This weekly newsletter outlines the latest developments in Washington, including major tax, small business and financial services developments in the negotiations on Phase Four legislation and regulatory guidance from various federal agencies.
Welcome Back From August
Stimulus Talks Resume … Again. COVID-19 stimulus package talks remain stalled. Neither White House negotiators—Chief of Staff Mark Meadows and Treasury Secretary Steven Mnuchin—nor congressional Democrats—Speaker Nancy Pelosi (D-CA) and Senate Minority Leader Chuck Schumer (D-NY)—budged on their topline asks last month, leaving COVID-19 discussions largely unchanged from when most lawmakers left Washington in early August.
Pelosi and Meadows spoke briefly on the phone in late August in an attempt to restart negotiations. However, no progress was made during the call, with Pelosi telling reporters afterwards that Democrats are “not budging.” She later added there was “no reason” to restart negotiations until the White House raises its topline number. Democrats have offered a topline number of $2.2 trillion, a compromise between the cost of the HEALS Act (around $1 trillion) and the HEROES Act ($3.4 trillion).
In an attempt to break the impasse and disagreement among their members, Senate Republicans introduced the Delivering Immediate Relief to America’s Families, Schools and Small Businesses Act (S.178) on Tuesday—the conference’s “targeted” proposal designed to build consensus among Senate Republicans so as to increase the party’s bargaining power. The proposal, which is estimated to cost $650 billion before the $350 billion in offsets, contains the following provisions:
- Legal liability protections;
- An extension of the Federal Pandemic Unemployment Compensation program at $300 per week until Dec. 27, 2020;
- $10 billion for the U.S. Postal Service;
- A second round of Paycheck Protection Program funds;
- Tax credits for organizations designed to promote school choice;
- Flexibility for 529 accounts, allowing parents to use funds for COVID-19-related education expenses;
- $15 billion in short-term assistance to help child care providers reopen and provide further appropriations for the Education Stabilization Fund; and
- An expansion of the $300 above-the-line tax deduction for charitable contributions to $600 for individuals and $1,200 for those filing a joint return.
For more information from the Brownstein Tax Policy Team, click here.
The Senate is scheduled to hold a cloture vote on the measure Thursday, but it is unclear exactly how many Republicans will vote in favor of the bill. Sens. Ted Cruz (R-TX) and Pat Toomey (R-PA), two members who have expressed their concern about congressional spending in response to the COVID-19 pandemic, have both said they will support the measure, indicating that Republicans may have enough votes to secure a simple majority. However, they are likely to fall short of the 60 bipartisan votes necessary to advance the measure.
Schumer and other Democrats have already expressed their opposition to the bill, with Schumer calling the proposal “emaciated” as it contains “no money for rental assistance, no money for nutrition assistance, and no money for state and local services, the census, or safe elections.” In addition, prior to the bill’s introduction, Pelosi and Schumer said the bill is “laden with poison pills Republicans know Democrats would never support.” Enough Democrats are expected to vote against the measure so that it will fail.
Proposing an alternative to a comprehensive package, Mnuchin has suggested Congress separately act on items with bipartisan support, such as additional relief checks for taxpayers, enhanced unemployment and aid for schools. Pelosi, however, has been unwilling to consider this, instead preferring to act on one comprehensive bill.
Additionally, good news for the economy may be bad news for the prospects of a deal. Following economic reports that the U.S. added 1.4 million jobs and reduced the unemployment rate to 8.4% in August, the group of around 20 Senate Republicans wary of additional spending may be more emboldened to refuse another deal. This group will also point to a Congressional Budget Office report released on Sept. 2 that estimated the federal government will have a $3.3 trillion deficit in fiscal year 2020, and will add $13 trillion to the national debt over the next decade. The $3.3 trillion deficit will exceed annual domestic product next year for the first time since post-World War II, when accumulated debt exceeded the size of the economy.
While negotiators continue to seek common ground on a COVID-19 package, Mnuchin and Pelosi have appeared to reach agreement on another looming deadline: funding the federal government. On Sept. 1, the two agreed to pass a stopgap measure before the Sept. 30 deadline. The length of the stopgap was reportedly not discussed, but Mnuchin suggested on Sept. 6 the two were aiming for a funding extension to sometime in December. What is clear, however, is that Mnuchin and Pelosi agreed to keep the stopgap measure “clean” and devoid of controversial “poison pills” that may prevent the measure from receiving enough support to pass. While rank-and-file lawmakers have yet to explicitly sign off on the stopgap, members are expected to pass such a measure so they can focus on campaigning ahead of the November elections.
Retirement On Deck? While top congressional and White House negotiators continue the struggle to reach an agreement on the next COVID-19 package, tax writers are looking ahead to other non-COVID-19 legislation. House Ways and Means Committee Chair Richard Neal (D-MA), who all but secured another term last week after winning a contentious Democratic primary, has reportedly reset his sights on retirement legislation. Even after passing the Setting Every Community Up for Retirement Enhancement (P.L.116-94)—bipartisan legislation intended to help Americans prepare for retirement—in December 2019, Neal has again targeted retirement legislation as something he would like to advance before the end of the congressional term.
Early last week, reports began circulating that Neal has begun preparing to mark up retirement legislation, although the exact timeline is currently unclear. Neal and Ranking Member Kevin Brady (R-TX) have already expressed an interest in pursuing bipartisan retirement legislation. At the very least, should a bipartisan agreement elude lawmakers this Congress, Neal could be using this as an exercise to outline his retirement policy priorities, should Democrats expand their control in November.
Democrats and Republicans have championed retirement legislation in the Senate. For instance, Senate Finance Committee Chair Chuck Grassley (R-IA) has said he is interested in pursuing legislation similar to the Retirement Security and Savings Act (S.1431)—better known as “Portman-Cardin” after its original authors, Sens. Rob Portman (R-OH) and Ben Cardin (D-MD). Portman and Cardin said some of the provisions within their proposal have bipartisan appeal, including the refundable version of the saver’s credit for low-income taxpayers. Another provision—one that would allow taxpayers, after reaching age 60, to contribute $10,000, as opposed to $6,000, to certain retirement plans on an annual basis.
Neal has set his sights again on retirement provisions within the Rehabilitation for Multiemployer Pensions (Butch Lewis) Act (H.R.397), which passed the House 264-169 in July 2019. In fact, during the Democratic National Convention in mid-August, he joined a panel focused on retirement security in which he repeatedly advocated for the bill. However, the problems facing the multi-employer pension plans are deep and wide with little bipartisan agreement on how to address the necessary reforms of the system as well as additional funding.
Neal is hoping to accomplish a number of goals through the retirement legislation push, including allowing workers to carry benefits when they switch jobs and again raising the threshold beyond 72 for required minimum distributions from traditional Individual Retirement Accounts (IRAs).
Activity This Week
Below is a brief discussion on select hearings for the tax and financial services committees.
House Financial Services Committee
On Sept. 8, the Subcommittee on Diversity and Inclusion held a hearing entitled “Holding Financial Regulators Accountable for Diversity and Inclusion: Perspectives from the Offices of Minority and Women Inclusion,” during which the following witnesses testified:
- Joyce Cofield (Executive Director, Office of Minority and Women Inclusion (OMWI), Office of the Comptroller of Currency);
- Sheila Clark (Director, OMWI, Board of Governors of the Federal Reserve System);
- Lacey Dingman (Director, OMWI, Federal Reserve Bank of New York);
- Nikita Pearson (Acting Director, OMWI, Federal Deposit Insurance Corporation); and
- Monica Davy (Director, OMWI, National Credit Union Administration).
- Lorraine Cole (Director, OMWI, U.S. Department of the Treasury);
- Pamela Gibbs (Director, OMWI, U.S. Securities and Exchange Commission);
- Sharron Levine (Director, OMWI, Federal Housing Finance Agency); and
- Lora McCray (Director, OMWI, Consumer Financial Protection Bureau).
On Sept. 10, the full committee will hold a hearing entitled “The Need for Financial Aid to America’s States and Territories During the Pandemic: Supporting First Responders, Assisting Schools in Their Efforts to Safely Educate, and Preventing Mass Layoffs,” during which the following witnesses will testify:
- Lujan Grisham (Governor, State of New Mexico);
- Tim Walz (Governor, State of Minnesota);
- Laura Kelly (Governor, State of Kansas); and
- Lou Leon Guerrero (Governor, Territory of Guam).
House Ways and Means Committee
On Sept. 10, the Subcommittee on Trade will hold a hearing entitled “The Caribbean Basin Trade Partnership Act: Considerations for Renewal,” during which the following witnesses will testify:
- Hervé H. Denis (Ambassador of the Republic of Haiti, the Embassy of the Republic of Haiti);
- Mr. Georges Sassine (President, Association des Industries d’Haïti);
- Ms. Lauren Stewart (Regional Program Director, Americas, Solidarity Center);
- Ms. Beth Baltzan (Principal, American Phoenix Trade Advisory Services PLLC); and
- Mr. Jerry Cook (Vice President, Government and Trade Relations, Hanesbrands, Inc.).
On Sept. 11, the Subcommittee on Select Revenue Measures will hold a hearing entitled “Consequences of Inaction on COVID Tax Legislation,” during which the following witnesses will testify:
- Betsey Stevenson (Professor of Economics and Public Policy, University of Michigan);
- Marc Morial (President, National Urban League);
- Tom Colicchio (Chef and Owner, Crafted Hospitality);
- Nakitta Long (Winston-Salem, North Carolina); and
- Alex Brill (Resident Fellow, American Enterprise Institute).
Senate Banking Committee
On Sept. 9, the committee held a hearing entitled “The Status of the Federal Reserve Emergency Lending Facilities,” during which the following witnesses testified:
- Hal Scott (President, Committee on Capital Markets Regulation);
- Jeffrey D. DeBoer (President and Chief Executive Officer, The Real Estate Roundtable); and
- The Honorable William Spriggs (Professor of Economics, Chief Economist, Howard University, AFL-CIO).
Senate Finance Committee
The committee has no event scheduled.
Phase Four Proposals
The introduction of new proposals has slowed since the height of the pandemic. Some of the most recent proposals are outlined below.
- Reclaiming American Rare Earths (RARE) Act (H.R.8143). Introduced by Rep. Lance Gooden (R-TX) and cosponsored by four Republicans and two Democrats, the bill would permanently allow a tax deduction at the time an investment is made in property used for the mining, reclaiming or recycling of critical minerals and metals from the U.S.
- RECOVERY Act. Introduced by Sen. Ted Cruz (R-TX), the bill seeks to address a comprehensive reopening of the economy through job creation, reopening schools and establishing long-term retirement security.
- Ensuring Telehealth Expansion Act (H.R.8156). Introduced by Rep. Roger Williams (R-TX), the bill would extend the telehealth provisions in the Coronavirus Aid, Relief, and Economic Securities (CARES) Act (P.L.116-136) through Dec. 31, 2025.
- Save our Social Security Now Act (H.R.8171). Introduced by Rep. John Larson (D-CT), the bill would overturn President Trump’s executive action to defer payroll contributions.
- American Dream Down Payment Act (H.R.8176). Introduced by Reps. Greg Meeks (D-NY) and Al Green (D-TX), the bill would establish qualified down payment savings programs.
The Week in Rewind
Below are last week’s biggest stories from Capitol Hill and the administration.
Payroll Deferral Takes Effect. The Internal Revenue Service (IRS) left companies, taxpayers and payroll processors only days to digest its guidance on the implementation of President Trump’s Aug. 8 presidential memorandum deferring the employees’ portion of the Social Security tax, which took effect on Sept. 1. In the guidance, the IRS explained that, on a biweekly pay period basis, employers may elect to defer the withholding and payment of employee payroll taxes for those earning below $4,000 during the pay period. The guidance also states that although the employer must repay these taxes between Jan. 1, 2021, and April 30, 2021, employers can arrange to collect the taxes ratably over four months from employees, or make alternative arrangements.
A number of questions have arisen following the guidance, such as how employers will recoup payments from employees that leave the company before 2021, how the deferral aligns with state and local law and what companies should do if they are unable to immediately implement the program. Due to the uncertainty around the deferrals, including how and if there will be a congressionally authorized holiday, it is expected that many companies will not elect to offer the deferral.
On Sept. 2, House Ways and Means Committee Ranking Member Kevin Brady (R-TX) said he will be introducing legislation that will entirely forgive the deferred taxes through 2020, adding that “Congress, Republicans and Democrats, [should] make clear that these payroll taxes will be forgiven.”
Congressional Democrats are taking a different approach. Led by Senate Minority Leader Chuck Schumer (D-NY) and Senate Finance Committee Ranking Member Ron Wyden (D-OR), Senate Democrats began the process of revoking the IRS guidance released at the end of August. On Sept. 2, Schumer and Wyden sent a letter to Comptroller General Gene Dodaro, who runs the Government Accountability Office (GAO), to determine whether or not the guidance “constitutes a ‘rule’ subject to CRA review on an expedited timeframe.” If GAO determines the guidance qualifies as such a rule, Democrats would need to secure a two-thirds majority in both the House and the Senate to overturn the guidance, assuming they will need to override a presidential veto. Given that it is likely not enough Republicans will support the effort, Democrats are unlikely to succeed in their CRA attempt.
Mnuchin Climbs the Hill. On Sept. 1, Treasury Secretary Steven Mnuchin appeared before the Select Subcommittee on the Coronavirus Crisis to discuss the administration’s response to the COVID-19 pandemic and the status of negotiations between the White House and Democratic congressional leaders. Contrary to some Republican lawmakers, Mnuchin reiterated his interest in reaching bipartisan agreement on another economic response package, though Democrats continue to hold firm on demands for a $2.2 trillion package. At the same time, however, he acknowledged the two sides have been unable to come closer to an agreement due to major sticking points, such as legal liability protections and state and local aid. Given these difficulties, Mnuchin repeatedly suggested lawmakers set the contentious provisions aside and move piecemeal legislation on the areas that have widespread agreement, such as more funding for the Payment Protection Program and additional stimulus payments.
Speaking to the president’s Aug. 8 payroll deferral executive memorandum, Mnuchin testified that the president remains committed to eliminating the deferred taxes, but explained the administration would need congressional authority for such a move. If legislation completely forgiving the deferred taxes is enacted, Mnuchin said general funds would be redirected so the Social Security program is made whole. Discussing the administration’s hopes for the next legislative package, Mnuchin insisted that assisting workers is a top priority for him and President Trump—whether that be through addressing the expiration of enhanced Unemployment Insurance or offering tax credits to incentive companies to hire workers.
IRS Modernization Still Wanting. National Taxpayer Advocate (NTA) Erin Collins published a number of blog posts last week in which she highlighted some of the technological shortcomings of the IRS. On Sept. 1, Collins suggested the IRS embrace recent technological advancements to assist taxpayers’ interactions with the agency, particularly during the COVID-19 pandemic. Collins urged the IRS to expand its use of email and electronic digital signatures so that the agency matches practices of private financial institutions. The same blog post also contained suggestions that the IRS improve taxpayers’ online account accessibility so the online experience is more user-friendly for taxpayers and practitioners. Finally, Collins advised the agency to adopt videoconferencing for taxpayers “to as many taxpayer-facing functions as possible.”
On Sept. 3, Collins published another post in which she explained the “desperate” need for multiyear funding for the modernization of IRS computer systems and infrastructure. She highlighted again that the IRS will need a “substantial overhaul” of its IT systems to truly be modernized according to directives enacted under the Taxpayer First Act (P.L.116-25). To implement its modernization plan, Collins said the IRS will require additional funding—$2.5 billion.
After lawmakers rushed to enact legislation, agencies are now attempting to keep up by quickly releasing regulations and other guidance. A look at select COVID-19-related implementation guidance and non-COVID-19-related guidance released during the previous week will be published here by the Brownstein Tax Policy Group.
- On Sept. 1, the IRS and Department of the Treasury released final rules (T.D.9910) for the base erosion and anti-abuse tax (BEAT). The final regulations contained a similar structure of the proposed regulations released at the end of last year, including the election to waive certain deductions.
- The IRS and Department of the Treasury released final rules on Sept. 3 on nuclear decommissioning regulations (T.D.9906). These rules regulate the deductions and contributions for trusts that are used to decommission nuclear plants.
- On Sept. 8, the IRS released Revenue Procedure 2020-41 to provide domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and liability companies in an effort to calculate their minimum effectively connected net investment income.
- Further, the IRS released Notice 2020-68 to provide guidance for the Setting Every Community Up for Retirement Enhancement Act of 2019 and the Bipartisan American Miners Act of 2019. The IRS also released Revenue Procedure 2020-40 to permit a discretionary amendment made to qualified preapproved plans or section 403(b) preapproved plans if adopted by the deadline set in the statute.