Last week, House of Representatives Ways and Means Committee Chairman Jason Smith (R-MO) kicked off what is expected to be months-long congressional negotiations over tax legislation. After a markup session that lasted nearly 10 hours, the tax committee passed three pieces of legislation that will be packaged together to comprise the American Families and Jobs Act. The bills passed on a purely partisan basis, with no Democrats on the committee voting in support, and with little chance that the combined bill would pass the Democratic-controlled Senate in its current form. As such, the committee’s action is seen as House Republicans’ first step on the road to talks with their Democratic Senate counterparts, possibly culminating in a year-end, bipartisan tax package.
The three bills passed by the Ways and Means Committee are:
- The Tax Cuts for Working Families Act (H.R. 3936);
- The Small Business Jobs Act (H.R 3937); and
- The Build It in America Act (H.R. 3938).
The combined legislation would extend certain provisions from the 2017 Tax Cuts and Jobs Act (TCJA) which are due to expire in the next two years and are a priority for Republicans. These include tax breaks for research and development, bonus depreciation provisions and deductions for business interest payments. Of specific interest to the commercial real estate industry, the bills include:
- A three-year extension of 100% bonus depreciation for certain capital investments (equipment, machinery and qualified leasehold improvements). Currently, bonus depreciation has been decreased to 80%, with further phasedowns in the next few years.
- A four-year extension of business interest deductibility rules that applied from 2018 through 2021.
- New rules in the opportunity zones program for “rural opportunity zones” and new information-reporting requirements for the existing program.
For individuals and families, the bill would also provide for a new “guaranteed deduction bonus” of $4,000 for the next two years to be added to the existing standard deduction.
Democrats are supportive of several of these provisions, but voted against the bills because they did not include one of their major tax priorities: the renewal of an expanded child tax credit that was enacted in response to the COVID-19 pandemic. Also left out of the legislation was the elimination of (or any increase in) the current $10,000 cap on deductions for payment of state and local taxes (“SALT”) – an important priority for many Democrats and some Republicans from California, New York, New Jersey and other relatively high-tax states. In addition, the cost of the three bills, which the Joint Committee on Taxation estimates at $237 billion over 10 years, is partially offset with $216 billion in revenue increases resulting largely from a paring back of many of the clean energy tax incentives enacted in last year’s Inflation Reduction Act – a signature policy achievement of the Biden administration and congressional Democrats.
Despite the initial Democratic opposition and well-worn partisan talking points used by both sides during the markup, statements by both the chairman and Richie Neal (D-MA), the ranking Democrat on the committee, as well as by Senate Finance Committee Chairman Ron Wyden (D-OR), signaled an openness to negotiating a bipartisan deal. Many House Republicans support extension of the childcare tax credit, and some from high-tax states would welcome revisiting the SALT cap provisions in current law. The bargaining chips are clear to everyone, and the reality is that only a bipartisan tax package will stand a chance of passing both the House and the Senate and be sent to President Joe Biden’s desk for his signature.
The timing for a floor vote on the American Families and Jobs Act in the House of Representatives remains unclear. With the tight margin the Republican majority has in the chamber, Smith as well as Speaker Kevin McCarthy will need to deal with deficit hawks in their conference who support the business provisions but may demand that the legislation be fully offset with spending reductions equal to or exceeding the cost of the bill.
Navigating this difficult legislative terrain may require Republicans to pass a partisan bill in the House, with inclusion of Democratic priorities necessary to ensure Senate passage coming later in negotiations with that chamber. Regardless of when the House passes its tax legislation, bicameral talks between members of both parties in the House and Senate will continue most likely for the remainder of the year, with any deal coming to fruition before Congress recesses in December.