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Senate Makes More Tax Changes to Stimulus Package as Debate Begins

Posted on Mar. 5, 2021

The Senate voted to start debate on a stimulus package that would make several changes to the tax code, including limiting deductions for the compensation of highly paid corporate executive officers and expanding the employee retention credit.

Vice President Kamala Harris was needed to break a tie on the March 4 procedural vote allowing the Senate to proceed with consideration of its substitute amendment to the House-passed American Rescue Plan (H.R. 1319) on a 51-50 vote. The House passed its version of the bill February 27.

“This legislation will keep America’s families, businesses, and workers afloat, and hasten the day when our country can return to normal and our economy can come roaring back,” Senate Majority Leader Charles E. Schumer, D-N.Y., said on the floor.

The budget reconciliation process being used for the bill will allow it to pass the Senate with a simple majority vote. However, Republicans are expected to offer hundreds of amendments to stall the bill’s passage.

Democrats are also expected to offer amendments to the bill. Budget Committee Chair Bernie Sanders, I-Vt., signaled that he’ll offer an amendment to add an increase in the national minimum wage to $15 per hour. That comes after the Senate parliamentarian ruled that a minimum wage increase wouldn’t abide by reconciliation rules.

Senate Democratic Whip Richard J. Durbin of Illinois might also introduce an amendment to provide income tax relief for recipients of unemployment benefits. 

Handful of Changes

Among its changes to the House-passed bill, the Senate substitute would deny a deduction for compensation in excess of $1 million for the eight highest-paid employees — plus the CEO or CFO — of publicly traded companies. Under current law, the deduction is denied only for the three highest-paid employees.

That provision wouldn’t kick in until 2027, and it would bring in $7.8 billion over the next 10 years, according to the Joint Committee on Taxation (JCX-13-21).

The substitute also would expand use of the ERC to new small business start-ups. The change would add $1.5 billion to the cost of the bill, the JCT estimated.

Senators also amended a section eliminating the taxation of student loan forgiveness through 2025 that would cost $44 million, according to the JCT. The Senate version would lower the annual income full phaseout threshold for the $1,400 rebate checks from $100,000 to $80,000 for single filers and from $200,000 to $160,000 for married couples filing jointly.

That change was met with complaints from some Democrats. Rep. Bonnie Watson Coleman, D-N.J., argued that those making slightly above $80,000 in her district are middle-income because of the high cost of living. “People are struggling, and we’re fighting over how many people we want to exclude from the relief checks,” she said.

Lowering the phaseout threshold would save only $12 billion over the House version, according to the JCT.

The measure would temporarily dramatically expand the child tax credit and the earned income tax credit, including by sending monthly advance child tax credit payments to families.

Language in the Senate bill reflects a minor change to give the IRS flexibility to complete the process. A prior version instructed the IRS to send “monthly” payments, but Democrats changed that to “periodic” over concerns that the language would be struck down by the Senate parliamentarian.

This bill is likely only the beginning of efforts to permanently increase and expand the EITC and the child tax credit, some progressive Democrats say. House Ways and Means Committee member Suzan K. DelBene, D-Wash., said President Biden is supportive of making permanent changes to the EITC and child tax credit.

“We cannot lift children and families out of poverty for just one year,” DelBene said in a statement. With the support of Biden, she said, “we can forever alter the way our nation addresses children in poverty.”

Republicans, however, have complained that instructing the IRS to send out monthly credits would hamper the agency. Ways and Means ranking member Kevin Brady, R-Texas, argued that Democrats should be working with Republicans to find a solution to address child poverty instead of acting alone.

Still in the Bill

Senate Democrats kept a provision in the bill that would repeal the U.S. affiliated group election to allocate interest expense on a worldwide basis, effective for tax years beginning in 2021. Practitioners have argued that although the election would likely be made in 2022, on 2021 tax returns, the long-lasting implications mean that the sometimes-ignored provision deserved much more attention. The provision would save $22.3 billion over 10 years, according to the JCT.

Democrats are also looking to reduce the threshold for when third-party payment processors must report information to the IRS. Under current law, companies like eBay Inc. and Airbnb Inc. must report when people are paid more than $20,000 over at least 200 transactions. The language in the bill would drop that threshold to $600 to capture more of the money earned by independent contractors in so-called gig economy jobs.

Correction, March 11, 2021: The bill would eliminate the taxation of student loan forgiveness.

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