Taxation & Representation, Sept. 17, 2024

2025’s Potential Tax Writers

In September and October, Brownstein will preview some of the members that Senate leadership, as well as Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID), could consider for membership to the Senate Finance Committee, based on who would make significant contributions to the committee if they were selected to serve. Our series will continue with Sen. Cory Booker (D-NJ).

Sen. Cory Booker (D-NJ)
Cory Booker currently serves as the senior senator from New Jersey. He was first elected to the Senate in 2012. The resignation of his colleague, Bob Menendez (D-NJ), from the Senate on Aug. 20 left the New York City metropolitan area without member representation on the Finance Committee. Rarely has there been a significant period of time where the New York financial center has not been represented on the committee, since tax, trade and capital markets are of strong interest to the business community in New York, New Jersey and Connecticut. Sen. Booker’s inclusion on the Finance Committee would fill this gap while adding another fierce advocate for economic opportunity across the income spectrum.
 

Sen. Booker was born in Washington, D.C., and raised in Harrington Park, New Jersey, where he was first exposed to the importance of community and the issues facing northern New Jersey. He attended Stanford University, later becoming a Rhodes Scholar and earning a master’s degree at Oxford, followed by a J.D. at Yale Law School. After completing his education, he returned to New Jersey, serving in Newark’s city government and later serving as the city’s mayor from 2006 to 2013. During his mayoral tenure, Booker was credited with reducing the city’s crime rate, building affordable housing and implementing various governmental reforms. On the Finance Committee, Booker would be poised to advocate for the various tax proposals he has championed in the Senate and during his 2020 presidential campaign. Booker has been one of Congress’s most vocal proponents for creating “baby bonds,” a federally funded low-risk savings account created at birth that can be accessed once the account holder turns 18. On a number of occasions, Booker has reintroduced the American Opportunity Accounts Act (S. 441), which would create the baby bonds program nationwide. Booker supports other tax reform measures, such as his introduction of the Tax Refund Protection Act (S. 1209), which would require the Treasury Department to more closely regulate tax preparers. As a presidential candidate, Booker championed even more reforms squarely focused at improving the lives of lower- and middle-income Americans, such as expansions of the Earned Income Tax Credit, Child Tax Credit and Renters Credit.
 

Sen. Booker presents a compelling pick to join the Finance Committee, not just because of his impressive accolades as a mayor or his vocal advocacy as a lawmaker, but also his commitment to public service that has spanned his entire career.

Legislative Lowdown

Tim Walz Brings Varied Tax-Policy Positions to the Democratic Ticket: After Vice President and Democratic presidential nominee Kamala Harris selected Gov. Tim Walz (D-MN) as her running mate for the 2024 presidential election on Aug. 6, attention turned to Walz’ range of tax proposals during his tenure in Congress and in the Minnesota governor’s mansion. While governor, Walz took advantage of a Democratic trifecta in Minnesota’s state legislature and a state budget surplus to enact a package of proposals, including several related to tax policy, outlined in the state Democratic Party’s platform.
 
In 2023, Walz signed a $3 billion tax bill making several significant changes to the state’s tax code, including $1 billion in tax increases. These tax increases included a 1% surtax on individuals, estates and trusts having net investment income exceeding $1 million per year, as well as phaseouts to the standard and itemized deductions for individuals making more than $220,650 per year, increases in state sales and excise taxes, and application of federal global intangible low-taxed income (GILTI) rules at the state level. The bill provided numerous benefits to low- and middle-income individuals, including a fully refundable tax credit of up to $1,750 per child with no income phase-in and broader eligibility requirements, a policy Walz touted as “the best child tax credit in the country.” The bill also provided one-time tax rebate payments of up to $1,300, exempted Social Security income from state taxes for low- and middle-income earners, and adopted federal exclusions from taxable income under the American Rescue Plan Act (ARPA, Pub. L. 117-2) for student loan forgiveness. Finally, the bill made changes to renters’ and property tax credits and the state’s pass-through entity tax. The Minnesota Legislature’s 2024 tax bill included fewer tax provisions, but it raised the state’s payroll tax to 0.88% to finance an expansion of the state’s paid family and medical leave program.
 
Prior to becoming governor, Walz served in Congress as the representative of Minnesota’s 1st Congressional District from 2007 to 2019, where his record on tax policy was more moderate. In 2012, Walz was one of 19 House Democrats to vote for the American Taxpayer Relief Act of 2012 (Pub. L. 112-40), a bill that extended the George W. Bush-era tax cuts and was opposed by the vast majority of House Democrats. In 2017, Walz voted against the Tax Cuts and Jobs Act, citing several provisions in the bill he claimed would harm veterans.
 
Though Walz will likely remain consistent with Vice President Harris and President Biden’s policy priorities, his record as governor indicates he could bring more progressive views to the table on tax policy should Democrats win a trifecta in the November elections.
 
Vance Proposes Increase to Child Tax Credit: On Aug. 11, Sen. JD Vance (R-OH), the 2024 Republican vice-presidential nominee, expressed his support for raising the child tax credit from the current maximum of $2,000 per child to $5,000 per child in an effort to advance a “pro-family” agenda. Vance did not offer additional details on his child tax credit proposal, such as eligibility criteria. As noted in last week’s edition, Vice President and Democratic presidential nominee Kamala Harris followed with a proposal to raise the credit to $6,000 for families with newborn children.
 
Trump Proposes Ending Taxes on Overtime Pay: On Sept. 12, former President and 2024 Republican presidential nominee Donald Trump announced a new tax policy proposal—ending taxes on overtime wages, generally defined as any hours worked beyond 40 hours per week. The proposal is designed to appeal to blue-collar workers paid an hourly wage, adding to his portfolio of populist proposals. The concept has been criticized by economists who believe the proposal would not be economically viable, with a Tax Foundation analysis finding that the proposal would cost a minimum of $227 billion and could cost over $1 trillion if all pay associated with overtime work was exempt from taxation.
 
House Votes to Tighten FEOC Requirements on Clean Vehicle Credit Rules: On Sept. 13, the House voted 217-192 to pass the End Chinese Dominance Of Electric Vehicles Act (H.R. 7980), which would tighten foreign entity of concern requirements for the Section 30D Clean Vehicle Credit, with the intent to prohibit Chinese battery components from qualifying for the credit and thus preventing more Chinese-sourced materials from entering U.S. supply chains. Seven Democrats joined all House Republicans in supporting the bill, but other Democrats have argued that the restrictions make the credit unduly difficult to access and may leave the door open to racial discrimination of groups like Chinese American citizens. The bill is unlikely to pass in a Democratic-controlled Senate, and the White House issued a statement expressing opposition to the bill.
 
Ways and Means Committee Favorably Reports Education, 1099-K Reporting Reform Bills: On Sept. 11, the House Ways and Means Committee marked up five bills, favorably reporting each of them to the full House for consideration. The bills included the Saving Gig Economy Taxpayers Act (H.R. 190); the USA Workforce Investment Act (H.R. 9461); and the Educational Choice for Children Act of 2024 (H.R. 9462).
 
The Saving Gig Economy Taxpayers Act would restore the de minimis reporting exception for third-party settlement organizations, as reported on Internal Revenue Service (IRS) Form 1099-K, at the same threshold as applied prior to the passage of the American Rescue Plan Act (ARPA). ARPA substantially decreased the 1099-K reporting threshold from $20,000, with a 200-transaction minimum, to $600 with no minimum number of transactions. The IRS delayed implementing the lower 1099-K reporting threshold for tax year 2023 and began implementing the provision in 2024 with a threshold of $5,000 as a way to “phase-in” implementation and “reduce taxpayer confusion”—an assertion that Republicans on the committee have argued is lacking in any statutory basis and demonstrates the increased compliance burdens that would come with the $600 reporting threshold enacted in ARPA. Democrats on the committee have argued that the $20,000 reporting threshold and 200-transaction minimum was no longer appropriate in a rapidly evolving gig economy and allows savvy individuals to circumvent the law, contributing to the tax gap.
 
The USA Workforce Investment Act would create a nonrefundable tax credit for taxpayers who make a qualified charitable contribution to a nonprofit organization that provides workforce development or apprenticeship training programs. Such an organization would be required to be a tax-exempt 501(c)(3) organization that is included as a provider under Section 122(d) of the Workforce Innovation and Opportunity Act (WIOA). Republicans argued that the bill would help expand apprenticeship opportunities to help students pursue nontraditional forms of education. Democrats criticized the bill for purportedly having weak guardrails and argued that WIOA criteria was not an appropriate metric for deciding which programs would be eligible for tax-deductible contributions.
 
The Educational Choice for Children Act of 2024 would create a nonrefundable tax credit for taxpayers who make a qualified charitable contribution to a scholarship-granting organization as a way to make the cost of attending a private school more affordable. Republicans stated that the pro-“school choice” bill would help families pursue the best possible educational opportunities for their children by enabling new methods of funding scholarships for children, enabling parents to select schools for children that cater to their individual needs. They also defended the bill’s restrictions on income, saying that contributions received are distributed based on the cost of living in a recipient’s area. Democrats criticized the bill, arguing that school-choice programs disproportionately benefit wealthier families who can afford the often steep costs of attending private school and that the bill deprioritizes public education.
 
Whether the reported bills are passed by the full House before the end of this Congress, they are unlikely to pass in a Democratic-controlled Senate. All three bills passed on party-line votes.
 
Finance Committee Hearing Provides Precursor to 2025 Tax Debate, with Controversy over JCT Stats: On Sept. 12, the Senate Finance Committee held a hearing titled “The 2025 Tax Policy Debate and Tax Avoidance Strategies,” in which witnesses discussed several tax-planning strategies by wealthy individuals and multinational corporations, as well as various individual and corporate tax provisions from the Tax Cuts and Jobs Act that are set to expire in 2025, absent congressional action, and their effect on families and businesses.
 
Prior to the hearing, the Joint Committee on Taxation published a background document in which staff summarized the present law governing the taxation of wealthy taxpayers as well as distributional data. In it, JCT found that the top 0.01% of taxpayers by income paid an average federal tax rate of 34% in 2019. Republicans praised JCT’s findings as evidence that lowering tax rates across the board grows the economy and does not decrease the receipt of tax revenue as much as previously thought, while Democrats were highly critical of JCT’s findings. In particular, Senate Finance Committee Chairman Ron Wyden (D-OR) dismissed the finding as “funny math” that did not take into account alleged tax-avoidance strategies employed by high-income, high-wealth individuals, such as the so-called “buy, borrow, die” tax-planning mechanism.
 
Also discussed during the hearing were several tax provisions in the Tax Cuts and Jobs Act (Pub. L. 115-97) that have expired or are set to expire in 2025. Among the most-discussed TCJA provisions were the Section 199A deduction for passthrough entities and the reduction in individual income tax rates and expanded brackets.
 
Finance, Ways and Means Committees Seat New Democrats: Sept. 12’s Senate Finance Committee hearing also featured a new member on the panel: Sen. George Helmy (D-NJ), who was sworn in on Sept. 9 to replace former Sen. Bob Menendez (D-NJ). Prior to becoming a senator, Helmy served as the chief of staff to Gov. Phil Murphy (D-NJ) as well as state director for Sen. Cory Booker (D-NJ). Sen. Helmy has taken over Menendez’s roles on all Senate committees, though he will only serve in the chamber until the end of the Congress on Jan. 3, 2025.
 
Similarly, Rep. Steven Horsford (D-NV) was reappointed to the House Ways and Means Committee on Sept. 10, filling a gap left by the death of Rep. Bill Pascrell (D-NJ) on Aug. 21. Horsford last served on the Ways and Means Committee from 2019 to 2022 when Democrats controlled the House. Rep. Horsford was also appointed to the committee’s Health Subcommittee and Social Security Subcommittee.
 
Funding Bill Update—Congress Remains in Stalemate: On Sept. 13, House Speaker Mike Johnson (R-LA) abandoned a planned vote on a stopgap funding bill in light of continued holdouts from some House Republicans and returned to Capitol Hill this week with an eye on continuing negotiations. Government funding will run out on Oct. 1 without the passage of a spending bill. While House Republican leadership continues to explore options to advancing a variation of last week’s proposal, discussions by Senate leaders may result in a clean continuing resolution being advanced by the Senate in the coming days.

Energy-Tax Mainlines

Senate, House Democrats Urge Strict Interpretation of Hydrogen Tax Credit: On Sept. 12, 66 Democratic members of Congress, led by Sens. Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR) and Reps. Jamie Raskin (D-MD) and Don Beyer (D-VA), wrote a letter to several department and agency heads, including Treasury Secretary Janet Yellen and Energy Secretary Jennifer Granholm, urging the Treasury Department to issue final guidance on the Section 45V Clean Hydrogen Production Tax Credit that would not allow producers to qualify for the credit if fossil fuels were used in the hydrogen-production process. The lawmakers argue that the Section 45V Credit, which was enacted in the Inflation Reduction Act (IRA, Pub. L. 117-169), was intended to meet the U.S. Nationally Determined Contribution target goal of reducing carbon emissions by 50% to 52% between 2005 and 2030. The lawmakers endorsed the European Union-style adoption of the so-called “three pillars” concerning clean electricity used in hydrogen production: incrementality, temporal matching and deliverability. The letter states that the adoption of strict standards would “ensure that we do not subsidize a greenwashed industry that burdens environmental justice communities with toxic pollution.”
 
Treasury Department, IRS, DOE Open Applications for Qualifying Advanced Energy Project Tax Credit: On Aug. 29, the Treasury Department, Internal Revenue Service (IRS) and Department of Energy (DOE) announced that full applications may be submitted for the second round of the Section 48C Qualifying Advanced Energy Project Tax Credit Program, enacted under the Inflation Reduction Act. The announcement notes that the submitted concept papers have requested nearly $40 billion in tax credits, of which approximately $10.3 billion is located in census tracts denoted as “energy communities.” There are approximately $6 billion in tax credits available for the second round of allocations, of which $2.5 billion is reserved for projects in energy communities. Interested parties must have submitted an initial concept paper, and full applications are due on Oct. 18. A webinar for applicants was hosted on Sept. 16.
 
Vilsack Indicates That Treasury Department Will Release Section 45Z Guidance Before Jan. 20: As the keynote speaker on Aug. 15, Agriculture Secretary Tom Vilsack stated that the Treasury Department is looking to release guidance on the Section 45Z Clean Fuel Production Credit by Jan. 20, before the end of President Biden’s tenure. Vilsack expressed optimism that a wider variety of crops would qualify under the guidance with regard to climate-smart agricultural practices to help U.S. producers.

1111 Constitution Ave

IRS, State Tax Agencies and Private Sector Groups Form Coalition to Combat Tax Scams: On Aug. 16, the Internal Revenue Service (IRS) announced the formation of the Coalition Against Scam and Scheme Threats, a collaboration between the agency, state tax agencies and several professional organizations and tax preparation companies to address tax scams and schemes. State tax agencies are represented by the Federation of Tax Administrators, while the professional organizations that have joined the coalition include the Council for Electronic Revenue Communication Advancement, the National Association of Computerized Tax Processors and the American Coalition for Taxpayer Rights. The coalition will employ a “three-pronged approach,” seeking to “expand outreach and education about emerging scams, develop new approaches to identify potentially fraudulent returns at the point of filing and create infrastructure improvements to protect taxpayers.” The coalition was convened by IRS Commissioner Daniel Werfel, who said that the coalition will enable the industry to “work closely together, share information faster, respond quickly to threats and quickly alert the public to new and emerging threats.”
 
TIGTA States That IRS Is Having Difficulties Complying with Audit Pledge: On July 24, the Treasury Inspector General for Tax Administration published an audit report titled “The IRS Has Made Limited Progress Developing the Methodology to Comply With the Treasury Directive to Not Increase the Audit Rate for Taxpayers With Incomes Below $400,000 Due to Planning and Implementation Challenges.” The report analyzes the IRS’s methodology for ensuring that Inflation Reduction Act funds are not used to increase audits of taxpayers with incomes below $400,000, in line with a pledge made by the Biden administration.
 
TIGTA found that although the Treasury Department and the IRS have come to a consensus on using Tax Year 2018 as the base year for calculations, the IRS has not yet finalized its methodology for calculating audit coverage rates. While the IRS routinely calculates coverage rates, they are working with the Treasury Department to explore different methodologies to determine compliance with the Treasury Directive. The IRS stated that prior to any decisions being made as to how the audit coverage rate will be calculated, the IRS and Treasury Department would need to come to an agreement. The IRS, however, has not maintained formal documentation of the decisions and exchanges regarding the Treasury Directive.
 
TIGTA issued four recommendations to the IRS deputy commissioner, including that they formally document the processes related to the development of the methodology and to establish controls to ensure the appropriate information has been updated in the audit management system. The IRS agreed to recommendations to establish procedures to update total positive income but disagreed with a recommendation to use Return Transaction File data to produce counts of filing data on certain thresholds, instead opting to use Statistics of Income.
 
IRS to Verify PTINs in Attempt to Combat Scams: On Aug. 14, Internal Revenue Service (IRS) Return Preparer Office Director Kimberly Rogers  said that the agency is planning to begin verifying preparer tax identification numbers (PTINs) to prevent individuals who do not renew PTINs from being able to submit prepared returns and scammers from creating and maintaining fake PTINs to defraud taxpayers. Rogers did not give further details on the verification process. This decision is part of IRS’s increased initiatives to report unscrupulous preparers to protect taxpayers from scams and schemes.

At A Glance 

Treasury Department, IRS Propose Regulations Concerning Dual Consolidated Losses: On Aug.7, the Treasury Department and Internal Revenue Service (IRS) issued proposed regulations concerning dual consolidated loss (DCL) limitations and the 15% global minimum tax developed by the Organisation for Economic Cooperation and Development (OECD). The proposed regulations are intended to address certain issues with existing DCL rules, including clarifications on what constitutes a “foreign use” of a U.S. multinational company’s loss recorded abroad to prevent duplication of losses in multiple jurisdictions, as well as providing rules that would take effect under the OECD’s Pillar Two framework, as member countries implement the global minimum tax regime. Comments and requests to participate in the public hearing are due by Oct. 7.
 
IRS Issues Regulations Concerning CFC Foreign Currency Gains, Losses: On Aug. 19, the Treasury Department and Internal Revenue Service (IRS) reissued proposed regulations regarding certain elections made or revoked by controlled foreign corporations (CFCs) with respect to reporting foreign currency gains or losses. The proposed rule clarifies concerns with inconsistencies regarding CFC filing requirements and allows controlling U.S. shareholders to make an election by filing a statement with their original income tax return clearly indicating that the election has been made.
 
IRS Issues Proposed Regulations on Tribal Welfare General Welfare Benefits: On Sept. 13, the Treasury Department and Internal Revenue Service (IRS) issued proposed regulations concerning benefit payments by a tribal government to its members under the Tribal General Welfare Exclusion Act. The regulations provide that such benefits will generally qualify for an exclusion from gross income, but only for individual or family needs and not for compensation for services. Comments on the proposed rules must be submitted by Dec. 17, and a public hearing has been scheduled for Jan. 13, 2025.
 
Werfel Assures More Accurate ERTC Denials in the Future: Speaking at an event on Sept. 6, Internal Revenue Service (IRS) Commissioner Daniel Werfel said he expects the accuracy rate of agency-issued Employee Retention Tax Credit (ERTC) claim denials to increase as the IRS continues to process claims. The agency has stated that 90% of ERTC claim denials have been accurate, but this figure has been disputed by some tax professionals and businesses that assert that their legitimate claim was denied. Werfel stated he anticipates the error rate on ERTC claim denials to be lower than 10% in future waves of denials. The IRS is also continuing to pay out claims it deems low risk “on a steady basis,” according to Werfel.

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.
 
Other
On Wednesday, the Senate Banking, Housing, and Urban Affairs Subcommittee on Economic Policy will hold a hearing titled “The Macroeconomic Impacts of Potential Tax Reform in 2025.”