Legislative Lowdown
Reconciliation Update: Johnson’s Blueprint Appears to Be Stalling: House Republicans concluded their policy retreat in Florida on Jan. 30, with reports indicating that they were unable to reach a consensus on how to proceed with a budget resolution that would then allow Republicans to produce a reconciliation bill to extend the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97) and address other tax proposals. House Speaker Mike Johnson (R-LA) had proposed a reconciliation timeline that would require the House Budget Committee to mark up and report a FY2025 budget resolution by this Friday, but Freedom Caucus members on the committee, such as Reps. Ralph Norman (R-SC) and Chip Roy (R-TX), have continued to raise concerns about the sufficiency of the spending cuts, calling for at least $1 trillion in spending cuts before debating and voting on the blueprint. On Feb. 3, it was announced that the House Budget Committee would not mark up its budget resolution this week. The outlook remains unclear, but according to recent reports, the Senate Budget Committee is poised to proceed on a FY2025 budget resolution that would include a narrow reconciliation instruction in keeping with the Senate’s preferred two-bill approach. More information about the Senate’s two-bill approach can be found in the Jan. 8 issue of “Taxation & Representation."
Tax Worldview
EU Parliamentarian Suggests Retaliation After Trump Administration Pulls Out of OECD Two-Pillar Deal: On Jan. 29, European Parliament Subcommittee on Tax Matters Chairman Pasquale Tridico stated that the European Union (EU) may seek to retaliate against the United States for withdrawing from the Organisation for Economic Co-operation and Development (OECD) two-pillar global tax agreement. President Trump signaled the U.S. withdrawal from the agreement in a Jan. 20 memorandum. Tridico suggested that, if the European Commission is unable to convince the Trump administration to rejoin the agreement, then the European Court of Justice (ECJ) should fine U.S. companies that do not comply with the global tax regime. However, the ECJ is politically independent and can only take action if a U.S. company violates EU law, and it is unclear whether Tridico is authorized to speak on behalf of the European Commission, as it decides the EU’s tax policy and is a separate entity from the EU Parliament.
Tariff Watch—Trump to Pause Tariff Implementation on Canada and Mexico for 30 Days: A day before 25% tariffs were set to go into effect against most imports from Canada and Mexico and 10% tariffs on all imports from China, President Trump announced that he would postpone the implementation of the Canadian and Mexican tariffs for 30 days, following commitments from Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum to address related illegal immigration and drug trafficking issues. The tariffs on Chinese imports remain in place. In a statement released on Feb. 4, the Ministry of Finance of the People’s Republic of China (PRC) announced that tariffs ranging from 10% to 15% would be imposed on select American exports beginning on Feb. 10. The announcement does not specify a time on Feb. 10 or outline whether the tariffs will apply to goods already in transit. The tariffs include:
- A 15% tariff on coal and liquefied natural gas, specifically unformed anthracite; coking coal; other unformed bituminous coal; briquettes, coal balls and similar solid fuels made from coal; unformed lignite (Annex 1 – Eight total items).
- A 10% tariff on “crude oil, agricultural machinery, large-displacement automobiles, and pickup trucks.” This includes pure electric trucks and a range of passenger, off-road and other vehicles with hybrid and traditional engines, among other goods. (Annex 2 – 72 total items)
Chinese President Xi Jinping took several additional retaliatory measures, including filing a complaint at the World Trade Organization (WTO), initiating an antitrust investigation on Google, expanding export controls on critical minerals and designating several American companies to its Unreliable Entity List.
China’s retaliatory actions are narrower than President Trump’s blanket 10% tariff on all Chinese goods. However, reports indicate that the Chinese retaliation led to the cancellation of a phone call between Presidents Trump and Xi that had been scheduled for Tuesday, Feb. 4.
Brownstein wrote a client alert about the tariffs as well as their method of implementation, which can be found here.
The Tax Policy Center (TPC) estimates that the impact of the 25% tariffs would reduce consumers’ average after-tax income by about 1%, with employees in affected industries, like natural gas, feeling even greater effects. TPC also estimated that the tariffs would raise $110.5 billion in federal revenues in 2026 and would gradually decrease to an annual revenue of $76.5 billion in 2035 due to changes in consumer behavior. The imposition of tariffs by the executive branch may also affect negotiations with respect to revenue raisers that could be part of a tax reconciliation bill—to the extent that tariffs result in significant revenues, they could influence the perceived need for additional revenues and/or spending cuts to offset the cost of the expiring tax provisions and other proposals under consideration for the anticipated reconciliation bill this year.
1111 Constitution Avenue
Finance Committee Leaders Release Discussion Draft of IRS Reform, Tax Administration Proposals: On Jan. 30, Senate Finance Committee Chairman Mike Crapo (R-ID) and Ranking Member Ron Wyden (D-OR) issued a discussion draft of legislation, as well as a section-by-section summary, aimed at updating tax administration and procedures at the Internal Revenue Service (IRS). The draft includes several administrative fixes that have long been proposed by lawmakers, including improving notices to taxpayers regarding math or clerical errors in returns, streamlining tax return digitization, reviewing offers-in-compromise, and postponing filing deadlines due to natural disasters. The discussion draft also includes provisions that would simplify tax reporting for U.S. citizens who live abroad, expand jurisdiction of the U.S. Tax Court, provide for further independence of the National Taxpayer Advocate (NTA), and make the IRS Independent Office of Appeals more accessible to taxpayers.
The draft legislation would also subject paid tax preparers to additional IRS oversight, including setting minimum standards of competence for preparers. It would subject preparers who do not furnish a valid preparer tax identification number (PTIN), who unreasonably understate liabilities in tax returns or who otherwise prepare returns improperly to penalties, including the suspension or revocation of PTINs.
After the discussion draft was released, National Taxpayer Advocate Erin Collins praised it, stating that, should the bill be enacted in its current form, it would be “among the most significant pieces of taxpayer rights legislation Congress has passed.”
Deregulation Executive Order Also Reinstates OIRA Review of IRS Regulations: On Jan. 31, President Trump signed an executive order that mandates that, across all executive departments and agencies, 10 regulations must be eliminated for every new one created, as part of a regulatory overhaul similar to but larger in scale compared to an executive order issued during his first administration. This executive order also reinstates a memorandum of agreement between the Treasury Department and the Office of Management and Budget (OMB) that allows the Office of Information and Regulatory Affairs (OIRA) to review proposed Treasury Department and Internal Revenue Service (IRS) regulations. Proponents of OIRA oversight argue that it allows for greater transparency with regard to determining regulatory discretion, while critics argue that it will cause delays and may lead to more biased outcomes because of the dismissal of Treasury Department and IRS expertise.
At a Glance
House Judiciary Committee Chairman Probes IRS Contractor Leak: On Jan. 30, House Judiciary Committee Chairman Jim Jordan (R-OH) wrote a letter to Internal Revenue Service (IRS) Acting Commissioner Douglas O’Donnell requesting additional information from the agency on events surrounding the leak of thousands of taxpayers’ sensitive tax information by former contractor Charles Littlejohn. The letter requests the IRS to answer questions concerning how many taxpayers had information that was accessed or leaked and how the IRS has helped provide assistance to affected taxpayers.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.