still the possibility that tax rates may increase and that other changes will be made to the tax law this year. Forecasting and modelling remain vitally important.