Over the next two weeks as Congress prepares for its long summer recess, major decisions will be made affecting the legislative tax agenda for the rest of this session of Congress and, in the case of tax reform, for 2015.

The most important near-term issue is the highway trust fund (HTF) which supports highway and related infrastructure construction and maintenance and which, absent a new infusion of cash, will run dry by mid-August, halting thousands of projects throughout the US just months before the Congressional elections. The House of Representatives and the Senate are expected this week to adopt legislation reported last week by their respective tax writing committees extending the HTF through March 2015 and to resolve differences in their respective approaches by the end of the month.

Traditionally, the HTF has been supported by taxes on gasoline and diesel fuel, but the current rates of tax on these sources is no longer sufficient to support the fund and, given a reluctance to raise fuel taxes in an election year, the tax writers have been forced to look elsewhere.

Both versions of the legislation rely on a combination of so-called “pension smoothing” provisions (allowing employers to make smaller deductible contributions to their pension plans by altering investment growth assumptions for those contributions), an extension of existing customs user fees, and a $1 billion transfer to the HTF from the leaking underground storage tank trust fund to raise the $10.9 billion needed to keep the HTF from running out of money. However, while the Senate uses these revenue sources, its pension smoothing provision raises less revenue ($2.7 billion, as opposed to $6.4 billion in the House bill) also relying on a number of tax compliance measures, including more detailed reporting by financial institutions on mortgage interest. Despite the urgency of the HTF issue and the general similarities of the House and Senate bills, there are potential pitfalls ahead as the two chambers prepare to pass their measures bill and negotiate a final deal before the end of the month.

House Republicans, wary of giving in to their Senate colleagues on tax issues, have strongly objected to the tax compliance measures in the Senate bill as “new taxes” and some Senate Democrats, notably Environment and Public Works Committee Chair Barbara Boxer (D-California), object to Senate Finance Committee Chairman Ron Wyden’s (D-Oregon) decision to agree to the House position to put additional funding through March 2015 into the HTF by means of a transfer of general revenues. Chairman Wyden’s original position was to address the HTF in a two-stage process in 2014, with A short-term extension only though the end of the year to force lawmakers to come up with a long term fix in 2014. The decision to go through Spring 2015 is likely to result in Congress deferring a permanent fix until 2015, especially if the November elections result in significant changes in the composition of Congress.

A deal on the HTF appears likely in any event. The Administration issued a tepid endorsement of the House bill as a temporary solution while urging Congress to work on long-term funding for the HTF before the end of the year.

The path to eventual enactment of the expired tax provisions is also becoming clearer. Following Senate passage earlier this year of the Expire Act, an $85 billion package of extensions of the tax provisions that expired at the end of last year and some that will expire at the end of 2014, House Leaders announced that they would take a different approach and would examine each expired provision on an individual basis. So far, however, the House has adopted legislation to extend three of the expired provisions on a permanent basis (the research credit; small business expensing; bonus depreciation) and will consider permanent extensions of a number of small charitable provisions later this week, but, given the limited amount of floor time between now and the likely early October adjournment for the elections, it appears unlikely that the House will take up many more of the expired provisions before then. Instead, there are indications that Ways and Means Chairman Dave Camp (R-Michigan) has abandoned the idea of examining each extender in favor of the ultimate goal of negotiating a deal with the Senate to make at least one of the expired provisions permanent while agreeing to extend most of the others in the Expire Act for two years.

This approach represents a major change of direction by House Republicans, and especially by Chairman Camp, who suggested extending only a handful of the expired provisions in the comprehensive tax reform draft that he released in February and instead called for many of the provisions to be repealed, including bonus depreciation, which he asked the full House to permanently extend last week. There are two main reason for this change of heart.

First, while the goal of tax reform was to exchange tax expenditures for lower rates on a revenue neutral basis, with tax reform unlikely to be enacted this year failure to extend the expired provisions will result instead in major tax increases for many businesses and individuals. As a result,Congressional leaders in both parties are under pressure to act once again on the expired provisions temporarily while deferring action on tax reform to 2015.

Second, while some lawmakers have argued that tax reform would be easier to enact if the expired provisions are left out, the opposite may be true. To the extent that the expired provisions are extended, especially on a long-term basis, their value increases the cost of the tax system (the baseline) and in so doing, may give lawmakers more to work with in trying to exchange tax expenditures for lower rates.

In the House debate last week on the permanent extension of bonus depreciation, most Democrats voted against the proposal and objected to the high cost of the provision ($287 billion). They noted that along with the cost of the two other expired provisions the House recently voted to extend permanently, the House would add more than $600 billion to the deficit,  while the Senate Expire Act would extend all of the expired provisions for a much more modest, and in their view, fiscally responsible cost of $85 billion. A number of House Democrats also noted the change in opinion on the part of House Republicans, and especially Chairman Camp, in seeking permanent extensions of some provisions hey previously had advocated discarding.

Although Republican members, most notably Representative Pat Tiberi (R-Ohio), the sponsor of the bonus depreciation measure, argued that the change of heart was due to the delay in the enactment of tax reform, the cost issue will be an impediment when the House and Senate negotiate a final extenders deal later this year. The Senate position, temporary extensions, is likely to prevail. And, while it appears increasingly unlikely that the tax extenders will be addressed before the November elections, given the collapse of efforts in the House to review each provision in depth and the failure to enact tax reform this year, there is greater optimism on the Hill that the provisions will be addressed. Nonetheless, action on the extenders should not be taken for granted and advocates for particular provisions should continue their efforts.

In his remarks at the start of the Senate Finance Committee’s markup of the Expire Act in April, Chairman Wyden stated that the uncertainty caused by the on-and-off nature of the expiring tax provisions is a compelling reason to pursue tax reform. He assured his colleagues that he would not preside again over an extenders debate; the next step would be comprehensive tax reform in which some of the provisions would become permanent and some would be discarded. Chairman Wyden, who is now shifting the Committee’s attention to tax reform, is expected at a hearing next week on international tax to articulate another compelling reason for Congress to act.

Although the Finance Committee hearing is expected to be generally on reforms of the international tax system, the focus will be on the issue of corporate inversions, a number of highly publicized transactions in which US companies seek to reduce their overall effective tax burden by shifting their place of incorporation to an overseas jurisdiction with lower tax rates, usually by merger with a foreign entity. In recent weeks, a number of high-profile inversions have been announced, sparking a debate in the media and on Capitol Hill on the need to reform the US tax system by lowering the corporate tax rate and making it easier and less expensive for US companies to bring foreign profits back into the US. As of now, the US has the highest corporate tax rate (35 percent) of any nation in the OECD.

Since becoming the Finance Committee Chairman in February, Senator Wyden has aggressively criticized the current US tax code (at times calling it a “rotting carcass that smells worse every day”) and has initiated a process within the Committee to achieve a consensus on tax reform by the late summer of 2015. While Wyden has proposed temporary measures to stem the spate of corporate inversions  immediately, his Republican ranking member, Senator Orrin Hatch (R-Utah) has objected to such measures on the grounds that the better way for the US to address the challenges posed by inversions is to adopt comprehensive reforms as quickly as possible. In the hearing next week, both Wyden and Hatch will likely  argue that tax reform is needed quickly to protect the ability of US companies to compete globally, and, for that matter, to keep US companies from moving offshore.

This week, responding to the announcement of two more inversions, Wyden stated, “If there's one of these every 72 hours, there's going to be a pretty big drumbeat to do something quickly.”

While Congress appears likely once again to adopt temporary extensions of the expired provisions and funding for the HTF, the theme that Chairman Wyden and many of his colleagues will now focus on will be the need for Congress to form a consensus around permanent reforms of the tax code, especially in the corporate and international areas, and to act on them by the latter part of 2015. They will argue that they are devoting their energies to achieving those reforms because what is at stake is no less than the future of the United States as the dominant global economic power.