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Capitol Hill Check-In: Tax Priorities in 2021

David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Capitol Hill check-in. On January 20, Joe Biden was sworn in as president of the United States for the next four years. Later that day, Vice President Kamala Harris swore in two Democratic senators from Georgia as well as her replacement from California, setting up the Democratic Party's control of the House, Senate, and White House for the first time in a decade. Here to talk about what that means for tax policy and legislation are Tax Notes Capitol Hill reporters Jad Chamseddine and Alexis Gravely. Jad, Alexis, welcome back to the podcast.

Jad Chamseddine: Thanks for having me.

Alexis Gravely: Hi. Glad to be back.

David Stewart: Now since it's on everyone's mind, let's talk about the coronavirus pandemic first. Congress passed some coronavirus relief in December, which included the $600 support payments among other measures. What's the latest you're hearing on COVID-19 relief?

Alexis Gravely: Yeah. So a couple of weeks ago, President Biden released his $1.9 trillion plan for the next relief package. It honestly isn't super tax-y as it is right now. There's the $1,400 stimulus checks of course, and then an extension of the refundable tax credits for employers who are providing paid leave and then expansion of the child tax credit and earned income tax credits. But, you know, this is only a starting point. There's no actual bill and there are a lot of details that will have to be hammered out both among Democrats and between Democrats and Republicans. So we'll have to wait and see what's different by the time they're actually poised to pass something.

And then as far as timing, it's hard to say. Of course, the Senate is about to begin former President Trump's impeachment trial, and they also still have to confirm some of Biden's cabinet nominees, so that going to take up some time. And I mean, Republicans, aren't really interested in passing another relief package right now anyway because Congress passed $900 billion in relief last month and they don't see the need to have something big so soon after that. But President Biden, he's signaling at this point that he wants something to pass with bipartisan support rather than trying to work around Republicans using budget reconciliation. So it's going to take time for them to try to find middle ground. And if that doesn't happen, then Democrats are going to have to pivot and go to budget reconciliation.

But Senator Ron Wyden, he's the Democrat from Oregon and the incoming chair for Senate Finance Committee, and one of his big priorities is unemployment insurance and the pandemic UI benefits; they run out around mid-March. And so he told reporters this week that that's sort of the benchmark for him that they need to pass something before those benefits run out in March.

David Stewart: So this is the first time in 10 years that Democrats will be in control of both houses of Congress as well as the White House. So what players are we expecting to see on the scene in charge of the taxwriting committees?

Jad Chamseddine: As Alexis just said, Senator Ron Wyden of Oregon is going to be the incoming Senate Finance Committee chair. He'll probably get that title once they officially sort of have a power-sharing agreement between Republicans and Democrats as to how many people are going to be on each committee. And the ranking member is going to be Mike Crapo from Idaho. He's a new guy. He's been on the Finance Committee. He was the chair of the Senate Banking Committee before and he had worked with Senator Sherrod Brown of Ohio, who's also on the Finance Committee. We don't really know much about Crapo's tax policy areas. He's been sort of coy on discussing these issues. At least in the beginning, it was until Georgia was decided and we haven't really spoken with him since, but we know that he has a good working relationship with Democrats. He helped pass a bill that exposes shell companies last year.

And so we know at least there are some issues that he likes to work with Democrats. On that note, we don't necessarily know where he's going to be working with Sen. Ron Wyden on perhaps some of the more aggressive tax policies that Democrats are going to be pursuing in the next couple of years at least. On the House side, we have the same players. It's going to be Richard Neal of Massachusetts heading the Ways and Means Committee and we have Kevin Brady of Texas going to be the ranking member. They've been working together now for a few years where before Brady was the chair and he passed the TCJA and Neil was the ranking member at the time, so they've worked together for a while now. They have a good working relationship, especially when it comes to things like retirement security. They've worked well together. They've passed a bill before on that, and they're probably likely going to pass another bill on improving retirement security in the next couple of years.

David Stewart: So what are some of the tax priorities that you're expecting them to take on?

Jad Chamseddine: Obviously we're going to be looking at Democrats because they are in control. So you're going to see a lot more, I would say, aggressive tax policies from Democrats. We know that a priority for Richard Neal is going to be expanding the EITC, the earned income tax credit, and the child tax credit, the CTC. It's one of his main priorities. He told me last summer he's going to beef that up if that's the last thing he's going to do while chair. I don't know where he's going, probably nowhere, but that's definitely a priority for him and many, many Democrats. We know that Sherrod Brown was on the Finance Committee and Michael Bennett, who ran for president and also is on the Finance Committee. They've been working on proposal on this for many years now. So this is definitely going to be an issue that Democrats are going to be improving upon, especially with what we saw with the pandemic and low-income households being affected badly by this.

So we know that this is what Democrats are going to try to improve over the next two years. Obviously we know that they're going to try to roll back some TCJA policies. We don't necessarily know where that's going to be because it's not entirely clear whether they want to increase the corporate tax rate and to how much. Over the past couple of years I've spoken with many Democrats who were not entirely sure where they fall upon that. You know, whether it's going to be 25 percent or going to 28 percent. It's fair to say that they all believe that they're not going back to the pre-TCJA 30s percent, [like] 35 or 38 percent.

And another issue is international taxation. We know that Wyden has sort of hammered that home and Lloyd Doggett on the Ways and Means Committee has been a big proponent. They feel that the international tax code has not been written in favor of domestic companies that still allows corporations to send jobs overseas and for better tax breaks. So they want to stymie that in the next couple of years.

And the reason why I say two years, because we obviously don't know what's going to happen in 2022. Democrats may lose the Senate and so they're looking at the short window of two years. We know that Yellen said during her confirmation that they don't want to increase corporate taxes or taxes on families during the pandemic, as we don't know obviously when the pandemic is going to end officially. But we're probably going to say within the next year, there's not going to be any changes to tax rates. And probably we may see that in 2022, we may see some sort of talking about increasing those rates.

David Stewart: Now, one of the biggest legislative victories of President Trump's tenure was the Tax Cuts and Jobs Act, which you mentioned a bit ago, and Democrats have vowed to dismantle it. So are we seeing any legislative proposals to do that?

Jad Chamseddine: You know, besides the corporate tax rates issue, there hasn't been many proposals that have come about that are taken seriously by lawmakers that are going to dismantle the TCJA. We know that many Democrats have said that they're not interested in going back and taking apart the TCJA, but they do want to have fixes. And so corporate tax is obviously is very high on that range. We've heard that the estate tax exemption could be lowered from it's currently set up at $11.2 million, something along those lines. And pre-TCJA, it was at $5.5 million, I think, probably with inflation $5.7 million now.

It could drop back down and we've had proposals from Sen. Bernie Sanders and some of the more progressive wing that they want to see that exemption even lower further down to around the $3 million mark to capture sort of a wider base and gets more money and could be a big revenue raiser as well for some of the other policies that they want to pursue like the CPC and the EITC just to pay for it. So that's a big issue for them that, you know, you're already talking about rich people keeping their money in trusts for all eternity and having their children feed off of that for the rest of their lives and their grandchildren's lives. And that's sort of putting a small stop to that. We're going to see Republicans obviously cry foul because they've wanted to get rid of the estate tax for the past 20 years or so. Those are I think big priorities.

And I think one of the main priorities for Democrats in the next couple of years, probably in the next year, and we may even see this in a pandemic relief bill is getting rid of the SALT cap. We know that this is a touchy issue with some Democrats because it's seen as a bailout for some of the wealthier coastal elites as they're called. But it is a big issue for Democrats from New York, from New Jersey, from California. And obviously Senator Chuck Schumer is one of those that wants to get rid of the SALT cap. And now that he's set as majority leader, you may see that included in a reconciliation bill of some sort. It is a big issue. It's going to continue to be a big issue.

I've spoken with a few lawmakers that have said they need to decide soon whether this is going to be a big priority for them or whether they're going to sort of wait for another year before they stuff that into another tax reconciliation bill maybe that we could see in 2022. But it is definitely something that there's going to be some jockeying over in the next few months or so.

David Stewart: All right, well, along the subject of jockeying here, we're talking about a Senate that is 50-50 split with the tie-breaker vote from the vice president. So, realistically, how much can get done in a Senate with a bare majority?

Alexis Gravely: Well with the filibuster, you need 60 votes to pass legislation. So with the slim majority, Democrats can't just pass everything on their own. They're going to need some Republican senators to support whatever it is they're trying to get done. There's been some talk about Democrats abolishing the filibuster to get around that 60-vote threshold, but for obvious reasons that's controversial and it's seeming less likely now because more moderate Democrats like Joe Manchin of West Virginia and Kyrsten Sinema of Arizona have come out and said that they would not vote to get rid of the filibuster.

Alexis Gravely: And so then the other option is budget reconciliation, which can be a complex process, but it can push legislation through with only a simple majority. That's how the Tax Cuts and Jobs Act was passed in 2017. But there are a lot of rules that come with budget reconciliation and it can't be used often. For example, everything in the bill has to have some effect on the budget. So any extraneous provisions would have to be excluded, and it can increase the deficit beyond the 10-year budget window or include anything that would affect the Social Security program.

So there are other rules in addition to those, but once you get past all the rules, whatever the bill is, would still have to garner broad support because Democrats are operating on such a slim majority that they can't really lose any votes. I mean, it depends on what they're trying to get done as to how much they can do. Obviously some things can get more bipartisan support than others, but right now it's certainly not looking like things will be smooth sailing for Biden's or the Democrats' legislative agenda.

David Stewart: Now although President Trump no longer holds office, the controversy over disclosure of his tax returns and financial information doesn't seem to have gone away. Jad, could you update us on that?

Jad Chamseddine: Yeah, so obviously there've been a lot of lawsuits to get to Trump's tax returns one way or the other. There's one currently ongoing in New York and that's probably the closest they've gotten so far to getting the tax returns. And whether those tax returns are going to made public is a whole other issue. But the one in New York is a criminal procedure sort of seeing as to whether Trump has used money, has evaded certain laws, has cheated on his business taxes in a certain way.

The one that we've been interested in is one that pits the House Ways and Means Committee, the House in general, versus the Treasury Department. Now when the Democrats got the majority in the House in 2019, they launched a suit to force the Treasury Department to hand over Donald Trump's tax returns so they can oversee six years of his tax returns to see whether he's been audited correctly by the IRS and sort of an oversight over president's tax returns and the vice president's tax returns. And by that they used section 6103(f) of the code.

And obviously the Treasury Department said, "You're not getting his tax returns," at the time. Secretary Mnuchin was in charge at the Treasury and backed by the DOJ. Now that lawsuit has stalled for years now, so it's been 2019. There's been issues about standing. There's an issue whether the House can bring a suit like that, and it hasn't really moved anywhere. What we're seeing now is recently there was an update to the case where the president's lawyer, his personal lawyer wanted to know whether the House is going to bring another suit, whether they're going to re-up their suit to force the Treasury Department to release the president's tax returns to the Ways and Means Committee, to Chair Neal, and whether the Justice Department, obviously now under new leadership or going to be under new leadership, whether it's going to change his position in the matter.

And we obviously don't know what's going to happen. And we don't know whether the Treasury Department is going to relent and give Neal the tax returns. But at the same time, the rule also allows for any taxwriting head to demand the tax returns from Treasury Department. So now that Ron Wyden is going to become Senate Finance Committee chair, he also has the power to demand the tax returns from Treasury. So now you have two chairs that can demand the tax returns from Treasury. And on top of that, from the experts that we've spoken with, the public doesn't need to know, nor does Donald Trump need to know whether the tax returns have been given to the chairs.

Another thing obviously at this point is even if they give the tax returns to the Ways and Means Committee or the Senate Finance Committee, it doesn't mean the public is going to know what's in there. And that would require a vote in the House to see whether they can publish some parts of Donald Trump's tax returns. If they find fault with them, if they find that there are many issues that the IRS did not take into consideration, that the IRS sort of turned a blind eye, that there's been pressure put on Treasury from Donald Trump while he was in office to not go after him on some of the problems with his tax returns, that's going to be a whole other issue that we could see play out in the next year or so.

David Stewart: Before we wrap up, I do want to ask you a bit about what it's like reporting on the Hill these days between the coronavirus and in the post-January 6 insurrection period. What is it like doing your job?

Jad Chamseddine: Yeah, it's been interesting. I think first came the coronavirus and I think no one really knew how to navigate it at the beginning. You sort of have to keep your distance from the lawmakers when you're interviewing them. You form semi-circles when a lawmaker would talk to you compared to the previous days when it was a huddle and a sort of free-for-all. You mobbed them. And so now I think you have more respect for the space for each other's space to a certain degree. Asking questions in masks is also sometimes tough because you're walking and you're talking and sometimes you don't necessarily hear the answers that they're giving. And so that was sort of tough.

Jad Chamseddine: And then there was always a new coronavirus outbreak in the House and in the Senate. Every once in a while, you'd have a senator or House lawmaker get the coronavirus and then you have to make sure that you didn't talk to them beforehand. That happened to me when Senator Rand Paul got the coronavirus and I spoke to him probably the day before he told everybody that he had the coronavirus. I had to isolate for a couple of weeks and then came in after the insurrection. I think now what you're seeing is a lot of national guards around the building.

Alexis Gravely: Yeah. There's a lot of fencing outside as well. There's several different layers. And actually when I went up this week, I had a really hard time trying to figure out how to get out of the Hill because it's very restricted as far as entering and exiting. So it was easy to get lost before. It is even easier now.

David Stewart: Well, we really appreciate what you do, especially with what you're dealing with these days. Jad, Alexis, thank you for being here.

Jad Chamseddine: Thank you for having me.

Alexis Gravely: Thanks for having us.

David Stewart: Now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from his home is Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?

Jasper Smith: Thanks, Dave. In Tax Notes Federal, Bradley Borden and Douglas Longhofer explore the disparities between book income and tax income allocations that can result after a partner contributes section 704(c) property to a partnership or a partnership is required to revalue its assets. Edward Zelinsky argues that the rules applied to private foundations should also govern donor-advised funds. In Tax Notes International, eight authors with Asia-Pacific's Leading Tax Advisors examine commonly used vehicles for investment fund purposes in Asia. Michael Birk examines a German court decision about the proper qualification of interim gains that are recorded when a taxpayer acquires capital investments during a fund’s fiscal year. On the Opinions page, Joseph Thorndike discusses the history of the three-martini lunch and the broader debate over tax deductions for business meals. Nana Ama Sarfo looks at expected tax transparency developments in 2021. And now, for a closer look at what’s new and noteworthy in our magazines, here is Tax Notes State Editor in Chief Jéanne Rauch-Zender.

Jéanne Rauch-Zender: Thank you, Jasper. I'm excited to have Jeffrey Friedman, partner with Eversheds Sutherland join me to discuss his Tax Notes State article "The Complexities of State Taxation of Digital Advertising". Welcome to the podcast, Jeff.

Jeffrey Friedman: Thank you so much for having me. Appreciate it.

Jéanne Rauch-Zender: Our pleasure. To begin, can you tell us a little bit about your article?

Jeffrey Friedman: Sure. We're noticing a disturbing trend that started decades ago frankly, and it was lying dormant, thank goodness, for many years, but now it's a trend again. And that is the taxation of digital advertising or even advertising more generally. Primarily we think it's really bad tax policy and we think it's also, in many respects, illegal or unconstitutional.

We thought the article was particularly timely given the recent state events in Maryland and New York and some other states that are seriously considering texting digital advertising. So we thought now would be a great time to kind of revisit the topic in a more thoughtful, longer article format. And we appreciate State Tax Notes for publishing it.

Jéanne Rauch-Zender: Agreed, Jeff. You provide great analysis on initiatives out of Florida, New York, and Texas. What led you to write on this topic now?

Jeffrey Friedman: The recent developments in New York and Maryland in particular have us concerned. But it's not limited to those two states as the article notes. We believe that many states are watching what's going on in those states both legislatively and judicially. For instance, legislation was just introduced I think in New York on January 7, another bill to tax digital advertising. Of course as most of your listeners know, Maryland already passed that digital advertising tax only to have it vetoed by the governor and is now considering an override of that veto next month. So we thought now would be a good time to remind stakeholders and others regarding the problems with taxing digital advertising as legislatures are concerned, considering those impositions today.

Jéanne Rauch-Zender: Absolutely. And I agree Tax Notes State is the perfect platform for that. Where can our listeners find you online?

Jeffrey Friedman: Primarily on my law firm's website, which is www.stateandlocaltax.com. It's our state local tax blog at Eversheds Sutherland. It's the easiest one to remember. Our longer website is www.eversheds-sutherland.com, but statelocaltax.com should do it. And we have all our content published there too, including reprint rights from State Tax Notes.

Jéanne Rauch-Zender: Well, thank you so much for joining me today. Jeff, it's been a real pleasure.

Jeffrey Friedman: Thank you for having me. I really enjoyed it.

Jéanne Rauch-Zender: You can find Jeff's article online at www.taxnotes.com and be sure to subscribe to our YouTube channel Tax Analysts for more in-depth discussions on what's new and noteworthy in Tax Notes. Again, that's Tax Analysts with an S. Back to you, Dave,

David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.

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