A bipartisan path forward on the Child Tax Credit

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Jul 17, 2023 View in browser   By Benjamin Guggenheim A QUESTION OF TONE: As House Republicans are teeing up a tax package for a floor vote (pending some issues over SALT relief that we’ll get to in a bit), proponents of restoring the expanded Child Tax Credit and immediate deductions for research and development for business are clearly starting to position themselves for negotiations that could occur in the Senate later this year. If you followed last year’s negotiations over the end-of-year government spending bill, you would know that Democrats held firm over their ultimatum that there should be no R&D breaks for companies without the expansion of family relief that was enacted during the pandemic. And at the end of the day, neither side came close to offering a solution that could bridge the gap, creating frustration among pretty much everyone. But if you’ve been watching closely, the tone of the conversations around the tax items is slowly but surely shifting. Take a Senate Finance Subcommittee on Taxation and IRS Oversight hearing last week in which Chair Michael Bennet (D-Colo.), a major proponent of the expanded CTC, spoke at length about how the credit enabled parents in Colorado to sustain their jobs by providing extra income for childcare and transportation. Bennet also emphasized how American incomes, except for taxpayers in the top 20 percent, have flatlined for decades. What came next was less expected. “This may surprise you to hear this, but I agree with you, and you know how rare right now this exchange is in this kind of setting,” responded Sen. Ron Johnson (R-Wis.), who has previously been a critic of entitlement programs like Medicare and Social Security. “We need a public setting where we can have these discussions, and both sides need to talk with each other as opposed to past each other.” HAPPY MONDAY: And before we go further into these CTC discussions, you should know the transcript of the closed executive session in which House Ways and Means Republicans decided to release whistleblower allegations on the Hunter Biden case has now been made available here. Nothing too surprising: Democrats lambasted Republicans for not interviewing around 50 government employees mentioned in the whistleblower testimony and for not having a “legislative purpose” for publishing documents that would have otherwise been protected by taxpayer privacy laws. Committee Chair Jason Smith (R-Mo.) responded that the release was necessary to allow other committees of jurisdiction to pitch in on the investigation into the president’s son. What should we look out for this week? Email: bfaler@politico.com, bguggenheim@politico.com and teckert@politico.com. Or Twitter: @tobyeckert, @brian_faler, @ben_guggenheim, @POLITICOPro and @Morning_Tax.   JOIN 7/26 FOR A TALK ON THE NEW ENERGY ECONOMY: Join POLITICO's lively discussion, "Powering a Clean Energy Economy," on July 26 at 5:15 PM ET. We'll explore the effectiveness of consumer-targeted policies to boost sustainability and create clean energy jobs. How are the Inflation Reduction Act's provisions faring? Which strategies truly sway consumer behavior? How are advances in technology shaking things up? And, what's the future for energy consumption reduction? Hear from featured speaker, Rep. Debbie Dingell (D-Mich.), among other experts. Don't miss this insightful event — register today and be part of the conversation driving America's clean energy future! REGISTER NOW.     Want to receive this newsletter every weekday? Subscribe to POLITICO Pro. You’ll also receive daily policy news and other intelligence you need to act on the day’s biggest stories. HEART OF THE ISSUE: Even though Republicans have concerns about the costs of the expanded Child Tax Credit and its refundability feature (in which taxpayers with no liability can still get the full benefit by receiving a check from the IRS), the dispute over arguably boils down to this: Despite a slew of studies suggesting that the family relief did not disincentivize work, Republicans just aren’t buying it. That’s partly because GOP lawmakers say there was so much going on in the pandemic economy that it’s difficult to determine to what extent the expanded CTC actually affected work. And then there’s a paper frequently cited by Republicans that was co-written by Kevin Corinth, a senior fellow at the right-leaning American Enterprise Institute, finding that the expanded credit has marginal effects on work that would reduce employment by 1.5 million people — which Corinth and the other authors assert would in turn diminish the poverty-slashing effects of the program. According to the paper, that’s because the pandemic-era CTC not only expanded the credit amount and made it fully refundable, but also eliminated a requirement that parents make a certain amount of income ($2,500) to qualify for some relief, as well as phase-in effect in which parents can claim more and more of the credit as they earn more. (As a side note, Bennet fiercely contests this claim, saying critics live in “imaginary worlds” if they think, for instance, that a working parent making $2,000 a month would quit their job if they start receiving an additional $250 per month from the CTC). That’s all to say that several Republicans like Johnson and Smith have in fact indicated they are on board with finding a way to further alleviate child poverty, but Democrats will likely need to address the GOP's concerns about the credit’s marginal effects on work to get to a bipartisan solution. “If we lay a plan on the table, we’ll just be attacked,” said Johnson on an alternative approach to negotiations. “There are just some basic truths or basic realities that we need to get on the table.” THE STATE OF R&D: Meanwhile, the very same day as the subcommittee hearing House Ways and Means members Ron Estes (R-Kan.) and John Larson (D-Conn.) participated in a conference hosted by the Information Technology Industry Council to discuss legislation that would restore immediate deductions for research and development expenses. The lawmakers clearly see reversing the five-year spreading-out of the costs enacted by the 2017 Tax Cuts and Jobs Act as imperative to not only retaining jobs in innovative industries, but also countering China’s rise as a global superpower and its efforts to surpass the U.S. in technological capabilities. Noting how China provides its companies a “super deduction” for their research and development activities, for instance, Larson said, "China doesn’t have a democracy. They are very authoritarian, and they are setting a path and a tone to surpass the United States.” THINGS GET SALTY: As our Sarah Ferris and your Weekly Tax author report in a new article out this morning, the GOP tax package spearheaded by Smith has a SALT problem, which looks to be impeding efforts by the leadership and the Ways and Means Committee to get a floor vote on the legislation by August recess. Specifically, we have several Republican members of the SALT caucus saying they won’t support the bill without some sort of state and local tax relief. That could pose a problem for Speaker Kevin McCarthy, operating as he is with a slim five-member majority. And here’s some more granular detail for our tax wonk readers: Members of the SALT caucus aren’t united behind a single plan for negotiating the relief, but rather seem open to a range of proposals that involve lifting the cap by certain amounts and even placing income limits on who can qualify. That especially makes sense, if you think about it, given that the GOP tax package includes plans led by SALT member Michelle Steel (R-Calif.) to again boost the standard deduction for all taxpayers. For instance, according to Joint Committee on Taxation analyses of the TCJA, that law’s increase in the standard deduction resulted in the most dollar benefits to the middle- and upper- income brackets, while analyses of a repeal of the SALT cap, including one conducted by the Tax Foundation, indicate that the policy would primarily help the top 10 percent of earners. That may help explain why SALT caucus member Rep. Nicole Malliotakis (R-N.Y.) — whose congressional district of southern Brooklyn and Staten Island has a median income of $76,805, according to Census data, and is relatively lower income compared to the districts of other SALTers — seems to have been at least partly swayed by the standard deduction proposal. Meanwhile, members like Rep. Andrew Garbarino (R-N.Y.)., who represents one of the wealthiest districts in the country, have taken more hardline views against the lack of SALT relief in Republicans’ marquee tax package.   JOIN 7/27 FOR A TALK ON WOMEN LEADERS IN THE NEW WORKPLACE: In the wake of the pandemic, U.S. lawmakers saw a unique opportunity to address the current childcare system, which has become increasingly unaffordable for millions of Americans, but the initial proposals went nowhere. With the launch of the Congressional Bipartisan Affordable Childcare Caucus in May, there may be a path to make childcare more affordable in the U.S. Join Women Rule on July 27 to hear from featured speakers Rep. Ro Khanna (D-Calif.), Rep. Nancy Mace (R-S.C.), and Reshma Saujani, Founder & CEO of Moms First and Founder of Girls Who Code, on ways to reach a bipartisan solution on this timely issue for women in the workplace. REGISTER HERE.     Around the World Reuters: “Turkey increases fuel tax as it bolsters stretched budget” Bloomberg: “UK Government Considers Scrapping Inheritance Tax, Times Says” ABC: “Kenyan religious leaders urge the president to repeal a new tax law as protests surge” Around the Nation WSJ: “High-Earning Retirement Savers Are Losing Some of Their 401(k) Tax Break” The Hollywood Reporter: “The Mansion Tax Effect: Luxury Home Sales Stall in Los Angeles” MLive: “Families could receive $2K ‘baby bonus’ under proposed Child Tax Credit expansion” Also Worth Your Time Tax Notes: “Pillar 2 Would Overlook Some Tax-Advantaged IP Transfers” Bloomberg: “Tax Adviser to Famous DJ Tiesto Charged With Hiding $100 Million From US” WSJ: “IRS Delays New Payout Rules for IRAs Again” Did you know? The wealthiest congressional district in New York is represented by serial fabulist Republican Rep. George Santos, according to 2022 data compiled by Forbes. Santos is also an advocate for repealing the SALT cap.   Follow us on Twitter Toby Eckert @tobyeckert Bernie Becker @berniebecker3 Brian Faler @brian_faler Benjamin Guggenheim @ben_guggenheim   Follow us

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