Tax Package Hits Snag in Senate

After a brief respite of bipartisanship in January, the border security and foreign aid package is officially dead in the water, and the Senate’s busy legislative calendar has effectively stalled the bipartisan tax package that the House passed last week. In other words, everything is back to normal in D.C.

On Wednesday, Jan. 31, the House passed, by a strong margin of 357-70, a bipartisan tax package that extended the increased child tax credit for another two years as well as several business tax provisions that were part of the Trump tax cuts in 2017. Most notably:

• Research & Development Tax Deduction: The 2017 Tax Cuts and Jobs Act included a ‘pay-for’ that changed the R&D tax deduction starting in 2023 by requiring businesses to deduct their R&D expenses over a five-year period, rather than in the year in which the expense was incurred. The tax package averts this change for another two years, allowing businesses to continue to fully deduct their R&D expenses for the tax year in which they are incurred.
• Bonus Depreciation: Bonus depreciation allows businesses to deduct a significant portion of certain kinds of expenses, such as real estate rental properties, vehicles, computer equipment, and office furniture, in the year in which they are incurred. The 2017 tax bill increased the bonus depreciation from 50% to 100%, however that increase expired in 2023. The bill retroactively extends this increase through 2026, giving businesses another two years to make significant capital investments and fully write them off in the same year.

The business tax cuts amount to an estimated $33 billion, and along with the roughly $32 billion child tax credit increase, the bill represents a significant injection of cash into the economy. This would go a long way towards cementing the economy’s ‘soft landing’ following last year’s interest rate hikes and high inflation rates.

Unfortunately, while many thought that the House would be the larger obstacle, the Senate calendar is proving equally vexing. After failing to pass the bipartisan border security and foreign aid package, the Senate is leaving for a two-week recess at the end of the week. They will come back on Feb. 26 and immediately have to tackle the expiring government funding bills which come due on March 1 and March 8. Realistically, that means the Senate won’t have time to vote on this package until mid-March, which is getting perilously close to the April 15 tax deadline and would be very challenging for the IRS to implement.

Adding to the uncertainty, Senator Crapo, the lead Republican on the Senate Finance Committee, has spoken out against the bill and specifically against the increases to the child tax credit. He is hoping to have an open amendment process in the Senate, and if any new amendments are adopted, it would require the House to pass the bill again, a prospect that is far from guaranteed. While Senate Democrats could ignore Sen. Crapo’s request, this would jeopardize Republican support for the bill and could cause it to fail to get the 60 votes it needs to advance.

The bottom line: In short, what looked like a likely bipartisan win is now likely to be a bipartisan flop.