Capitol Hill observers are expecting the tax components of House Democrats’ massive new coronavirus relief package to amount to mostly a partisan wish list.
But since the Constitution grants the House sole authority to originate revenue legislation, Democrats’ bargaining power on the next aid bill makes any wish list they put out difficult to ignore.
Top Democrats have said the measure will focus mainly on tax policies directly related to the economic crisis precipitated by the COVID-19 pandemic, such as expanded employer tax credits to cover workers’ wages and another round of direct payments that could top the $1,200 distributed to most Americans since mid-April.
But some Democratic officials and lobbyists following the deliberations say they also expect provisions that were floating around prior to COVID-19 bursting on to the scene to make it into the package.
Those include expansions of earned income tax credits for low-income childless adults, more generous tax credits for parents with very young children as well as beefed-up child and dependent care credits. Rolling back the 2017 GOP tax law’s $10,000 cap on state and local tax deductions is also on the table, these people say, as is a rescue of failing union pension plans.
Not everything in the Democrats’ bill will be anathema to Republicans.
A notable exception likely will be inclusion of something that’s gotten a bipartisan push recently: reversing the IRS’ determination that businesses can’t claim a tax deduction on expenses paid with forgivable Paycheck Protection Program loans. House Ways and Means Chairman Richard E. Neal, D-Mass., and Senate Finance Chairman Charles E. Grassley, R-Iowa, jointly asked Treasury Secretary Steven Mnuchin to overturn that IRS ruling and restore the double benefit that Congress intended.
Another bite at the apple
Neal was Pelosi’s right hand in March’s negotiations and appears to be continuing that role, lobbyists say. And Neal, according to his office, is committed to getting a number of tax items in the bill that were also in an earlier version of the huge aid package that House Democrats introduced but were dropped in the final bill.
One provision would make the child tax credit fully refundable, increasing it from $2,000 to $3,000 for six years and boosting it to $3,600 for children under 6 years old. The refundable portion of the credit is currently limited to $1,400 for families lacking income to make full use of the credit against taxes owed.
Last year, Ways and Means advanced a bill making the credit fully refundable for two years while increasing it to $3,000 only for children under 4 years of age. The 10-year cost of that measure was scored at $80 billion by the Joint Committee on Taxation.
At six years rather than two, the cost would probably be around $250 billion, and that’s without including the increases in the size of the credit, according to Maya MacGuineas, president of the watchdog group Committee for a Responsible Federal Government.
“With debt set to match the size of the economy this year, we shouldn’t borrow a couple hundred billion dollars extra for a proposal that isn’t directly related to COVID-19 relief,” she said in a statement about the proposed child tax credit expansion.
While the eventual $2 trillion relief bill provided for $1,200 payments to individuals, just $500 was included for each child, meaning the law “counts a child as two-fifths of a person,” Reps. Rosa DeLauro, D-Conn., a senior appropriator, and Suzan DelBene, D-Wash., who sits on Ways and Means, wrote in a letter to congressional leaders Thursday arguing for the boost. They introduced legislation last year that matches what Pelosi included in the House Democrats’ aid proposal.
“We know that child poverty has been on the rise,” DelBene said in an interview. “If a mom with two kids would receive a smaller check than a childless couple, when you do those comparisons it really doesn’t make sense,” she said. A single mom with two children would qualify for a $2,200 payment, while a couple without children got $2,400.
Expenses for young children are particularly high, which is why the legislation bumps the credit another 20 percent for each child under 6 years of age, she added.
DelBene is also part of a bipartisan push to expand the employee retention tax credit, which was part of the March law. That new program allows companies a tax credit of 50 percent of up to $10,000 in second-quarter wages for each employee retained during that quarter. It applies to businesses with fewer than 100 employees that suffered a revenue loss of 50 percent or more.
The maximum tax credit would be $5,000, but that would rise to $36,000 under the proposed expansion, which is co-authored by Reps. Stephanie Murphy, D-Fla.; John Katko, R-N.Y.; Brian Fitzpatrick, R-Pa.; and Chris Pappas, D-N.H.
“Really, the ultimate goal here is to make sure we can keep workers on payroll,” DelBene told CQ Roll Call. It’s a big plus that this can be done by expanding an existing program, she said.
It would be a large expansion, since the proposed change would increase the credit to 80 percent of up to $15,000 in wages for the second, third and fourth quarters of the year. The companies would have to qualify for each quarter, but the bill would also relax the threshold, making eligible those companies whose revenues fell 20 percent, rather than 50 percent.
And companies having up to 1,500 employees but no more than $41.5 million in revenues would be eligible.
DelBene allows that the expansion would be an expensive one, though she points out that by keeping workers on payrolls the savings on unemployment benefits would offset much of the cost.
A lot of give, some take
Since a lot of companies will not be posting profits this year, expanding the employee retention tax credit arguably dovetails with a provision in the March bill that Democrats are now blasting.
The 2017 tax code overhaul ended the ability of companies to get instant refunds by applying current-year losses against taxes they’d paid in the previous two years. The March law restores the carryback for any net operating losses posted in 2018, 2019 or 2020 and allows those losses to be applied to taxes as far back as five years. The idea is to quickly get cash into business’ coffers.
That provision was also in House Democrats’ bill and was applauded as “welcome tax relief for businesses at a time when revenues may be profoundly constrained,” according to a blog post by William Gale, co-director of the Urban-Brookings Tax Policy Center, on March 27 when the bill was signed into law. The group is officially nonpartisan, but Democrats often cite their work and consult their experts on tax policy.
The loss carryback provision carries a cost of $25.5 billion over 10 years, according to the Joint Committee on Taxation. But Democrats like Texas Rep. Lloyd Doggett, a Ways and Means member, say that’s too big a giveaway and that it should be scaled down to a two-year loss carryback and tailored only to small businesses.
Doggett has introduced legislation that would change that break and do away with a much costlier, $135 billion tax cut in the March law that eliminates limits on excess losses incurred by owners of “pass-through” businesses, which include partnerships, subchapter S corporations and sole proprietors, for 2018 through 2020.
The 2017 tax law capped the amount of losses that business owners could deduct from income earned elsewhere, including salary and investment income, at $250,000 for individuals and $500,000 for joint filers.
The JCT estimates that 82 percent of the benefit of removing that cap for those three years will go to those with incomes of more than $1 million. Critics say real estate developers and financiers will disproportionately benefit, although backers say the universe of affected businesses is much greater.
“I am pleased that Speaker Pelosi is strongly opposing this provision, which should be repealed in upcoming pandemic relief legislation,” Doggett said in a statement. The Senate version was introduced by Sheldon Whitehouse, D-R.I., who serves on the Finance Committee.
No Republican in either chamber has yet signed on to the Doggett-Whitehouse effort, however, which indicates scaling back the two business tax breaks may face tough sledding even if the measure makes it into the House Democrats’ new aid package.