Congress Eyes Tax Changes in 2023. Is a Bipartisan Deal Possible?

When Congress returns from its August recess, only several months will remain to enact major legislation before the start of a busy 2024 election season. Members of both parties recently introduced major tax policy legislation, but so far most of these bills remain partisan.

If an opportunity for Congress to pass year-end tax legislation materializes, it will need to be the product of bipartisan compromise. Any tax policy legislation should also adhere to core values of:

• fostering domestic economic growth;
• providing support for workers and their families; and
• prioritizing fiscal responsibility.

Domestic Economic Growth

House Republicans recently introduced a package of three tax reform bills, collectively referred to as the American Families and Jobs Act, which were each reported out on a party-line vote from the Committee on Ways and Means. The first bill in the package, the Small Business Jobs Act, focuses on tax provisions affecting small businesses. The bill would increase an expensing allowance targeted at small businesses and make more investments in small businesses eligible for a tax exclusion. The second bill, the Build It in America Act, temporarily addresses three business tax provisions affected by the 2017 Tax Cuts and Jobs Act (TCJA) by:

• Restoring full expensing for R&D expenditures: Full expensing reduces the costs businesses bear when investing in R&D. Until 2022, businesses had been able to fully recover the cost of their R&D investments immediately. TCJA permanently switched R&D treatment from full expensing to five-year amortization starting in 2022, which was projected to raise revenue and offset some of the cost of TCJA’s tax cuts. This provision would make full expensing retroactive to 2022 and extend it through 2025.
• Extending 100% bonus depreciation: TCJA provided businesses with an incentive to invest in assets that can make workers more productive, such as machinery and equipment, by offering 100% bonus depreciation (full and immediate expensing) in the year of the investment. TCJA scheduled this bonus depreciation to phase down 20 percentage points each year from 2023 through 2027. This provision would undo the phase-down through 2025.
• Restoring more generous allowances for interest deductions: TCJA reformed the deductibility of business interest, with a tightening of limits made effective in 2022. From 2018 through 2021, businesses could take interest deductions up to 30% of income based on earnings before interest, taxes, depreciation, and amortization. Since 2022, the limit has been 30% of income based on earnings before just interest and taxes, reducing the value of interest deductions for companies making investments in depreciable or amortizable assets. This provision would restore the more generous limit through 2025.

Worker and Family Supports

The third bill in the Republicans’ tax package includes a major tax cut aimed at low- and middle-income workers and their families: a temporary increase to the standard deduction. The Tax Cuts for Working Families Act would expand the federal standard deduction on a temporary basis, for 2024 and 2025 only. The current standard deduction, $13,850 for single filers and $27,700 for married taxpayers filing jointly in tax year 2023, would rise by $2,000 for single filers and $4,000 for married joint filers. This temporary added deduction would phase out for single taxpayers making above $200,000 and joint filers making above $400,000. The legislation would still provide a tax cut to the vast majority of taxpayers though: more than 87% of all tax returns in 2020 took the standard deduction, according to IRS data.

Meanwhile, a group of Senate Democrats and a group of House Democrats each introduced bills that would permanently expand the Child Tax Credit to $3,000/$3,600 per eligible child (the former for children 6-17 and the latter for children under age 6), put in place for 2021 only under the American Rescue Plan (ARP). The current CTC is $2,000 per child and is scheduled to fall to $1,000 per child upon TCJA expiration in 2026. The Senate legislation would go even further than the ARP CTC by indexing the per child amount to inflation. The House legislation also indexes the per child amount to inflation, and provides a one-time, $2,000 “baby bonus” to parents of newborns.

Fiscal Responsibility

Lawmakers looking to pass any of the provisions outlined above will need to grapple with the revenue implications (and deficit increase) that these policies create:

• The Joint Committee on Taxation (JCT) estimated that the three business provisions in the Build It in America Act, effective through 2025, would reduce revenues by $47 billion over 10 years without offsets.
• The tax provisions in the Small Business Jobs Act, which set permanent policy, would reduce revenues by $81 billion over 10 years without offsets, according to JCT.
• Two years of the bonus deduction would reduce revenues by $97 billion over 10 years without offsets, per JCT.
• Permanent CTC expansion that mirrors the $3,000/$3,600 per child CTC would cost at least $1.6 trillion over 10 years, according to previous estimates. A shorter expansion, such as the three-year expansion (2023-2025) proposed by the Biden administration, would cost $429 billion.

The Build It in America Act includes offsets to help pay for the business tax cuts and the bonus standard deduction by repealing a subset of the tax incentives for clean energy investments enacted in last year’s Inflation Reduction Act. Democrats, however, oppose these offsets which may leave lawmakers in search of alternative offsets when a tax package comes together.

Seeds of Compromise?

There is broad bipartisan support for reforming the tax treatment of R&D expenditures. R&D expensing can grow the U.S. economy, create jobs, raise wages, and help the U.S. compete on innovations that will define progress in the 21^st century. Legislation to undo five-year amortization for R&D and return to full expensing has the support of 77 Democrats and 77 Republicans across the two chambers of Congress, and businesses large and small have testified to the economic harms of R&D amortization compared to full expensing.

On the individual side of the tax code, there is bipartisan support for expanding the CTC beyond what was enacted in the 2017 tax law. While Democrats and Republicans seek agreement on the per-child amount, refundability, and eligibility for the lowest-income families, newer proposals like indexing the per-child amount to inflation could achieve bipartisan support. Similarly, BPC has offered a fiscally responsible reform proposal that would expand support and would retain incentives for parents to work.

There is also bipartisan momentum behind efforts to reform and expand the Low-Income Housing Tax Credit that provides financing support for affordable rental housing, and to create the Neighborhood Homes Tax Credit to finance the building and renovating of owner-occupied homes in distressed neighborhoods. BPC has argued that these credits represent two important tools for increasing housing supply in America.

Responsible Budgeting

Congress still has a chance to engage in bipartisan tax negotiations in 2023. As lawmakers debate these policies, they should also focus on ways to pay for them and avoid timing gimmicks used solely for the purpose of reducing the on-paper cost of tax cuts. The bipartisan Fiscal Responsibility Act is projected to reduce deficits by more than $1.5 trillion over the next 10 years—Congress should not turn around just months later and blow those savings.