March 12, 2021

Tax News & Views Capitol Hill briefing. March 12, 2021

In this issue:

Biden signs American Rescue Plan into law ...... 1 Taxwriters preview ‘Build Back Better’ debate at Ways and Means subcommittee hearing ...... 3 Neal, Pascrell push for extended 2021 tax filing season ...... 5 Biden to nominate Batchelder, Davidson for Treasury posts ...... 7 Deloitte Tax looks at COVID-related changes affecting compensation and benefits, Qualified Opportunity Funds ...... 8

Biden signs American Rescue Plan into law

President Biden on March 11 signed the American Rescue Plan into law, capping an eight-week sprint by congressional Democrats and the White House to enact the sweeping $1.9 trillion tax-and-spending package aimed at addressing the continuing economic and health impacts of the coronavirus pandemic. URL: https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR1319EAS.pdf

Tax News & Views Page 1 of 10 Copyright © 2021 Deloitte Development LLC March 12, 2021 All rights reserved. The new law, among other things, extends and enhances a number of current-law tax incentives for businesses, provides another round of direct economic impact payments for certain individuals, temporarily enhances several tax credits aimed at low- and middle-income workers and families, and provides funding relief for cash-strapped multiemployer and single-employer pension plans. It also includes a handful of revenue offsets that were added in large part to ensure the broader measure complied with budget reconciliation rules under which the bill was passed.

On the spending side, the law includes substantial assistance to state and local governments, increased funding to speed vaccine production and distribution, another extension – through September 6, 2021 – of the federal supplement to state-level unemployment benefits, plus additional funds for housing and nutrition assistance.

For a more extensive overview of the final version of the American Rescue Plan, including a detailed discussion of its revenue provisions, see Tax News & Views, Vol. 22, No. 11, Mar. 10, 2021. (Also see separate coverage in this edition for an alert from Deloitte Tax addressing compensation and benefits provisions in the new law.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210310_1.html

What’s next?

Enactment of the American Rescue Plan marks the completion of the Biden administration’s first major fiscal initiative.

Attention is likely now to turn to an economic recovery package – dubbed by the White House as the “Build Back Better” plan – that the president and congressional Democrats hope to move later this year. The Build Back Better plan is expected to emphasize infrastructure investment and climate change mitigation, while potentially also calling for additional health care spending and incentives for research and development and domestic manufacturing. (See separate coverage in this issue for details on a House Ways and Means subcommittee hearing on the potential role of the tax code in addressing infrastructure issues.)

But many critical questions remain unresolved at this point – including the overall price tag of the potential package and the extent to which it should be paid for, if at all, through tax increases. These issues could help determine whether Democrats and Republicans are able to work together on a bipartisan bill or whether Democrats again attempt to leverage the budget reconciliation process to eliminate the need to gain support from congressional Republicans. (To utilize reconciliation, congressional Democrats would have to adopt a budget resolution for upcoming fiscal year 2022 – a process that itself could prove challenging due to the varying fiscal views of moderates and progressives within their caucus.) The concerns of certain moderate Democratic senators notwithstanding, changing the Senate’s filibuster rule (the procedural rule that requires 60 votes to end debate) also has not been entirely ruled out.

We may get a clearer idea of the tax and spending proposals President Biden intends to pursue when he releases his budget proposal for fiscal year 2022 later this spring.

Taxwriters preview ‘Build Back Better’ debate at Ways and Means subcommittee hearing

A March 11 House Ways and Means Select Revenue Measures Subcommittee hearing on “tax tools to help local governments” provided a possible table-setter for the upcoming congressional debate over President Biden’s yet-to-be-released COVID-19 economic recovery package known as the “Build Back Better” plan.

Although specifics of the Build Back Better plan are scarce, the president has indicated that it will emphasize infrastructure investments, health care spending, and climate change mitigation, and may also include incentives for research and development and domestic manufacturing.

Economic growth through infrastructure investment

Subcommittee Chairman Mike Thompson, D-Calif., noted in his opening statement at the hearing that the COVID-19 pandemic has left many US cities and counties facing the twin threats of declining revenues and an increased demand for services, which can be addressed through “substantial” federal investments in infrastructure projects.

To that end, Thompson said he hopes to expand on the Moving Forward Act, a $1.5 trillion package approved in the House last year that called for a five-year reauthorization of highway and mass transit spending, as well as large outlays related to upgrading schools and child care facilities, expanding the nation’s stock of affordable housing, delivering broadband Internet access to underserved communities, upgrading drinking water and wastewater infrastructure, modernizing the electric grid to accommodate more renewable energy sources, investing in health care- and postal service-related upgrades, and boosting Amtrak funding to accommodate upgrades and expansions of passenger rail service.

On the tax side, that legislation included a number of proposals intended to spur private investment in infrastructure, housing, and low-income neighborhoods, such as reinstating tax credit bonds similar to the now-expired Build America Bonds program; reinstating the tax-exempt status of interest on advance refunding bonds, which was repealed as part of 2017’s Tax Cuts and Jobs Act (TCJA, P.L. 115-97); and permanently extending the new markets tax credit and enhancing the low-income housing tax credit. It also proposed a long list of tax incentives aimed at encouraging renewable energy and energy efficiency. Notably, the Moving Forward Act did not call for an increase in fuel excise taxes or other significant tax or spending offsets to cover the anticipated reduction in federal receipts resulting from the new and expanded tax incentives. (For additional details, see Tax News & Views, Vol. 21, No. 33, June 26, 2020.) URL: https://newsletters.usdbriefs.com/2020/Tax/TNV/200626_1.html

Tax News & Views Page 3 of 10 Copyright © 2021 Deloitte Development LLC March 12, 2021 All rights reserved. At the hearing, witnesses speaking on behalf of state and county governments – including Stephen K. Benjamin (representing the US Conference of Mayors), Kevin Boyce (representing the National Association of Counties), Elizabeth Reich (chief financial officer for the City of Dallas), and Randy Howard (of the Northern California Power Agency), all of whom were invited by the panel’s Democrats – agreed that bringing back tax credit bonds and restoring the tax exemption for advance refunding bonds would make it easier for localities to secure affordable funding for infrastructure projects.

“Keeping infrastructure costs low is critical to job creation and infrastructure investments that are the backbone of our economy,” Benjamin noted in his written statement.

They also uniformly called for permanently extending the new markets tax credit and repealing the current- law cap on the deduction for state and local taxes (SALT).

Possible areas of bipartisan agreement

Subcommittee ranking member Adrian Smith, R-Neb., agreed that the tax code can be “a valuable tool” to support infrastructure investments and noted that the Tax Cuts and Jobs Act “intentionally” retained the tax- exempt status of municipal bonds “because of their importance in helping communities meet their basic infrastructure needs.”

Smith added that although the TCJA repealed the tax exemption for interest on advance refunding bonds, he would be open to considering “a smarter approach that avoids the stacking of loans and trims the cost to the federal taxpayer.”

There is also bipartisan support, Smith said, for economic development incentives such as a permanent extension of the new markets tax credit and an expansion of the TCJA’s Qualified Opportunity Zone program – although he cautioned that Congress should not enhance these incentives without first ensuring that they are working as intended.

One issue unlikely to attract Republican support would be repealing the cap on the SALT deduction, Smith said.

Smith also noted that the witnesses at the hearing generally reflected the interests of larger suburban and urban areas and suggested that the subcommittee consider holding a separate hearing focused on the infrastructure needs of smaller communities and rural areas.

The sole witness invited by the Republicans – Michael Hendrix of the Manhattan Institute – agreed that Congress has a unique opportunity to rebuild infrastructure and restore distressed communities, but he noted that the economic impact of the pandemic has been uneven, with some localities seeing an increase in revenues rather than a decline. He urged lawmakers to “avoid quick fixes that result in waste and federal micromanagement.”

Tax News & Views Page 4 of 10 Copyright © 2021 Deloitte Development LLC March 12, 2021 All rights reserved. Hendrix also told the panel to remember the potential role of the private sector in addressing infrastructure issues.

“With interest rates at historic lows, the private market has been eager to back state and local bond issuances on favorable terms, all without the need for overly generous federal subsidies,” he said.

Finance Committee to look at tax code and domestic manufacturing

We could get a glimpse of the future debate over another possible component of the president’s Build Back Better agenda at an upcoming Senate Finance Committee hearing to consider the “effect of the US tax code on domestic manufacturing.”

The hearing is scheduled for March 16. The witness list as of press time includes George S. Davis of the Intel Corporation, Jonathan Jennings of the Ford Motor Company, Jay Timmons of the National Association of Manufacturers, and Michelle Hanlon of the Massachusetts Institute of Technology.

— Michael DeHoff Tax Policy Group Deloitte Tax LLP

Neal, Pascrell push for extended 2021 tax filing season

The COVID-19 pandemic led to the filing deadline for the 2020 tax season being delayed from April 15 to July 15, but a push by some on Capitol Hill for a similar move this year has so far failed to yield a similar result.

Pandemic issues, late tax code changes

House Ways and Means Committee Chairman Richard Neal, D-Mass., and Oversight Subcommittee Chairman Bill Pascrell, Jr., D-N.J., on March 8 pointed to the ongoing health emergency in calling on the IRS to extend the filing season. In their joint statement, they cited the lower-than-usual numbers of returns filed and processed by the end of February – down 25 percent and 31 percent, respectively – as well as the fact that only 27 percent of calls to the IRS were being answered. URL: https://waysandmeans.house.gov/media-center/press-releases/unprecedented-conditions-neal-pascrell-urgently- demand-irs-extend-2021

“We stand in the midst of the most important tax filing season in recent memory, and taxpayers cannot get the help they need from the IRS,” the chairmen said.

The two also argued that the massive American Rescue Plan signed by President Biden March 11 makes significant changes to tax law – for example, it includes a new exclusion from gross income for 2020 for up to $10,200 in unemployment insurance benefits received by certain taxpayers – that will require time for

Tax News & Views Page 5 of 10 Copyright © 2021 Deloitte Development LLC March 12, 2021 All rights reserved. taxpayers to research and fully understand. (For additional details on the American Rescue Plan, see Tax News & Views, Vol. 22, No. 11, Mar. 10, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210310_1.html

Some outside organizations, including the American Institute of CPAs (AICPA) and the National Association of Tax Professionals, have also urged a delay, with the AICPA noting in a March 4 letter to IRS Commissioner Charles Rettig that recent legislation means “many IRS forms are still not available for electronic filing which has also caused a state delay in releasing forms.” URL: https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/56175896-filing-deadline-for- the-2020-tax-year-final.pdf

Delayed filing season = delayed refunds?: But organizations such as the Federation of Tax Administrators (FTA), which represents state revenue agencies, and the leading private-sector tax software companies have advocated for keeping the April 15 date. The FTA said in a statement March 10 that a delay would be costly for state and federal tax administrators and others involved with tax filing. The software firms, under the banner of the American Coalition for Taxpayer Rights, also argued that an extended filing season could mean a longer wait for taxpayers to receive refunds, and both groups say a longer season can confuse taxpayers.

Rettig made this latter point himself last month, when he said the IRS did not plan to extend the filing season.

“Keep in mind, it creates a lot of confusion for taxpayers,” he said during a February 23 House Appropriations subcommittee hearing. “It also backs up the Internal Revenue Service.”

Rettig also noted that taxpayers can file for extensions or can amend their returns if necessary. He has not made any recent public statements in response to the demand from Reps. Neal and Pascrell.

So far, neither Senate Finance Committee Chairman Ron Wyden, D-Ore., nor the top Republican taxwriters in the House and Senate have weighed in on whether to extend this year’s filing deadline.

Oversight subcommittee hearing planned: Rep. Pascrell also announced this week that the Ways and Means Oversight Subcommittee will hold a hearing on the 2021 filing season with IRS Commissioner Rettig on March 18, where this subject is sure to take center stage.

Neal takes helm of Joint Committee on Taxation

In other taxwriting committee developments, Ways and Means Chairman Neal on March 9 was named as the chair of the bicameral Joint Committee on Taxation (JCT) for this session of the 117th Congress. The top spot at the JCT rotates between the chair of the House Ways and Means Committee and the Finance Committee each year, with the lead House taxwriter taking on the first half of each Congress.

The nonpartisan committee is intimately involved with all tax legislation, helping lawmakers and congressional staff develop and analyze proposals, providing official revenue estimates, drafting legislative histories for tax bills, and undertaking investigations of various aspects of the federal tax system.

Neal also recently announced that the Ways and Means Democrats are taking on a new Racial Equity Initiative aimed at addressing “the role of racism and other forms of discrimination in perpetuating health and economic inequalities.” Neal appointed taxwriters Terri Sewell of Alabama, Jimmy Gomez of California, and Steven Horsford of Nevada to lead the working group, which is tasked with making recommendations on “justice- forward legislation” for the committee.

“This working group will ensure that policy proposals – including health care, family and worker support, taxes, and many more – considered by the committee address economic and social inequities and advance racial justice,” Horsford said in a statement announcing the initiative.

In January, Ways and Means Democrats published a report entitled “Something Must Change: Inequities in US Policy and Society,” as well as a framework of policy pillars and priorities for legislation. In the economic equity area, the framework included approaches such as eliminating barriers to work and job training caused by poverty and systemic racism, extending the work opportunity tax credit, and guaranteeing paid leave for all US workers. (For prior coverage, see Tax News & Views, Vol. 22, No. 2, Jan. 15, 2021.) URL: https://newsletters.usdbriefs.com/2021/Tax/TNV/210115_2.html

— Storme Sixeas Tax Policy Group Deloitte Tax LLP

Biden to nominate Batchelder, Davidson for Treasury posts

In two much-anticipated Treasury Department appointments, President Biden announced March 11 that he will nominate Lily Batchelder as the assistant secretary for tax policy and Jonathan Davidson as the assistant secretary for legislative affairs. Both have spent time in senior roles on Capitol Hill and assisted with the Biden administration’s transition process.

Batchelder is currently a tax law professor at New York University, where her work focuses on “personal income taxes, wealth transfer taxes, business tax reform, retirement savings, social insurance, and the effects of fiscal policy on economic insecurity, income disparities, and intergenerational mobility,” according to the Biden administration’s announcement. Working to reduce income inequality is something that both the administration and congressional Democrats have cited as part of their tax policy goals.

After time in tax law practice at Skadden, Arps, Slate, Meagher & Flom and a previous stint at NYU, Batchelder spent 2010 to 2015 in Washington first as the Democrats’ chief tax counsel at the Senate Finance Committee under then-Chairman Max Baucus, D-Mont., and then as deputy director of the White House National Economic Council and deputy assistant to President Obama.

Tax News & Views Page 7 of 10 Copyright © 2021 Deloitte Development LLC March 12, 2021 All rights reserved. Deputy Assistant Secretary for Tax Policy Mark Mazur is expected to serve as acting assistant secretary until Batchelder is formally nominated and confirmed by the Senate.

Davidson has spent more than two decades working in the Senate, where he currently serves as chief of staff to Finance Committee member Michael Bennet, D-Colo. Previously, he was chief of staff to then-Sen. Paul Sarbanes, D-Md., and Rep. John Sarbanes, D-Md., and chief counsel to Sen. Mark Warner, D-Va.

During the Biden administration’s transition, Batchelder headed up the IRS transition team and Davidson led the economic nominations confirmation team.

— Storme Sixeas Tax Policy Group Deloitte Tax LLP

Deloitte Tax looks at COVID-related changes affecting compensation and benefits, Qualified Opportunity Funds

New alerts from Deloitte Tax LLP examine pandemic-related legislative changes and IRS guidance with implications for compensation and benefits plans, the employee retention tax credit, and investments in Qualified Opportunity Funds.

Compensation and benefits

The $1.9 trillion American Rescue Plan, which President Biden signed into law on March 11, includes several provisions that affect employer tax deductions and credits and funding of pension plans, such as: URL: https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR1319EAS.pdf

• An expanded definition of “covered employee” under Internal Revenue Code section 162(m); • Enhancements to the employee retention tax credit and extension of the credit to qualified wages paid through December 31, 2021; • Modifications to the payroll tax credit for qualified wages paid to employees due to sick leave or expanded family and medical leave for reasons related to COVID-19 and extension of the credit by two calendar quarters through September 30, 2021; • An increase in the individual tax exclusion for employer-provided dependent care assistance; • Funding relief for single employer pension plans; and • Funding relief and funding assistance for certain multiemployer pension plans.

An alert from Deloitte Tax looks at these provisions and discusses their potential implications for affected taxpayers. URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210312_5_suppA.pdf

Also available from Deloitte Tax is a summary that looks at provisions related to the employee retention tax credit in the American Rescue Plan and recent guidance (Notice 2021-20) addressing retroactive changes to the credit that were included in the Consolidated Appropriations Act, 2021, the omnibus tax-and-spending legislation that was signed into law last December 27. URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210312_5_suppB.pdf URL: https://www.irs.gov/pub/irs-drop/n-21-20.pdf

Deloitte Tax will be releasing a tax alert that will discuss the potential implications of the various updates and additions provided by Notice 2021-20 in more detail.

Qualified Opportunity Funds

The IRS recently issued Notice 2021-10, which extends certain pandemic-related penalty relief originally provided to Qualified Opportunity Funds (QOFs) and their investors under previous guidance that expired last year. URL: https://www.taxnotes.com/research/federal/irs-guidance/notices/qualified-opportunity-funds-get-additional- covid-19-relief/2l6mh

QOFs are a component of the Qualified Opportunity Zone (QOZ) Program, which was added to the federal income tax code under 2017’s Tax Cuts and Jobs Act (P.L. 115-97) to authorize the designation of economically distressed communities as QOZs, where new investments, under certain conditions, may be eligible for preferential tax treatment. Electing taxpayers that invest in QOZs through a QOF can defer and potentially reduce tax on prior capital gains rolled over into such a fund, as well as permanently eliminate tax on future gain arising from appreciated QOF investments held for at least 10 years.

In response to the COVID-19 pandemic, the IRS last year released Notice 2020-39, which provided temporary relief from complying with certain time-sensitive requirements for tax-advantaged investments made by eligible taxpayers through a QOF. Notice 2021-10 extends the relief originally provided under the earlier guidance and makes additional enhancements to the QOZ Program. URL: https://www.taxnotes.com/research/federal/irs-guidance/notices/irs-provides-covid-19-relief-for-opportunity- funds%2c-investors/2clfc

A tax alert and table from Deloitte Tax provide an overview of the guidance. URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210312_5_suppC.pdf URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210312_5_suppD.pdf

— Michael DeHoff Tax Policy Group Deloitte Tax LLP

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