Tax News & Views

Tax News & Views Capitol Hill briefing. June 18, 2021

In this issue:

Bipartisan Senate infrastructure ‘framework’ adds backers, Democrats plot budget reconciliation strategy ...... 1 Taxwriters focus on international issues, tax gap at FY 2022 budget hearings ...... 6 House OKs corporate governance package with country-by-country financial reporting mandate ...... 9

Bipartisan Senate infrastructure ‘framework’ adds backers, Democrats plot budget reconciliation strategy

The prospects for an infrastructure package negotiated by a bipartisan group of senators appeared to brighten this week as more than one-fifth of the upper chamber lent its support to that effort; still, Senate Democratic budget writers and party leaders began plotting a path forward for a fiscal year 2022 budget resolution with reconciliation instructions that potentially could be used to move infrastructure-related provisions and tax policy changes to President Biden’s desk without Republican support.

Details of the Senate infrastructure “framework” – which was negotiated by a group of 10 senators led by Sen. Kyrsten Sinema, D-Ariz., and Sen. Rob Portman, R-Ohio – began to emerge over the weekend of June 12, and negotiators on both sides of the aisle discussed its parameters with their respective colleagues over the course of this week.

The bipartisan group, which also includes moderate senators such as Democrat Joe Manchin of West Virginia and Republican Mitt Romney of Utah, came together as prior infrastructure talks between President Biden and a group of GOP senators led by Shelley Moore Capito of West Virginia, began to founder and ultimately broke down on June 8. (For prior coverage, see Tax News & Views, Vol. 22, No. 29, June 11, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210611_1.html

According to a two-page summary of the plan that began circulating on June 16, the package would call for $973 billion in spending over five years (the typical span of a highway reauthorization bill), and about $1.2 trillion over eight years. By contrast, President Biden’s infrastructure-focused American Jobs Plan called for about $2.2 trillion in spending over eight years, though the White House did reduce that figure considerably during negotiations with Sen. Capito. URL: https://static.politico.com/0a/08/398515524e38ab4807521dcfbd92/bipartisan-infrastructure-framework-two- pager-final-7.pdf

The bulk of the spending would be focused on roads, bridges, rail and mass transit projects, and airports and waterways, with significant amounts also devoted to building out and updating energy, broadband, and water infrastructure.

On the financing side, the Senate bipartisan framework leans heavily on repurposing previously approved coronavirus relief funding toward infrastructure and by tapping into public-private partnerships, an infrastructure bank, private activity bonds, and direct-pay municipal bonds to draw in private capital.

Although the framework generally avoids tax increases, it does call for measures to increase revenue collections by addressing the tax gap (presumably by directing additional enforcement dollars to the Internal Revenue Service), imposing an annual surcharge on electric vehicles, and indexing to inflation the current excise tax rate on gasoline. It also would “adjust” customs user fees, which may imply simply extending certain fees beyond their otherwise scheduled expiration.

It is important to note, however, that certain reports on June 17 suggested that the summary made public the day before is still evolving – especially as it relates to its suggested policies around the gas tax and the user fee on electric vehicles, which may have been dropped in the latest plan presented to the White House. (The administration in the past has rejected gas tax increases and new user fees on the grounds that they would fall on the low- and middle-income income taxpayers that the president has vowed to shield from tax hikes.)

21 senators on-board so far: Although the prospects in general for bipartisan infrastructure negotiations have ebbed and flowed over the past several weeks, the Senate framework appeared to be picking up support late

Tax News & Views Page 2 of 11 Copyright © 2021 Deloitte Development LLC June 18, 2021 All rights reserved. this week. As of June 17, a total of 21 senators – 10 Democrats and 11 Republicans – were said to have lent their formal backing to the high-level framework. (The roster of Democratic supporters includes Independent Sen. Angus King of Maine, who caucuses with the Democrats.)

Twenty of those senators released a statement June 16 expressing support for the framework “that provides an historic investment in our nation’s core infrastructure needs without raising taxes.” URL: https://www.portman.senate.gov/newsroom/press-releases/senators-statement-infrastructure

Another notable Republican not among the 21 public supporters so far – Senate GOP Whip John Thune of South Dakota – lent cautious support to the bipartisan talks on June 16.

“I think they’ve tried hard to come up with something that structurally accommodates both the imperatives of Republicans and Democrats…and they’ve done a good job with it,” Thune told reporters.

Framework crosses the Capitol: In another notable development, Sens. Sinema and Portman, along with a handful of other key negotiators of the bipartisan Senate framework met with the House Problem Solvers Caucus on June 17 to discuss the plan.

The Problem Solvers Caucus – led by Rep. Josh Gottheimer, D-N.J., and Brian Fitzpatrick, R-Pa. – is a group of roughly 60 more centrist-minded Democrats and Republicans. The group released its own $1.2 trillion infrastructure plan on June 9 that broadly resembles the Senate framework. URL: https://problemsolverscaucus.house.gov/media/press-releases/problem-solvers-caucus-unveils-building-bridges- bipartisan-physical

But progressives raise concerns…

Building Republican support will prove critical if, after evaluating the framework in the coming days, President Biden and Democratic leaders choose to continue to give space for a bipartisan deal rather than revert to a Democrat-only infrastructure approach that more closely resembles Biden’s American Jobs Plan and his American Families Plan. (For prior coverage of the American Jobs Plan, which proposes to finance “hard” infrastructure investments with an array of tax increases on businesses, see Tax News & Views, Vol. 22, No. 19, Apr. 9, 2021; for prior coverage of the American Families Plan, which focuses on what the administration has characterized as “human” infrastructure investments in areas such as paid family and medical leave, universal child care, access to pre-kindergarten education, and free community college, financed mainly by tax increases on certain upper-income individuals and expanded funding for IRS enforcement efforts, see Tax News & Views, Vol. 22, No. 23, Apr. 30, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210409_1.html URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210430_1.html

That is because many progressive Democrats are becoming increasingly concerned that any bipartisan deal will fall short of fully addressing the nation’s infrastructure needs, fear such a bill will not aggressively implement policies designed to address climate change, and feel that Democrats should lean into the president’s

Tax News & Views Page 3 of 11 Copyright © 2021 Deloitte Development LLC June 18, 2021 All rights reserved. proposals to finance his plans by raising taxes on corporations and wealthy individuals – policies that they feel are popular among the general public.

Due to Democrats’ razor-thin majorities in both the House and Senate, in essence every defection by a progressive Democrat would have to be balanced out by the addition of a GOP supporter in order for a bipartisan deal to clear Congress.

“I would prefer bigger. I think this is a once-in-a-career type of opportunity to do what has to be done,” said House Ways and Means Committee Chairman Richard Neal, D-Mass. “…We should take advantage of the moment. The public is on our side. The momentum is with us.”

Other progressives are skeptical that certain moderate Democrats – Sens. Manchin and Sinema, in particular – would be there to support a subsequent reconciliation bill that includes Democratic priorities not addressed in the more narrowly focused bipartisan infrastructure framework.

“It’s either going to happen and we know 100 percent for sure that it’s going to happen, or it’s not going to happen,” Rep. Alexandria Ocasio-Cortez, D-N.Y., said on June 15. “And I think that certainty of that second piece is going to determine a lot on our stances on the bipartisan piece.”

Rep. Mark Pocan, D-Wis., echoed those sentiments.

“[I]f anything would proceed – and people are saying there’s going to be other bills that will come – I think the expectation from many of us will be, well, then those things either come first, or there is some more ironclad way to guarantee it’s going to happen,” Pocan said.

But that ironclad guarantee seems unlikely to materialize.

Sen. Manchin, for his part, indicated June 16 that he would not promise his support for a subsequent reconciliation package without first seeing its details.

“I’m not committing to that. I’m not committing to anything. I want to look at everything,” Manchin said. “I want to make sure that we make good decisions, sound decisions based on facts.”

Budget reconciliation

In related developments this week – and in many ways a recognition that Democrats need to keep all of their legislative and procedural options open – Senate Majority Leader Charles Schumer, D-N.Y., met with the 11 Democrats on the Senate Budget Committee (including Chairman Bernie Sanders, I-Vt., who caucuses with the Democrats) to plot a path forward for a fiscal year 2022 budget resolution that could be used to tee up the budget reconciliation process as a way to side-step a likely GOP filibuster against some or all of Democrats’ infrastructure ambitions.

Tax News & Views Page 4 of 11 Copyright © 2021 Deloitte Development LLC June 18, 2021 All rights reserved. By utilizing reconciliation – which first requires the House and Senate to adopt a congressional budget resolution authorizing the process – Democrats could advance subsequent budget-related legislation with the support of all 50 Senate Democrats plus the tie-breaking vote of Vice President Kamala Harris. This was the procedure Democrats employed to enact the COVID-relief focused American Rescue Plan earlier this year.

Echoing comments made by Chairman Sanders last week, Sen. Schumer indicated after the meeting that he intends to have a budget resolution on the Senate floor during July. By that time, it should be more clear whether bipartisan negotiations have borne fruit and, thus, the contours of any budget and its accompanying reconciliation instructions could be more easily determined.

“There was universal agreement we have a lot of things we have to do to help the American people and we have to have the unity to do it. Everyone has to listen to one another,” Schumer told reporters after meeting.

It is important to keep in mind, however, that in order to invoke the reconciliation process, Sen. Sanders and Democratic leaders would also have to secure the support of moderate Democrats – including Sens. Manchin and Sinema – on the underlying budget resolution. Those two senators in particular have been vocal about their reluctance to adopt procedural tactics to bypass Republicans in lieu of pursuing legislation on a bipartisan basis.

Sen. Jon Tester, D-Mont., who is a member of the bipartisan negotiating group, summed up the tightrope congressional Democrats are walking.

“You kill it, what do you get? You end up with nothing,” Tester said, responding to the idea of Democrats abandoning talks with the GOP in favor of a reconciliation-driven approach.

‘Deeming’ resolution kicks of House appropriations process: This week also saw House Democrats officially kick off the appropriations process for upcoming fiscal year 2022 – set to begin October 1 – when House Budget Committee Chairman John Yarmuth, D-Ky., filed a “deeming” resolution that, in lieu of an adopted budget resolution, effectively sets a top-line spending figure of about $1.5 trillion that the Appropriations Committee will then subdivide among its 12 subcommittees charged with writing and reporting annual appropriations bills.

House Democratic leaders hope to move as many fiscal 2022 spending bills as possible through the chamber before August.

Notwithstanding Yarmuth’s action, however, it is regarded by most as a foregone conclusion that Congress will have to pass a stop-gap “continuing resolution” to keep the government’s doors open past September 30.

Fiscal year 2022 represents the first year since 2013 that strict statutory caps, enforced by a “sequester” mechanism, have not applied to discretionary spending. Those sequester-related restrictions brought Democrats and Republicans together on four separate occasions to lift the caps for both defense and nondefense accounts.

Taxwriters focus on international issues, tax gap at FY 2022 budget hearings

Issues around the taxation of multinational businesses and proposals to narrow the tax gap dominated the discussion as Treasury Secretary Janet Yellen appeared at separate hearings before the Senate Finance Committee (on June 16) and the House Ways and Means Committee (on June 17) to consider the Biden administration’s fiscal year 2022 budget blueprint. (For a detailed discussion of the administration’s budget proposals, see Tax News & Views, Vol. 22, No. 28, May 29, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210529_1.html

International taxation

Members on both sides of the aisle at the Finance Committee hearing addressed the recent announcement that leaders of the G-7 nations have agreed on a global minimum tax of at least 15 percent and a reallocation of rights to tax the world’s largest and most profitable multinational corporations, making it clear that there are still many questions to be resolved before Congress will feel comfortable with a multilateral deal. (For prior coverage of the G-7’s announcement, see Tax News & Views, Vol. 22, No. 29, June 11, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210611_3.html

Digital taxes: Finance Committee Chair Ron Wyden, D-Oregon, focused his concern on the fate of current unilateral digital services taxes (DSTs) enacted by various EU member nations, which primarily impact US tech giants but are targeted for repeal under any global agreement through the OECD. While Yellen reiterated that the US will insist on full repeal of DSTs “and other relevant similar measures” as part of any deal, she also noted that the US is “retaining all options for discouraging the use of DSTs.”

“The US trade representative has started trade retaliation procedures via investigation in sanctions under Section 301,” Yellen said, referring to the provision of the Trade Act of 1974 that the Trump administration used to push back on DSTs. “And we’re keeping that tool available to use if it were to become necessary to get prompt action to eliminate DSTs. While we very much hope to avoid trade conflicts, this tool remains a useful lever to bring countries to the bargaining table.”

Global minimum tax and GILTI: Finance Committee ranking member Mike Crapo, R-Idaho, echoing concerns he voiced in a recent letter to Yellen, pushed back on the administration’s proposal to double the tax rate on global intangible low-taxed income (GILTI) before the rest of the world agrees to a global minimum tax and raised the concern that China and other countries may not sign on to such a tax. URL: https://www.finance.senate.gov/imo/media/doc/crapo_letter_on_oecd_negotations.pdf

Tax News & Views Page 6 of 11 Copyright © 2021 Deloitte Development LLC June 18, 2021 All rights reserved. While Yellen responded that the agreement being envisioned would have an enforcement mechanism to “incent holdout tax havens that don’t want to go along with this deal to come on board,” Crapo appeared unconvinced by her additional argument that the revisions the administration has proposed to US laws on international taxation – namely, replacing the base erosion and anti-avoidance tax (BEAT) with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) – will play a role in securing co-operation from other countries.

Sen. Pat Toomey, R-Penn., put a sharper point on the argument by noting that he completely opposes the push for a global minimum tax, regardless of the US’s own provisions.

“Expanding economic freedom, diminishing the burden countries put on their businesses, their economies, their opportunities for growth, that’s not a race to the bottom that we should try to prevent. That’s a race we ought to be winning,” Toomey told Yellen, adding, “And, by the way, I think everybody has to acknowledge that there is an implicit confession in this whole effort, which is that the Biden proposals, with respect to tax reform, make America less competitive. And that’s why we need these other countries to inflict the same kind of damage on their economies that he is suggesting we do to ours.”

Yellen noted multiple times during the Finance Committee hearing that the US regards the 15 percent global minimum tax rate the G-7 agreed on as a floor and that she hopes any final agreement reached at the OECD will call for the minimum tax to be imposed at a higher rate.

House Ways and Means Committee ranking member Kevin Brady, R-Texas, likewise took issue with the proposed minimum tax in his opening statement at that panel’s hearing, calling it “an embarrassing admission by President Biden that his tax increases will make America uncompetitive and drive jobs overseas.”

Ways and Means Republican Ron Estes of Kansas indicated he had “major concerns” that a global minimum tax would include carve-outs for other nations. He also contended that by agreeing to a global minimum tax the US would effectively be ceding its tax collection authority to other nations.

Yellen disputed that assertion, telling Estes that “we’re going to raise the tax that we apply to foreign income and we’d like foreign countries to do exactly the same thing.”

Country-by-country GILTI reporting: In an exchange with Ways and Means Committee Democrat Don Beyer of Virginia, Yellen defended the administration’s proposal to require GILTI reporting on a country-by-country basis, stating that the current rules allowing companies to “blend” income from high-tax and low-tax countries “perversely create a kind of ‘America Last’ problem.” She also noted that companies are already collecting the information necessary for country-by-country reporting and said the administration’s proposal was “entirely feasible and practical.”

Taxwriters on both panels were split – generally along party lines – on proposals in the administration’s budget blueprint to significantly increase the IRS’s budget for enforcement operations as well as specific compliance- related proposals such as additional information reporting as part of a coordinated effort to narrow the tax gap, the difference between the amount of tax owed to the government and the amount actually collected.

Democrats argued that the proposals would promote equity in the tax system by ensuring that taxpayers across the income spectrum pay all the tax they legally owe – an assessment Yellen endorsed.

Republicans countered that the proposals run the risk of creating a massive new bureaucracy within the IRS and jeopardizing taxpayer privacy. They were particularly concerned about a proposal that would require financial institutions to report gross inflows and outflows of financial accounts, with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner, with exceptions for accounts with a gross flow below a threshold of $600.

Finance Committee ranking member Mike Crapo called the proposed reporting requirement “very concerning” and contended that it “pulls almost all taxpayers into a surveillance dragnet.”

Yellen told the panel that the proposal “will help the IRS target their audits on the individuals who aren’t paying their fair share.”

In an exchange with Rep. Mike Thompson, D-Calif., at the Ways and Means Committee hearing, Yellen commented that the proposal is intended to identify “opaque income streams” that may otherwise go unnoticed – and untaxed.

In a nod to the Democrats’ equity argument, she also commented that the additional information reporting requirement will promote compliance among higher-income taxpayers. In response to a question from Ways and Means Committee member Lloyd Doggett, D-Texas, Yellen noted that the compliance rate among wage earners is roughly 99 percent, since that income is routinely reported to the IRS, while compliance rates are significantly lower among wealthier individuals, who more frequently have sources of income that aren’t subject to third-party reporting.

(The administration’s tax gap proposals were the sole focus of a recent Finance Committee hearing and a joint hearing by the Ways and Means Select Revenue Measures Subcommittee and the Oversight subcommittee. For prior coverage, see Tax News & Views, Vol. 22, No 29, June 11, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210611_2.html

SALT deduction

Yellen was also pressed about the administration’s position on repealing or relaxing the $10,000 cap on the deduction for state and local income taxes (SALT) that was enacted in 2017’s Tax Cuts and Jobs Act. (The

Tax News & Views Page 8 of 11 Copyright © 2021 Deloitte Development LLC June 18, 2021 All rights reserved. administration did not include a proposal to address the deduction cap in its budget blueprint, nor did it do so in the president’s American Jobs Plan or American Families Plan.)

Some “blue state” Democrats on both panels – including Senate taxwriter Robert Menendez of New Jersey and House taxwriters Bill Pascrell of New Jersey and Tom Suozzi of New York – argued that the cap has had a detrimental economic impact on their states and urged the administration to address it. Suozzi contended that the SALT deduction acted as a mechanism to prevent a tax rate competition among states – by stemming a potential migration of residents from high-service, high-tax jurisdictions to low-service, low-tax jurisdictions – in much the same way that the proposed global minimum tax is intended to prevent a race to the bottom on business tax rates internationally.

For his part, Ways and Means Committee ranking member Kevin Brady – who supports the cap and called the SALT deduction a “tax shelter” for affluent individuals – asked Yellen to clarify the administration’s stance.

Yellen replied that administration has not put forward a proposal on this issue, but it recognizes that the deduction cap is a concern in a number of states and wants to work with Congress to mitigate any problems the cap has created.

Yellen was noncommittal when Brady asked if the administration would accept a provision to address the cap as part of a compromise infrastructure tax package.

“I’m not going to negotiate here on behalf of the president,” she said.

— Michael DeHoff and Storme Sixeas Tax Policy Group Deloitte Tax LLP

House OKs corporate governance package with country-by-country financial reporting mandate

The House on June 16 narrowly approved a corporate governance package that, among other things, would amend the Securities Exchange Act of 1934 to require publicly traded corporations to report certain specified tax and nontax information to their shareholders on a country-by-country basis.

The Corporate Governance Improvement and Investor Protection Act (H.R. 1187) cleared the chamber on a largely party-line vote of 215-214, with four Democrats breaking ranks to join Republicans in the “no” column. URL: https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR1187RH-RCP117-5.pdf

The House-approved measure packages together several freestanding bills recently reported out of the House Financial Services Committee. The country-by-country financial reporting requirement was originally introduced as the Disclosure of Tax Havens and Offshoring Act (H.R. 3007) by Financial Services Committee member Cindy Axne, D-Iowa, on May 11. (A Senate companion version was introduced by Maryland Democratic Sen. Chris Van Hollen the same day.)

Corporations subject to the disclosure rules generally would be required to report information such as their total pre-tax profits and total amounts paid in state, federal, and foreign taxes for each jurisdiction in which they operate. They also would be required to disclose a number of specific tax-related items such as total accrued tax expenses, stated capital, and total accumulated earnings for each of their subsidiaries, as well as on a consolidated basis.

The Securities and Exchange Commission would be required to issue a proposed rule implementing the reporting requirement within one year after the legislation is enacted and to finalize a rule no later than 18 months after the enactment date. The reporting requirement would become effective one year after the rule is issued.

In a joint release that was issued when they introduced their original proposals, Axne and Van Hollen noted that corporations already report this information to the IRS under an international OECD framework and explained that the disclosure requirement would allow the public to “see the extent to which [these companies] are abusing tax havens or offshoring jobs.” The reporting requirement would “provide data on how international tax laws are working and where corporations are locating their business activities and taxes,” they said.

Many congressional Democrats view the proposed reporting requirement as complementing a proposal in President Biden’s American Jobs Plan and in his fiscal year 2022 budget blueprint to require US multinational corporations to calculate their global intangible low-taxed income on a country-by-country basis. (For additional details on the American Jobs Plan, see Tax News & Views, Vol. 22, No. 19, Apr. 9, 2021. For details on the tax proposals in the president’s budget package, see Tax News & Views, Vol. 22, No. 28, May 29, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210409_1.html URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210529_1.html

Other reporting mandates

The broader House-approved bill also includes provisions that would require public companies to disclose information about environmental, social, and governance metrics; expenditures for political activities; certain employee pay raises, including pay raises for executive employees and nonexecutive employees; and financial and business risks associated with climate change.

The measure now heads to the Senate, although it is currently unclear when (or whether) Democratic leaders in that chamber intend to bring it to the floor.

— Michael DeHoff Tax Policy Group Deloitte Tax LLP

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