Legislative Lowdown
Kamala Harris’ Rise to the Top of the Ticket Renews Attention to Her Tax Policy Proposals: On July 21, President Joe Biden announced his withdrawal from the 2024 presidential race and endorsed Vice President Kamala Harris as the Democratic nominee for president of the United States. With Harris now the front-runner for the nomination, the tax policy proposals from her career in the Senate and her 2020 presidential campaign have come under renewed scrutiny.
As a senator, Harris’ most notable tax policy proposal was her introduction of the LIFT the Middle Class Act (LIFT Act), which would have established a refundable tax credit of up to $3,000 for single tax filers and $6,000 for joint filers with low or moderate incomes. The estimated cost of the bill—about $3 trillion over a decade—would be offset through two measures: (1) repealing the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97), with the exception of provisions that provide relief to taxpayers with under $100,000 in annual income; and (2) assessing a fee on financial institutions with total assets of more than $50 million. However, according to the Committee for a Responsible Federal Budget, depending on the interpretation of the offsetting criteria, her proposed offsets would have covered as little as 20% of the cost. Harris had also introduced the Rent Relief Act of 2019, which would have created a tax credit for low- to moderate-income rent-burdened Americans (defined as individuals who spend more than 30% of their income on rent). The amount of the credit would be dependent on the renter’s income and would range from 25% to 100% of the “excess” rent.
While Harris never developed a comprehensive tax plan during her presidential campaign in 2019, she did highlight several concepts that largely aligned with Biden’s policy agenda. She called for restoring the marginal income tax rate for the top 1% of earners to 39.6% from the current 37%. She also called for implementing an “income-based premium tax” of 4% on households making more than $100,000 to pay for her version of “Medicare for All,” a proposal that the Biden campaign criticized at the time as being “Bernie Sanders-lite,” saying it would lead to tax increases on middle-class families. Similar to the LIFT Act, Harris called for replacing the TCJA with a monthly refundable tax credit of up to $500 for taxpayers with an annual income under $100,000. Additionally, she called for tax parity between the dividends and capital gains tax rates and ordinary income tax rates. She had also advocated for increasing the top corporate tax rate to 35%, which was 7% more than what Biden proposed during the 2020 campaign and in the Biden administration’s annual budget requests. Additionally, Harris pushed for raising the estate tax rate in order to finance a $300 billion dollar plan to increase teachers’ salaries by an average of $13,500. Lastly, Harris proposed a financial transactions tax, consisting of a 0.2% tax on stock trades, a 0.1% tax on bond trades, and a 0.002% tax on derivative transactions.
It remains to be seen whether Harris’ 2024 presidential campaign will largely follow Biden’s tax policy agenda or if she will return to her more progressive Senate and 2020 campaign agenda.
J.D. Vance’s Tax Policies Demonstrate Populist Bent: On July 15, former President and Republican presidential nominee Donald Trump selected Sen. J.D. Vance (R-OH) as his running mate for the 2024 presidential election, thrusting the 39-year-old first-term senator—and his policy proposals—into the national spotlight. Once a critic of the former president, particularly during his 2016 presidential campaign, Vance has become one of Trump’s fiercest allies during the former president’s first term. At the same time, many of Vance’s policy proposals, including those in the tax space, have undergone a similar evolution.
During his 2022 Senate campaign, Vance laid out a broad tax policy agenda, including proposals related to education and electric vehicles (EVs). At the time, Vance asserted that universities create “a massive left-wing bias at the heart of our society,” and he advocated for large increases in excise taxes on private university endowments. During his campaign, Vance also focused on protecting the domestic automotive industry, a major employer in his home state of Ohio, by repealing EV tax credits. Vance also opposed President Biden’s expansion of the child tax credit as proposed in the Build Back Better Act.
In the Senate, Vance has introduced or cosponsored a number of tax-related measures. On education, Vance introduced the College Endowment Accountability Act (S. 3514), which would increase the excise tax from 1.4% to 35% on private university endowments with assets of at least $10 billion, as well as the Encampments or Endowments Act (S. 4295), which would impose a 50% excise tax on university endowments whose schools fail to remove from their campuses protest encampments relating to the Israel-Hamas war. In the corporate sector, Vance introduced the Stop Subsidizing Giant Mergers Act (S. 4011), which targets large corporate mergers by treating reorganizations as taxable events if the acquirer and acquired company both have over $500 million in gross receipts. Regarding EVs, Vance introduced the Drive American Act (S. 2962), which is designed to eliminate over $100 billion in existing EV subsidies and replace them with the “America First Vehicle Credit,” a credit of up to $7,500 for new gas or diesel-powered vehicles including hybrids. Vance has previously said he opposed a reduction of the corporate tax rate, in contrast with Trump’s proposals to reduce the corporate rate.
In his acceptance speech at the Republican National Convention, Vance forcefully opposed the continuation of permanent normal trade relations with China and criticized Biden for his support of the North American Free Trade Agreement (NAFTA). Vance is expected to support Trump’s proposed across-the-board tariffs on all imports, with increased rates on Chinese imports, to promote U.S. manufacturing. Vance, however, has not tied his support of tariffs to an extension of key provisions in the Tax Cuts and Jobs Act (TCJA), as Trump has proposed.
A second-term Trump administration will likely be squarely focused on preserving Trump’s legacy through extending the TCJA, although, as vice president, Vance could seek to advance some of his more populist tax policy agenda.
Tax-Writing Committees Continue Preparations for 2025: Over the last few weeks, members from the Senate Finance and House Ways and Means committees have been meeting to prepare for tax policy discussions in 2025 against the looming expiration of key tax provisions of the Tax Cuts and Jobs Act (TCJA). Ways and Means Republicans have been particularly active, holding several field events, roundtables and listening sessions to understand constituents’ concerns and priorities with respect to TCJA’s expiring policies. These events provide particular insight into the issue areas on which the committee’s 10 “Tax Teams” are focusing their efforts. For example, the “Rural America” Tax Team, led by Rep. Adrian Smith (R-NE), is examining the federal estate tax, rural development and tax deductions for heavy machinery. The “Supply Chains” tax team, led by Rep. Carol Miller (R-WV), is primarily concerned with energy production, while the “Working Families” tax team, led by Rep. Brian Fitzpatrick (R-PA), is tackling a wide swath of issues related to individual taxes, including the alternative minimum tax and the state and local tax (SALT) deduction. On the other side of the aisle, Ways and Means Committee Democrats met for a second time with Joint Committee on Taxation Chief of Staff Thomas Barthold on July 8 to discuss “distributional” effects of the expiration of TCJA’s provisions.
In the Senate, Finance Committee Republicans have also split into working groups, though their processes and discussions have not been as transparent as those on the Ways and Means Committee. Finance Committee Republicans are reportedly considering the full slate of tax provisions in the TCJA and beyond, including provisions with bipartisan support. Ranking Member Mike Crapo (R-ID) said recently that committee Republicans are also focusing on cost estimates as they “dig into the analytics.” Finance Committee Democrats first held a private meeting in June and are continuing to strategize on the path forward on how to manage discussions on the TCJA.
Senate Democrats Urge Treasury Department to Improve Section 45V Tax Credit: In a July 11 letter, 13 Senate Democrats urged Treasury Secretary Janet Yellen to reconsider proposed regulations on the Section 45V Clean Hydrogen Production Credit, enacted under the Inflation Reduction Act (Pub. L. 117-169). The lawmakers offered alternative compliance approaches for each of the so-called “three pillars” concerning clean electricity used in hydrogen production: incrementality, temporal matching and deliverability. To improve incrementality, the senators called on the Treasury Department not to impose clean energy generation requirements for facilities located in a state with clean energy mandates or in a grid region with significant rates of emissions mitigation. They added that all hydroelectric and nuclear facilities that receive license extensions after section 45V became effective should be exempt from the requirements. With regard to temporal matching, the lawmakers urged the Treasury Department to exempt any temporal matching requirements for projects that begin construction before Jan. 1, 2028, and establish monthly matching requirements for those that begin construction between 2028 and 2032. The letter also outlined how the Treasury Department can improve the tax credit’s deliverability requirements, urging that regions lacking sufficient clean energy sources should receive an allowance when they need to access clean power for hydrogen production beyond the proposed regionality boundaries. The senators also asked the Treasury Department to allow hydrogen production pathways that use renewable natural gas to qualify for the credit. The letter concluded with a call for final regulations on the clean hydrogen credit by Aug. 16.
Cortez Masto, Rosen Sign Onto Bill Exempting Tips from Taxation: On July 16, Sens. Catherine Cortez Masto (D-NV) and Jacky Rosen (D-NV) announced that they would cosponsor the No Tax on Tips Act (S. 4621), a bill introduced by Sen. Ted Cruz (R-TX), which would exempt tips from federal income taxes. Bipartisan support for this legislation stemming from former President Trump’s recent proposal improves its outlook should Republicans win the White House and keep control of the House of Representatives. Speaking to the need for protecting the wages of tipped service workers, who comprise a large percentage of Nevada’s workforce, Sen. Cortez Masto said that the bill “is just one part of comprehensive efforts I support to cut taxes for tipped workers and for all hardworking middle-class Nevadans.” Similarly, Sen. Rosen said that the bill would “would deliver immediate financial relief for service and hospitality staff across our state.” The bill has also garnered support from some unions, with Nevada Culinary Workers Union Local 226 Secretary-Treasurer Ted Pappageorge saying that the bill represents a “starting point” to deliver tax relief to service workers.
Tax Worldview
Consensus Beginning to Be Reached on OECD's Pillar One Framework Text: On July 17, Chris Miller, a transfer pricing analyst with the Organisation for Economic Co-operation and Development (OECD), indicated that negotiators have begun to reach agreements on several portions of the OECD’s Pillar One global tax agreement. Miller said that “consensus has been achieved on nearly all aspects of the [multilateral convention] and the expanded Amount B framework,” and that the only outstanding issues are minor and affect a small number of jurisdictions. This follows after the target enactment date for Pillar One was moved multiple times, as it was originally planned to take effect at the end of 2023.
Miller’s comments were in keeping with the statement by Treasury Acting Deputy Assistant Secretary for International Affairs Scott Levine on July 18 that there is “near-consensus” on the definition of digital services taxes as part of Amount A of Pillar One of the OECD’s framework. Levine noted that the United States sought to reopen discussion on the definition of a digital services tax after receiving comments from stakeholders during the public comment period for Amount A. Despite the progress on the remaining Pillar One issues, several major hurdles remain, with Levine reiterating that the United States will only sign off on Amount A if OECD members reach agreement on Amount B, including the United States’ position that it is mandatory, not optional as proposed.
Ways and Means Republicans Urge USTR to Respond to Canadian DST: On July 11, House Ways and Means Committee Chairman Jason Smith (R-MO) and Trade Subcommittee Chairman Adrian Smith (R-NE) wrote a letter, joined by all committee Republicans, to United States Trade Representative (USTR) Katherine Tai, urging a response to the Canadian government’s decision to bring into effect a digital services tax (DST) on technology companies with an annual revenue over €750 million ($803 million), which is applied retroactively to Jan. 1, 2022. The Biden administration and U.S. lawmakers have repeatedly expressed concerns with Canada’s implementation of a DST, as it would disproportionately affect U.S. businesses and undermine international cooperation on the Pillar One global tax framework currently being negotiated by the OECD.
In the letter, the lawmakers urged Ambassador Tai to respond to Canada’s DST by initiating an investigation under Section 301 of the Trade Act of 1974, which “gives USTR ample authority to take action against unreasonable or discriminatory acts that burden or restrict U.S. commerce.” The letter asserted that negotiations with the Government of Canada on DST implementation have proven ineffective, necessitating stronger action from the U.S. government by retaliating and “exercis[ing] recourse under the United States-Mexico-Canada Agreement."
1111 Constitution Avenue
States Weighing Whether to Join ‘Permanent’ Direct File Program: As the 2024 tax-filing season closed, state revenue departments kept watch on the IRS Direct File pilot program in assessing their decision about whether to join the program for the 2025 tax-filing season. Direct File is a government-created tax preparation and filing program allowing eligible taxpayers to file tax returns directly with the Internal Revenue Service (IRS). The agency announced at the conclusion of the 2024 tax-filing season that it would seek to make permanent and expand the program in 2025. Direct File is billed as a “free” service, though it costs taxpayers tens of millions of dollars to establish and maintain. Most recently, New Mexico stated that it anticipates participating in Direct File in 2025, with Montana, Colorado and Hawaii considering joining in 2026. Other states are still weighing their options, citing technology, compliance and legal concerns as possible reservations about joining the program. The states of Alabama, Alaska, Georgia, Indiana, Michigan, Missouri, Ohio and Vermont, as well as the District of Columbia, have announced that they will not participate in Direct File next year, but some will continue to monitor the program’s success and have left open the possibility of joining in a future tax-filing season. One of the most significant considerations for states is whether or not participation in Direct File will necessitate the expenditure of state resources. Taxpayers have expressed interest in simultaneous federal and state tax-return filing, and state officials must assess the feasibility and cost of simultaneous filing.
IRS Announces Over $1 Billion Recovery of Overdue Taxes from Wealthy Taxpayers: In a press call on July 10, Internal Revenue Service (IRS) Commissioner Danny Werfel announced that the agency has received over $1 billion in past-due taxes, following outreach efforts aimed at taxpayers with more than $1 million in annual income and more than $250,000 in outstanding tax liabilities. Recovery efforts are part of IRS’s overarching initiatives on using Inflation Reduction Act funds to increase scrutiny on wealthy individuals, large corporations and complex partnerships through heightened tax enforcement, including by raising audit rates.
At a Glance
Treasury Department, IRS Issue Final Rules Concerning Required Minimum Distributions: On July 18, the Treasury Department and Internal Revenue Service issued final regulations concerning the age at which workers are required to begin withdrawing funds from qualified retirement accounts, also known as required minimum distributions or RMDs. The rules leave in place most provisions from earlier proposed regulations concerning the 10-year rule as it applies to RMDs and establishing a staggered schedule based on an employee’s date of birth to determine when an RMD will need to be taken.
Treasury Department, IRS Issue Final Rules on ‘Killer B’ Transactions: On July 17, the Treasury Department and Internal Revenue Service issued final regulations governing foreign corporations’ engagement in so-called “Killer B” transactions. Killer B transactions involve triangular reorganizations in which a subsidiary buys stock in its own parent company and uses the stock to acquire another company. The final regulations make no changes to proposed regulations released in October, which will block certain Killer B transactions due to tax avoidance concerns.
IMF Calls for Maintaining Interest Rates, Says Tax Increases Needed to Slow Debt: On July 18, the International Monetary Fund (IMF) issued its annual Article IV review of U.S. economic policies, urging the Federal Reserve to not cut interest rates until late 2024 and stating that “progressive tax increases” are needed to lower the federal deficit and mitigate “a growing risk to the U.S. and global economy."
Brownstein Bookshelf
CAP Report Finds Vulnerabilities in Legislation Exempting Tips from Tax: The Center for American Progress (CAP), a left-leaning think tank, published an article on July 17 finding that the No Tax on Tips Act (S. 4621 / H.R. 8941), introduced in the Senate by Sen. Ted Cruz (R-TX) and in the House by Rep. Byron Donalds (R-FL), would provide little-to-no tax relief for tipped workers, due to the fact that the wages of many tipped workers already fall below the minimum threshold for federal taxation. The report also highlights that the legislation would not affect non-tipped workers, who represent 95% of low- and moderate-wage workers, and that the bill may create ambiguities allowing wealthy individuals to recategorize their income as tip income and thereby lower their tax liability. The paper calls for restoring the Earned Income Tax Credit and Child Tax Credit from the American Rescue Plan Act (Pub. L. 117-2).
Hearings and Events
House Ways and Means Committee
On July 23, the House Oversight Committee held a hearing titled “Fueling Chaos: Tracing the Flow of Tax-Exempt Dollars to Antisemitism.”
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other
On July 23, the House Administration Committee held a hearing titled “Congress in a Post-Chevron World.”