Crunch Time: A Tax Update On The Infrastructure And Budget Bills

Tax Notes Capitol Hill reporters Doug Sword and Frederic Lee return to discuss the latest tax developments with the recordbreaking infrastructure and reconciliation legislation advancing in Congress.

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: So many bills, so little time.

When we last checked in on Congress in August, at the top of the House’s to-do list were two recordbreaking bills: the $3.5 trillion budget bill and the $550 billion infrastructure bill. Since then, committees in the House and Senate have been working on the reconciliation bill while the bipartisan infrastructure bill had been scheduled for a vote in the House the week of September 27.

But that vote had yet to happen as of this recording on the morning of September 30.

How is Congress handling the increasing pressure to pass legislation? Where do the two big bills stand today?

Here to talk about this are Tax Notes Capitol Hill reporters Doug Sword and Frederic Lee. Doug, Frederic, welcome back to the podcast.

Doug Sword: Nice to be here, Dave.

Frederic Lee: Hello, thanks.

David D. Stewart: To begin, there’s been a gradual ramping up of tensions in Congress over the last couple of months over an array of legislation. We’ve got the reconciliation bill, the infrastructure bill, the need to raise the debt ceiling, and potential government shutdown. Where do we stand today?

Doug Sword: You’re right. Congress has an awful lot on its plate. But they appear primed to remove at least one item from this jammed docket. It looks like the Senate will pass a continuing resolution (CR) and that the House will quickly follow suit.

As we speak, it’s the morning of September 30, and that’s the last day of the federal fiscal year. Without a CR , as they’re called, the government would partially shut down beginning October 1.

Instead they’re going to kick the can down the road to December 3. The CR covers all spending between now and December. That’s another deadline they’ll have to hit because Congress has not successfully passed all of its 12 spending bills since 1996. This is not unusual for them.

Meanwhile, Treasury Secretary Janet Yellen told us this last week that the government runs out of money October 18. After that, they can’t fully meet the obligations. This is a condition otherwise known as default, which has never occurred before. They’ll have to do something in the next couple of weeks on that.

Progressives want the infrastructure bill tied to the reconciliation bill. Moderates want to just move what is already there and already passed by the Senate. What happens could well impact the chances for reconciliation.

David D. Stewart: Let’s start with that infrastructure bill. It was passed by the Senate a month ago, and it was supposed to come up for a vote the week of September 27. What is in this bill?

Frederic Lee: The infrastructure bill is directed at exactly that. It’s hard infrastructure such as roads, bridges, and the like. In terms of pay-fors, part of the funding comes through ramped-up reporting requirements for cryptocurrency. Another part is coming from the renewal of Superfund taxes, which is an excise tax on several dozen chemicals that have been deemed hazardous.

In terms of numbers, the crypto measure is expected to bring in about $28 billion over 10 years. The excise tax measure should be bringing in about $14.5 billion.

The infrastructure bill hasn’t changed since the Senate passed it back in August. The reason for that is there was a rule adopted by the House that blocked further amendments to the infrastructure bill not long after it passed in the Senate.

When that happened, hopes to amend the crypto provisions, one way or another, ended. At least through amendment, which a lot of people saw as unfortunate because both those in the crypto sector and some lawmakers were really gunning to narrow the reporting requirements because of concerns that they were overbroad, especially regarding the word “broker” as it appeared in the bill text.

Now, we have to look at Sen. Cynthia Lummis, R-Wyo. She did say she wants a standalone piece of legislation to come to the Senate floor before the end of this year that would clearly define the term “broker” and other terms used in that space and the digital asset sector. I’m not sure if that’s actually going to occur, but we’re definitely going to be watching for it.

David D. Stewart: There’s been a lot of back and forth in the House over the infrastructure bill. What are the main conflicts that are delaying a vote?

Frederic Lee: You mentioned that the infrastructure bill passed the Senate a month ago. Well, there’s this linking strategy that was used with the infrastructure and the reconciliation bills. It was established early on in the process by the House and Senate leadership. That’s definitely played a role in the timing of the infrastructure bill and why it’s actually landing right now.

A group of Democratic moderates, including Rep. Josh Gottheimer, D-N.J., were pushing House Speaker Nancy Pelosi, D-Calif., a few weeks ago to bring the bipartisan infrastructure package to the floor quickly after it passed the Senate, which led Pelosi to promise to bring the legislation to the floor by September 27. Pelosi came out and said that the bill would come for vote on September 30.

House progressives have been saying in recent days that they’ll actually vote against the smaller infrastructure bill without there being a vote on the more progressive reconciliation package.

On the moderate side, in the House we have Rep. Stephanie Murphy, D-Fla. She said on September 29 that if the scheduled vote on the infrastructure bill were to fail or be delayed, there would be a significant breach of trust. It’s high stakes.

What we’re looking at is prominent factions of the Democratic party digging in their heels at a time when the chance to get these two bills through is really, really starting to narrow. You have to remember that the Democratic party coined itself as the “Big Tent Party,” so that’s one way to look at it.

Moderates are prioritizing the infrastructure bill while progressives are really backing the reconciliation bill. That’s a large reason why it’s shaking out the way it is.

David D. Stewart: Moving on to the reconciliation bill, the last time we spoke about it, this was a $3.5 trillion bill. But it seems to have gotten a smaller price tag since then. What’s the latest update there?

Doug Sword: Moderates in both the House and the Senate, but particularly in the Senate, are holding up the bill. That’s because of the numbers.

If you look at the Senate, there’s 100 members in the Senate, 50 are Democrats and 50 are Republicans. For most legislation, it takes 60 votes to beat a filibuster, but the reconciliation is an exception to that. It only takes a simple majority. Fifty senators along with Vice President Kamala Harris can pass a reconciliation bill 51 to 50. But that means not a single Democrat can bolt from their party on a very controversial bill.

Meanwhile, in the House, the majority is 220 to 212, which means if everybody shows up and Pelosi doesn’t hold on to four of those people, the bill fails.

On September 29, one of the Senate moderates, Joe Manchin, D-W.Va., put out a statement reiterating what he said several times before, that he can’t support $3.5 trillion. He pointed out that Congress doesn’t have a long-term funding plan to keep Social Security and Medicare afloat. He just thinks it is “fiscal insanity” to create new and expanded social programs.

Basically we don’t know the number for the moderates. They haven’t said what they would go for. They have said that they want to roll back partially the Tax Cuts and Jobs Act, or at least Manchin has said that. But we don’t have a number from them.

Democratic leaders acknowledged that the $3.5 trillion figure is something that’s fading into the past. So, the next couple of weeks of negotiation should be key in seeing what these numbers are.

David D. Stewart: Besides Manchin, who are the other key players to keep an eye on during these negotiations?

Doug Sword: Kyrsten Sinema, she’s a Democratic senator from Arizona. She’s a freshman. She has been probably the second most frequent moderate voice on the Senate side objecting to the size of this package.

Over in the House, it’s Gottheimer, who is the head of that nine moderate coalition that insisted on a vote on the infrastructure package. Then there’s Murphy. She is the co-chair of the Blue Dog Coalition, fiscally conservative Democrats. She was the only member of Ways and Means to vote against their 1,900-page tax package back on September 15.

There’s leadership, including House Ways and Means Chair Richard Neal, D-Mass., who is really enjoying pointing out that he has the only active piece of legislation out there — the 1,900 pages I just mentioned. He believes will be the basis for negotiations going forward. He’s very much in lockstep with Pelosi.

Over in the Senate, there’s Senate Finance Chairman Ron Wyden, D-Ore., who has put out hundreds of pages of legislative texts over the last few months on international tax regimes and repealing carried interest and a lot of other things. He’s looking to get a lot of that into the bill. His partner over in the Senate would both be Majority Leader Chuck Schumer, D-N.Y., and Senate Budget Chair Bernie Sanders, I-Vt.

But increasingly it’s President Joe Biden. Biden had been a big player early on since most of this package comes out of his tax proposals from the campaign. He’d been quiet in recent months. But in the last week, he’s met a couple of times with Sinema, Manchin, Gottheimer, Murphy and other moderates and progressives. He’s trying to get them to start talking about an actual number, because it’s really impossible to negotiate when nobody will say what their number is.

David D. Stewart: You mentioned the chair of the Ways and Means Committee and the work that that committee has been doing on the tax provisions of this bill. Could you tell us about the important pieces of that?

Doug Sword: Sure. What is now moving through the House is this massive reconciliation bill. It’s all been put together. It’s almost 2,500 pages, and almost 1,900 of that came from Ways and Means. This is very much a tax and revenue bill. If you look through the Joint Committee on Taxation scoring of this, they have really scrunched up type with 12 pages and there’s more than 140 separate scored tax provisions.

I’m going to mention some of the biggest tax increases. First is a big one: increasing the corporate income tax rate from 21 percent to 26.5 percent. That’s $540 billion over 10 years. That is the one that people are focusing on the most.

There’s also a bunch that are a $100 billion or more, in some cases quite a bit more. There’s the increase in the individual top marginal tax rate from 37 percent to 39.6 percent. There’s increasing the top capital gains rate from 20 percent to 25 percent. There’s a 3 percent surcharge on incomes over $5 million.

There’s changes to all those international acronyms — GILTI (global intangible low-taxed income) , BEAT (base erosion and antiabuse tax), and FDII (foreign derived intangible income). Basically overhauling the international tax regime to bring in several hundred billion dollars. These are all over 10 years, by the way.

There’s also a change to the net investment income tax, known as the NIIT, where they will apply the NIIT to certain incomes of high-income households. Then they would make permanent the excess business losses limitation. So, the owners of passthrough businesses couldn’t write off as much of their losses as they could.

One that isn’t over a $100 billion, but I’m going to mention anyway, is they’re going to double the taxes on tobacco and place a tax on vape products. That comes out very close to $100 million. 

Then there are the tax cuts. The biggest part of the tax cut package is $835 billion for social safety net tax cuts. That is mainly the child tax credit expansion that was in the American Rescue Plan Act in March that boosted the child tax credit to $3,600 over the year for children under six, and $3,000 for those under 18.

There’s also increases in the earned income tax credit, the child and development care tax credit, and there’s some sizable new caregiver tax credits.

There’s also a big group of green energy tax credits amounting to over $200 billion. In that is a renewal of the tax credit for electric vehicles, which had been $7,500, but it will be $12,500 if this bill passes. That’s a little controversial because $4,000 of that is if the car was made by union workers in a union plant. So Republicans aren’t too thrilled with that provision.

Then there’s over $100 billion of housing tax credits. There’s rehabilitation tax credits and a big expansion of the low-income housing tax credit.

David D. Stewart: Another option to pay for this reconciliation bill is new bank reporting requirement. Could you give some background on the bank reporting requirements and what they look like?

Doug Sword: Sure. This is another White House proposal. A large portion of what the White House wanted to use to pay for reconciliation was increased tax collections at the Internal Revenue Service. They were looking at about $300 billion in tax collection increases by boosting the IRS budget. The IRS budget has been pretty flat for about 10 years. They’ve lost an awful lot of their auditing and enforcement muscle. President Biden wants to build them up again.

But then an even bigger portion, even bigger payday on tax collections, would be over $400 billion by instituting a new bank reporting requirement. This would in effect be a 1099 for everything that goes in and out of your bank account. That’s because there’s a tax gap between what people pay and what people are supposed to pay. It’s estimated to be $700 billion to $800 billion a year. There’s very high compliance for people who have wage income because there’s third-party reporting.

Their employer tells the IRS how much they make. There’s third-party verification on dividend and interest income. But there’s no third-party verification largely on business income. Businesses fill out their tax returns. What the White House wants is their banks to report their gross inflows and gross outflows each year to see if that adds up to what they’re reporting in income.

This was not included in the Ways and Means bill. The $600 threshold was too low for Neal’s taste. There’s a lot of talk about what that should be and what all may or may not have to be reported.

This has become a big issue for Republicans because they consider it to be very invasive. It’s caught fire at the grassroots. There’s an awful lot of complaints coming from not just Republicans, but the people who are worried about the data collection here.

David D. Stewart: Thank you for being here. We look forward to having you back.

Doug Sword: Thanks for having us. It’s going to be interesting to see how it shakes out.

Frederic Lee: Thank you very much.