Crisis Averted: Breaking Down The Debt Ceiling Bill

Tax Notes reporter Alexander Rifaat discusses the tax implications of the recently passed debt ceiling bill and gentleman’s agreement over IRS funding.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: take it to the limit.

On June 3 President Biden signed the debt limit bill into law, successfully averting what would’ve been the first-ever U.S. government default. And although the end result passed on a bipartisan basis, there was a lot of uncertainty on both sides of the aisle leading up to it.

So what’s in the bill, and what should we expect next?

Joining me now to talk more about this is Tax Notes reporter Alexander Rifaat.

Alex, welcome back to the podcast.

Alexander Rifaat: Hi Dave, great to be back.

David D. Stewart: Why don’t we start from the basics. What ended up in the final bill?

Alexander Rifaat: So I’m going to take your question and flip it on its head and start with what is not in this bill. The bill does not include any elimination of the energy tax credits included in the Inflation Reduction Act (IRA) that Republicans wanted to scrap. It also does not claw back the $80 billion in IRS funding that was also included in the IRA last year.

However, what’s also not included but is of noteworthiness is a separate agreement that has been agreed to between the Biden administration and congressional Republicans to essentially claw back 25 percent of the $80 billion, so about $20 billion, over the next two fiscal cycles.

In terms of what is actually in the bill in terms of what Republicans had hoped to achieve originally and what has actually been enacted, there’s actually only $1.4 billion that is going to be immediately rescinded from the additional IRS funding in addition to a number of other adjustments in terms of work requirements for certain benefits.

But in terms of what is in the bill, it’s actually not as much funding decrease as Republicans had initially hoped for.

David D. Stewart: All right. Could you sort of spell out for us what concessions were made by both parties as they were trying to make this agreement?

Alexander Rifaat: Yes. As I just mentioned, with the White House and the Democrats, they have agreed to at least some rescission of the additional IRS funding secured last year. And for Republicans, as I mentioned, they did not get any of the energy tax credits clawed back as they had originally agreed. And I think, looking at the deal, it really is a reflection of the current political makeup that we have in Washington.

We have a Democrat president, a slim Democrat majority in the Senate, and a thin Republican majority in the House. So in terms of what Republicans had initially looked for, in terms of their previous legislation, the Limit Save and Grow Act, and what has actually been agreed to between Speaker [Kevin] McCarthy (R-Calif.) and the President and what’s become law, it really is a reflection of the current political reality we’re living in.

Were Republicans going to be able to extract some concessions from Democrats? Yes. Were they going to be able to get everything that they wanted? No. And I think that’s reflected in this bill.

David D. Stewart: How much did they really get at the end of the day, compared to what they were aiming for?

Alexander Rifaat: In terms of what Republicans had originally asked for, they’d asked for $71 billion of the $80 billion rescinded at the IRS. It looks like with adding up both what is actually being rescinded immediately, the $1.4 billion, with the extra $20 billion over the next two fiscal cycles, that amounts to about 25 percent. So it’s not, again, as I just mentioned, it’s not everything that they wanted, but I think that it’s a reflection of the political situation that we’re in.

For Biden and the Democrats, they were not able to hold on to all the funding that they wanted. They view the IRS funding as a crucial component to their effort to raise revenues and to go after high-income tax dodgers as well as multinational corporations. So not everybody got what they wanted. And you see that reflected in the bill.

David D. Stewart: How did the final vote play out in the House and in the Senate?

Alexander Rifaat: So in the House, what you had is a very interesting situation where you had the center from basically both parties come together and pass this bill, and the more extreme elements of both parties come out against this. You had progressive Democrats and conservative Republicans voting against this bill.

Progressives, such as Alexandria Ocasio-Cortez (D-N.Y.), [were] claiming that the spending cuts went too far. And you have on the other side Republicans claiming that the claw back of the IRS funding didn’t go far enough. And so, you had a situation basically where the diehard passionate wings of both parties unhappy with the deal, while the core coming together and getting the bill passed.

I won’t repeat what kind of sandwich Congressman Chip Roy (R-Texas) described this bill [as], but you can definitely tell that the more conservative element of the Republican Party was not happy with this agreement, and that was also seen with progressives on the left.

In the Senate, it was a much more partisan vote; a large portion of Republicans voted against the bill. So really, the area of contention, the area of fierce debate really took place in the House.

David D. Stewart: All right. So now that this bill has been passed, what are we hearing from both sides about how they feel about the end result?

Alexander Rifaat: Both sides have really tried to portray this deal as the best outcome given the current political environment, as I mentioned, given the makeup of Congress and who is in charge of the White House.

In terms of how they’re portraying this deal, it’s not necessarily seeing it as a win. Both sides are trying to prop up the concessions that they were able to achieve while also downplaying some of the concessions that they had to make.

David D. Stewart: All right. Now, you mentioned this side agreement about $20 billion. What really is this agreement, and what are we going to see from it?

Alexander Rifaat: Yeah, like I mentioned, the agreement is not in the bill. It’s simply a, if you want to call it, a gentleman’s agreement between the president and Speaker McCarthy. And it calls for $10 billion, again, of the additional funding that was allocated to the IRS to be repurposed, both in fiscal year 2024 and in fiscal year 2025.

And so, it’s nothing written, and it’s not in law, but it’s something that going into the upcoming appropriations process, what we should see happening. Republicans, especially those in the Freedom Caucus, have sort of grumbled about that because it’s not necessarily into law [so] it might not happen. Democrats are scrambling and saying that we have to find additional funding for it in order to make up for that shortfall.

So it’s unclear how the reappropriation will play out in the next two fiscal cycles. There hasn’t been an indication of what the funds will be repurposed for, but it is understood that this $20 billion will indeed be clawed back from the funding.

David D. Stewart: What have we heard from the White House about their position on this loss of money for the IRS?

Alexander Rifaat: The White House has been playing this off as a temporary setback in terms of their overall goal to re-modernize. The agency officials have said that this rescission will have no effect on the short-term and medium-term efforts to revitalize the agency.

They did, however, say that with this funding being rescinded that there would be [a] potential need to come back to Congress [and] ask for more money down the road. So essentially, kicks the can down [the road] in terms of what sort of effect the funding will have for the IRS.

David D. Stewart: Have we heard from IRS Commissioner [Daniel] Werfel about what it means for his agency?

Alexander Rifaat: Yes. After Biden signed the deal, [Werfel] expressed confidence, like the White House has, that this deal will have no bearing on the modernization efforts of the agency. He said the IRS is still on a positive trajectory. So in terms of what has been coming from the commissioner in terms of [the IRS’s] reaction of this deal, again, just trying to take a positive spin on it.

David D. Stewart: And what’s next? Is this issue actually solved all the way into 2025?

Alexander Rifaat: I think the key thing to consider here is that the bill suspends the debt limit up until January 2025. So essentially, this bill lays out the political ground rules for the next year and a half of both the makeup in Congress and the White House. It basically takes those concerns that both Republicans and Democrats have had, and it basically puts it on the ballot in 2024.

And I think that’s sort of the crucial thing to consider here is that it’s not necessarily something that is a long-term fix. It’s not necessarily something that is all set in stone. It simply is a, as I said in the beginning, a reflection of the political reality that we’re in.

David D. Stewart: All right, Alex. Thank you so much for being here, and we can happily not talk about debt limits for, I guess, a year and a half.

Alexander Rifaat: Sounds good.