A Look Ahead: After Policy Wins, White House Focus Turns to Implementation
If 2022 was a year of legislative success for the Biden administration, the next 12 months will see the White House grapple with the harder task of turning tax policy into action.
Halfway through his first term, President Biden can claim considerable progress on his tax vision with the passing of the Inflation Reduction Act (IRA, P.L. 117-169), which introduced a series of tax credits for clean energy development, a 15 percent corporate alternative minimum tax rate, and a 1 percent tax on stock buybacks.
Also, Democrats, with the support of a few Republicans, passed the CHIPS and Science Act of 2022 (P.L. 117-167), which provides tax incentives to boost domestic production of semiconductors.
Despite the measures seeming to tick several boxes on Biden’s economic agenda — boosting the green energy transition and bolstering opportunities for American workers while raising taxes on large corporations and wealthy individuals to pay for it — the White House will have to ensure the policies are both feasible in practice and compatible with other administration goals.
Add to the mix a Republican-controlled House with the potential to stifle Biden’s agenda, and 2023 could turn into a tricky year for the president.
Year of Implementation
The IRA, arguably the most consequential legislation passed in 2022, relies primarily on tax measures to reach policy goals.
Of the $369 billion allocated for climate-related investments in the IRA, $270 billion is in the form of tax credits.
Most of the energy tax subsidies stipulate strict domestic content and labor requirements, with the intention of onshoring production and increasing manufacturing jobs in the United States.
The bill also contains a 15 percent corporate AMT on companies with annual profits in excess of $1 billion, a 1 percent excise tax on stock buybacks in excess of $1 million per year, and a new limitation on the deductibility of excess business losses for some passthroughs.
The IRS was also a major winner in the legislation, securing $80 billion in additional funding over 10 years. Of that money, $46 billion was earmarked for enforcement, with the rest going to efforts to improve customer service, modernize technology, and support operations. According to the Congressional Budget Office, the increase in resources is expected to yield about $180 billion in additional revenue for the government over a decade.
In the coming months, how will the Biden administration ensure the tax provisions and IRS funding are executed effectively and with minimal side effects?
“2023 will certainly be a year of implementation,” Rachel Snyderman of the Bipartisan Policy Center told Tax Notes. “There is going to be a vested interest from the administration to demonstrate to taxpayers that these measures are improving their daily lives.”
Guide the Way
The White House has made issuing guidance on the tax provisions a top priority.
On December 16 the Biden administration released a guidebook on the energy tax credits in the IRA, and on December 19 Treasury announced a timeline for guidance on the corporate AMT and stock buyback measures.
Treasury and the IRS have issued numerous requests for public comment on the tax credits and conducted a series of roundtables with groups invested in or affected by the subsidies.
However, that hasn’t stopped growing concerns about some of the measures.
In particular, Europeans have been irked by the IRA tax credit for the purchase of electric vehicles.
Promoted as part of the Biden administration’s Made in America industrial strategy, the credit — worth up to $7,500 per purchase — aims to entice consumers to buy EVs while also encouraging investment in the country’s clean energy supply chain, from battery production to parts.
The credit requires EV assembly to be performed in the United States, 50 percent of EV batteries to come from North America (reaching 100 percent by 2028), and battery content to be either domestically sourced or from a free trade partner.
The provisions have sparked a backlash from the EU — which doesn’t have a free trade agreement with the United States — given the importance of the American market to Europe’s automobile industry.
Another looming issue for the administration is the limits of the corporate AMT.
While the 15 percent rate is the same rate as the OECD-brokered global minimum tax deal agreed to in 2021, some countries have insisted that the corporate AMT included in the IRA doesn’t bring the United States into compliance with pillar 2.
“It is important to move forward with the global minimum tax deal,” Jean Ross of the Center for American Progress told Tax Notes, pointing out the undertaxed profits rule in the agreement, which adds a top-up tax to signatories that don’t implement the 15 percent minimum tax. “If other countries implement it [pillar 2], there is a risk some revenue is taken away from us.”
The EU recently reached a deal to implement pillar 2, and the OECD expects the measure to start taking effect in 2023.
With Republicans strongly opposed to the agreement, it remains to be seen how the Biden administration will bring the United States into compliance without having to go through Congress.
On December 27 the IRS announced (Notice 2023-7) its intention to issue proposed regulations addressing the application of the corporate AMT.
Keep the Receipts
Stakeholders will also be paying considerable attention to how the administration reshapes a newly funded IRS.
In its pitch to secure more money for the agency, Treasury argued that a lack of resources was the primary reason behind years of dismal customer service and feeble enforcement.
Now that the IRA has provided more funding, the Biden administration will have to ensure taxpayers see a tangible difference in their interactions with the agency.
“It was a tough battle to get the money, but now they are going to be under a magnifying glass,” Ross said.
Treasury Secretary Janet Yellen commissioned the IRS to produce an operational plan on how it intends to use the resources, saying it was “key to ensuring the public and Congress are able to hold the agency accountable as it pursues needed improvements.”
Republicans, meanwhile, have made no secret of their opposition to the new funding and stated their intention to scrutinize the agency’s new resources once they take control of the House.
“The administration will be spending a lot of time fending off Republican efforts to cut IRS spending,” Howard Gleckman of the Urban-Brookings Tax Policy Center told Tax Notes.
Gleckman also noted that Biden’s pick to run the IRS, Daniel Werfel, still needs to be confirmed.
“They got to get Werfel confirmed. . . . It will be very difficult to get any of this [IRS funding plan] done with an acting commissioner,” Gleckman said.
Less Conversation, More Action
While there are still tax proposals Biden and fellow Democrats hope will pass in Congress in 2023, such as the expansion of the child tax credit that failed to make it into the year-end omnibus bill, producing results on the measures passed in 2022 will be top of mind for the White House over the next year.
The administration faces an early test with tax season just around the corner.
“Tax time is going to be the moment,” Snyderman said, pointing out that taxpayers will want to see a return on their investment in the IRS. “Taxpayers are going to ask: ‘Is filing faster? Is the wait time shorter if I call?’”
|Subject Areas / Tax Topics|
Tax Notes Int'l, Jan. 2, 2023, p. 136
109 Tax Notes Int'l 136 (Jan. 2, 2023)
Tax Notes Federal, Jan. 2, 2023, p. 28
178 Tax Notes Federal 28 (Jan. 2, 2023)
|Tax Analysts Document Number|