Republican takeover of U.S. Congress would mean tax fights are back

[November 05, 2022]  By David Lawder

WASHINGTON (Reuters) - Republicans aiming to win control of Congress on Tuesday say they plan to force President Joe Biden into a difficult choice on taxes: sign Republican legislation to make their 2017 tax cuts permanent or veto it and be branded as the president who put tax hikes on middle class Americans.

Congressional Republicans' tax strategies and a Democratic White House could ultimately mean a status quo on rates, deductions and credits for the next two years, tax professionals and analysts say.

But expect the political heat they generate to last until the 2024 presidential election.

Forecasts suggest Republicans have a strong chance of winning back control of the House of Representatives, and an even chance of taking control of the Senate.

A House victory means control of that chamber's legislatU.Sive agenda, and a slim Senate majority means Republicans could put new tax legislation on Biden's desk using 'reconciliation' measures.

Biden has already said he would use the presidential veto to block measures he opposes. Republicans plan to make that a feature of their political message for months to come.

TAX CUTS AND JOBS ACT

"We want to make the Tax Cuts and Jobs Act permanent, which will strengthen the economy," a senior House Republican aide told Reuters. "If Biden wants to veto that, he'll have to explain why he's raising taxes on middle-class Americans. Let him own it."

That 2017 Republican-passed tax law slashed top-line tax rates on corporations, a permanent feature that Democrats failed to reverse with control of Congress over the last two years.

The law's rate cuts and doubled standard deductions for individuals and small business expire at the end of 2025, along with a $10,000 cap on deductions for state and local taxes that increased federal tax bills for many coastal homeowners.

How effective this Republican talking point may be is unclear. The law cut the top tax rate for individuals to 37% from 39.6%; just one in five Americans polled in 2019 said they expected to pay less because of it.

Making the Tax Cuts and Jobs Act provisions permanent is "a top priority" for Republicans, said Representative Adrian Smith of Nebraska, who is seeking to chair the tax-writing House Ways and Means Committee.

KILLING THE 15% MINIMUM?

Smith also wants to restore some already expired business investment tax breaks passed in the 2017 act, and kill a global tax deal brokered by Treasury Secretary Janet Yellen for a 15% corporate minimum tax and a reallocation of some taxing rights on large multinationals to countries where their products and services are sold, he told Reuters in a statement.

Still, corporate tax planners say they may breathe a bit easier after two years of watching to see if overall company tax rates would increase to finance Democratic spending initiatives, said Ray Beeman, tax principal at Ernst and Young in Washington.

"Assuming the Republicans take at least the House, or both, it will probably really suppress a lot of the risk and uncertainty around tax policy, certainly compared to this Congress," Beeman said.

The U.S. Capitol building is seen in Washington, U.S., September 4, 2022. REUTERS/Elizabeth Frantz/File Photo

Democrats' ability to block Republican attacks on Biden's tax and spending policies would be much easier if they retain control of the Senate, where they could allow most House-passed measures to die.

But if Republicans do win both House and Senate control, Biden's veto becomes their first line of defense, as Republicans would be able to invoke budget rules that allow tax and spending bills to pass the Senate with only a slim partisan majority.

There are some decision-forcing events that may prompt Democrats and Republicans to engage in limited negotiations on tax policy: a government funding bill deadline of Dec. 16, expiration of more corporate tax breaks next year and a new deadline for raising the federal debt ceiling in late 2023.

AIMING AT THE IRS

Other targets for Republican tax legislation include rolling back a new 15% domestic corporate minimum tax for large companies and $80 billion in new funding for the Internal Revenue Service in Biden's climate and healthcare law.

The funding is aimed at closing an estimated $600 billion annual "tax gap" - taxes owed but unpaid - by cracking down on evasion by the wealthy, especially those with opaque income sources. It will be used to fill thousands of IRS positions coming empty due to retirements and budget cuts; Republicans have described the hires as an 'army' aimed at harassing taxpayers.

Representative Jason Smith, a Missouri Republican who also is seeking the Ways and Means gavel, said his party would "use every legislative opportunity – including the debt ceiling – to combat rising prices, to strengthen our economy, to secure our border, to repeal the 87,000 new IRS agents Democrats are hiring to target American families, to make America energy independent, and to right-size the federal government."
 

RESEARCH DEDUCTIONS

But may be rare bipartisan support for restoring an expired tax break that allowed companies to immediately deduct all research and development expenses from earnings instead of spreading them over five years -- a goal in line with the recently passed CHIPS and Science Act investments in semiconductors and research.

"That's a deal that could get done as soon as this December or maybe at some point next year," said John Gimigliano, head of legislative and regulatory services at KPMG in Washington.

Still, key Democrats including Senator Sherrod Brown of Ohio have said they would insist on tying it to an extension of a poverty-fighting expansion of the Child Tax Credit that also expired at the end of 2021.

(Reporting by David Lawder; Editing by Heather Timmons and Deepa Babington)

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