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Leftovers pile up for year-end tax bill menu

There's bipartisan interest in certain tax, trade provisions left out of budget, competitiveness bills

Sen. Michael D. Crapo, R-Idaho, named R&D expensing as his top priority for a year-end package.
Sen. Michael D. Crapo, R-Idaho, named R&D expensing as his top priority for a year-end package. (Tom Williams/CQ Roll Call file photo)

Incentives for clean energy and a tax break for companies’ research and development appear to be off the table for legislation moving this summer, raising the stakes for a potential year-end tax bill after the dust settles on the midterm elections.

“I think there’s a commitment that we’re going to have to have some tax legislation before the year’s out,” said Rep. Dan Kildee, D-Mich., a member of the Ways and Means Committee.

The panel’s top Republican, Rep. Kevin Brady of Texas, said he’s expecting his staff will begin working with the committee’s Democratic aides over August recess and into September on a potential package.

Some big-ticket items for both parties will likely be on the table after failing to make it into Democrats’ budget reconciliation bill — now expected to be far smaller legislation focused on lowering health care costs — or a slimmed-down economic competitiveness measure focused on boosting U.S. semiconductor manufacturing.

Clean energy cliff

Sen. Joe Manchin III, D-W.Va., nixed his party’s plan to move some $325 billion in clean energy tax credits into what used to be called “Build Back Better,” putting pressure on to preserve incentives that have or are set to expire.

Some Democrats still hope to get him on board with their more expansive credit package, which hasn’t found GOP backing. That would likely require another reconciliation bill, a fraught path with time short.

A set of more bipartisan clean energy tax incentives could instead factor significantly into a year-end tax bill. Several Democrats said that if they don’t move beforehand, they’ll serve as a motivating factor for a post-election deal.

Without action, many incentives start to disappear. Benefits for wind power plants cut off for sites where construction began after Dec. 31, 2021, while investment tax credits for solar equipment start to phase down after this year.

Tax credits for increasing home energy efficiency, building energy-efficient new homes, hydrogen-fueled vehicles, electric motorcycles, biofuel and alternative fuels like hydrogen or natural gas, along with their refueling property, also expired at the end of 2021. Biodiesel incentives fall off at the end of this year.

There’s a history of GOP support for offering companies tax breaks on clean energy investments, particularly with an all-in approach. The Senate Finance Committee’s top Republican, Michael D. Crapo of Idaho, introduced a bipartisan bill last year to create tax credits for power-producing sites that use emerging energy technology; carbon capture equipment, which can block emissions from burning oil and coal; energy storage technology; and electricity made from clean hydrogen.

Crapo pointed to his bill and said he hopes to discuss the issue with Democrats. “My legislation would probably contemplate creating that system and not the hodgepodge that we now have, but one way or the other, I’m in support of moving into that zone,” he said.

Republican Sen. Charles E. Grassley, who’s described himself as “father” of a tax credit for producing wind energy, said he’s interested in the biodiesel tax credit and incentivizing ethanol-based airplane fuel. Grassley’s home state of Iowa is a top producer of ethanol and biodiesel as well as corn and soybeans, the main feedstocks for the two biofuels.

Some Democrats also want subsidies for electric vehicles to be part of that conversation. The incentives offset the cost of EVs for consumers, but manufacturers are limited to selling 200,000 cars each that qualify for the tax break. While the tax credits are still available, some of the largest automakers have hit their limit or are projected to soon, including Michigan’s General Motors Corp. and Ford Motor Co.

Kildee said he wants to see the EV credits in a year-end bill, and fellow Michigan Democrat Sen. Debbie Stabenow said they’ll be part of a clean energy package “if I have my way,” something Democrats will look to move however they can.

“The need to compete and win the global clean energy race hasn’t gone away. The climate crisis hasn’t gone away,” Stabenow said. “So what we’ll do is just look for the next opportunity.”

Simply preserving the incentives currently in the tax code would mean more renewable energy in the years to come, but it wouldn’t come close to the level of production needed to fully decarbonize the power grid by 2035, President Joe Biden’s stated goal, said Ethan Zindler, head of Americas at clean energy researcher BloombergNEF. He said that to reduce carbon emissions, furthering all technologies that meet that goal makes sense. However, he said, some, like carbon capture technology, are useful but far less cost effective.

Groups such as the American Council on Renewable Energy, a trade group representing developers and companies that invest in renewable power sources, are lobbying hard to renew expiring tax incentives.

“ACORE is continuing our efforts with Congress to attempt to salvage as much of the clean energy tax package as possible, either in this bill or a different legislative vehicle,” José Zayas, executive vice president of policy and programs, said in a statement.

Drive for R&D

Another motivator for a year-end deal is restoring a bigger R&D incentive. Beginning this year, companies have to deduct their domestic R&D costs over five years instead of all upfront, a provision of Republicans’ 2017 tax law.

Companies have been lobbying for a reversal, which many top tax writers aim to deliver by year’s end. That push hit a snag in recent months, as some Democrats objected to moving forward with the tax break for businesses while benefits for lower- and middle-income families, like a larger child tax credit, remain lapsed.

Sen. Todd Young, R-Ind., said the “chips-plus” bill moving without R&D increases the need for another way to get it done this year.

“This should be our first order of tax business as we approach either a year-end package, or perhaps we could tuck it into another must-pass vehicle, because this is frankly a must-pass tax provision as we talk to so many of our companies,” Young said.

Crapo named R&D expensing as his top priority for a year-end package, and Grassley said it should be the motivator for a deal.

[Test vote on ‘chips-plus’ bill teed up in Senate]

Democrats will keep pressing for bigger family benefits to be part of the mix. Sen. Bob Menendez, D-N.J., said he’s hoping for a year-end package to build up the child tax credit and child and dependent care credit. Expansions of both credits, which aid families with children and those paying for day care, ended in January.

There could be room for a bipartisan expansion of the child tax credit, but cost could also be a barrier. Lawmakers typically extend existing law without offsetting the cost but often require any expansions or additions to the tax code to be offset.

Trade bills

As legislators begin to home in on a year-end bill, they’ll be balancing dozens of other tax, trade and health-related provisions that expired or will at the end of the year and new measures with bipartisan potential. Crapo said last week he’d like to see a “combo” package if provisions couldn’t move separately.

Reauthorizing and expanding Trade Adjustment Assistance, which aids workers who’ve lost jobs to foreign trade but expired at the end of June, remains a priority for Ways and Means Democrats. TAA provisions were left on the cutting-room floor when the budget reconciliation and competitiveness bills were trimmed.

A host of other trade provisions are also still in limbo as a result of the semiconductor bill getting whittled down, including renewal of duty-free treatment of products from developing countries under the Generalized System of Preferences program, and hundreds of temporary tariff suspensions on goods ranging from shelled pine nuts to “vacuum glass lined steel coffee servers over 2 liters.”

Sen. Benjamin L. Cardin, D-Md., is hoping to funnel more long-term funding for modernizing technology and systems to the IRS now that Democrats’ plan for $80 billion through reconciliation is on ice.

Other possibilities in the mix include bipartisan measures to boost retirement savings; tax breaks for businesses deducting interest expenses and purchasing physical assets, which wind down this year or next; an above-the-line deduction for charitable giving; and returning access to the employee retention tax credit, a pandemic relief measure used by small businesses and nonprofits, for the end of 2021.

“There’s a lot of moving parts here that could make it into an omnibus bill,” Cardin said.

Ellyn Ferguson and Lindsey McPherson contributed to this report.

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