It’s been a tumultuous start to the second session of the 118th Congress. When lawmakers return from a two-week recess next week, we expect legislating will continue to prove difficult, particularly as the focus shifts from policy to politics.
Government funding
After four continuing resolutions, Congress was finally able to pass the final six appropriations bills, funding the government for the remainder of the fiscal year. The $1.2 trillion “minibus” passed in the early hours of March 23, narrowly avoiding a government shutdown.
The funding bill didn’t contain any tax provisions but did provide annual funding for the IRS, holding steady from the previous fiscal year at $12.3 billion. In addition, the package clawed back $20.2 billion of the nearly $80 billion in additional IRS funding provided by the Inflation Reduction Act (IRA). This was an acceleration from the previous deal, struck by former Speaker Kevin McCarthy (R – CA) and Senate Majority Leader Chuck Schumer (D – NY), which called for $10 billion in funding decreases in both FY24 and FY25. The additional IRS funding provided by the IRA is earmarked for modernization and enforcement efforts.
Bipartisan tax bill
Not much hope remains for the Tax Relief for American Families and Workers Act, the bipartisan tax deal crafted by House Ways and Means Chair Jason Smith (R – MO) and Senate Finance Committee Chair Ron Wyden (D – OR). The bill, which passed the House by a wide margin in January, has stalled in the Senate. Sen. Mike Crapo (R – ID), ranking member of the Senate Finance Committee, has forcefully opposed the compromise in its current form. In recent weeks, Crapo has received support from several notable Republicans including Senate Majority Leader Mitch McConnell (R – KY), Minority Whip John Thune (R – SD) and Sen. John Cornyn (R – TX). Before leaving town, Crapo and Wyden traded offers to no avail.
Before leaving Washington, Schumer placed the bill on the Senate calendar, a move that would allow him to bypass the Senate Finance Committee and bring the bill to the floor for a vote. In order to accomplish this, Schumer needs 60 Senators to vote to invoke cloture, meaning Schumer would need at least nine Republicans to break with Crapo. With the growing Republican resistance and critical comments by Sen. Elizabeth Warren (D – MA), it appears unlikely Schumer will be able to reach the required three-fifths threshold to overcome a filibuster. However, simply holding a cloture vote could be seen as a political win for Democrats, as it would put Republicans on record as opposing the legislation.
There is a possibility for additional negotiations between Crapo and Wyden; however, the window of opportunity for this particular bill, which contains several provisions retroactive to 2022 and 2023, is rapidly closing. We continue to monitor the progress of the bipartisan bill and will provide you with updates should the prospects for passage change.
2024 legislative outlook
Congress has several must-pass bills to tackle upon their return, including the Foreign Intelligence Surveillance Act and Federal Aviation Administration reauthorization bills. There is certainly room for additional bipartisan legislation, but opportunities are limited. Unfortunately, to date, the 118th Congress has been the least productive in modern history, as it’s struggled with deep divisions between parties as well as among House Republicans. Over the coming weeks, we expect to see a shift away from legislating and toward campaigning and election politics. Furthermore both chambers are currently facing unique challenges:
House of Representatives
House Speaker Mike Johnson (R – LA) must tackle his role with a dwindling caucus. In just under a month, the Republicans will have lost two House members who have chosen to retire early – former Rep. Ken Buck (R – CA), who resigned effective March 22, and Rep. Mike Gallagher (R – WI) who is resigning effective April 19. The legislators come from opposite ends of the Republican party – Buck having been a Freedom Caucus member and Gallagher a member of the Problem Solvers Caucus. These two departures will leave Johnson with a one-vote margin.
Additionally, shortly before the current recess, Rep. Marjorie Taylor Greene (R – GA) filed a motion to vacate, which would oust Johnson from the Speaker role if the measure is passed by the House. Greene and other hardline conservatives are upset over the Speaker’s handling of the appropriations bills. While Greene didn’t file the motion as privileged, meaning there is no set date the resolution must be voted on, it lays the groundwork for another historic challenge of the Speakership.
Senate
After McConnell’s announcement that he will be stepping down as the Senate Republican leader in November, two Republicans threw their names in the hat – Thune and Cornyn. As these two veteran Senators campaign for the role, the practice of legislating becomes more complicated. We’re seeing this in the opposition to the bipartisan tax deal, as Thune and Cornyn align with Crapo and McConnell, who could both prove to be powerful allies in their quest for the top Republican position.
The Republicans are hoping to win back the Senate in the upcoming election, which would put the new leader in control of the chamber, and would make Crapo the Senate Finance Committee chair, rather than the ranking member. Odds appear to favor Republicans reclaiming the Senate as 23 of the 34 seats up for grabs currently belong to Democrats. To make matters worse for Democrats, they are losing Sen. Joe Manchin (D – WV), a moderate Democrat who represents a deeply red state, and Sen. Kyrsten Sinema (I – AZ), an independent who caucuses with them, to retirement.
Finally, Sen. Lisa Murkowski (R – AK) recently signaled she’s open to leaving the Republican party if former President Donald Trump is elected for another term.
The 2024 Election
Elections, particularly presidential elections, often feature calls for changes in tax policy. This year we expect tax plans to play a prominent role in campaigns, as the United States faces a looming fiscal cliff at the end of 2025, when many of the individual provisions and a key pass-through provision in the Tax Cuts and Jobs Act expire.
Most of the focus on tax policy will center around the platforms of the presidential candidates. But Congress remains essential to the enactment of any new laws – the prospect of legislation when one party controls both chambers of Congress and the White House looks very different than in a divided government.
Neither President Biden nor former President Trump have released campaign tax proposals. However, we have a strong sense of their general priorities from their current and prior terms. Last month, Biden released his FY25 budget proposal and Green Book; we expect many of the proposals contained within the budget and green book to inform the tax policy aspects of his presidential campaign.
As the candidates release their tax plans, we’ll provide updates and insights.
Questions?
Please reach out to your Baker Tilly tax member to discuss the impact of our tax policy updates.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.
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