Top tax writers in Congress announced a deal Tuesday morning to increase the child tax credit (CTC) and restore business deductions that were taken away to pay for the cut in the corporate tax rate in the Tax Cuts and Jobs Act from 2017
The CTC expansion would increase the maximum credit per child to $2,000 from $1,600 by 2025, while restoring business deductions for research and development expenses, interest payments and capital investments.
The deal also includes provisions to increase the low-income housing tax credit and an exemption to protect Taiwanese companies from double taxation following a US effort to shift segments of the high-end semiconductor industry, much of which is based there.
The proposal also increases the amount of capital expenditures that small businesses can write off immediately to $1.29 million from $1 million, along with increasing the reporting threshold for subcontractor work to $1,000 from $600.
To pay for the roughly $80 billion deal, the tax writers plan to eliminate the employee retention tax credit, which they say has been aggressively touted within the tax industry and has been the site of fraudulent business activity since the pandemic.
The cost of the recovered business and low-income credits would be covered exclusively by the repeal of the employee retention credit, which tax writers estimate will bring in $70 billion to $80 billion over the next ten years. No additional requests for employee retention credits will be accepted after January 31 of this year.
“American families will benefit from this bipartisan agreement that provides greater tax relief, strengthens Main Street businesses, increases our competitiveness with China and creates jobs,” said Ways and Means Committee Chairman Jason Smith (R-Mo .) in a Tuesday morning statement.
Senate Finance Committee Chairman Ron Wyden (D-Ore.) said the proposal could help up to 15 million children who are near the poverty line and would increase the stock of low-income housing across the country.
“At a time when so many people in Oregon and across America are plagued by rising rents and home prices, the improvements this plan makes to the Low Income Housing Tax Credit will build more than 200,000 new affordable housing units prices,” he said in a statement.
“By boosting research and development, this plan will also encourage innovation and help strengthen our economic competitiveness with China.”
What the final legislative vehicle for the tax deal might be, and whether it will become law before tax season begins on Jan. 29, remains to be seen.
Lawmakers are rushing to pass a bill by Jan. 19 to avert a partial government shutdown as House conservatives rally against a deal brokered by Speaker Mike Johnson (R-La.) and Senate Majority Leader Charles Schumer (DN.Y.).
Funding battles and the upcoming election could weaken the political will needed to make a significant change to the core tax provisions.
But some rank-and-file senators are already sounding enthusiastic about the deal’s prospects.
“I have been a strong advocate for boosting American R&D since I first introduced bipartisan legislation in 2020 to restore the R&D deduction, and with clearly growing bipartisan support in both the Senate and the House, I will I continue to work with my colleagues and the business community to get this deal done,” Sen. Maggie Hassan (DN.H.) said in a statement.
Key provisions of the deal extend only through the end of 2025, when major parts of the US tax code enacted by the 2017 tax law are scheduled to revert to their previous levels.
These include changes to individual and household tax rates, the level of the standard deduction, the cap on state and local tax credits, the cap on personal exemptions and the repeal of the alternative minimum tax, among others.
In the current proposal, only Taiwan’s double taxation provision, along with the expanded capital investment and subcontract write-offs for small businesses, are permanent changes to the tax code.
As tax writers scramble to find a vehicle for their proposal before tax season begins, an agreement reached over the weekend to pass a temporary funding measure to keep the government running in March could end up giving them additional time and legislative opportunities.
“I am encouraged by the bipartisan conversations that have taken place since the Schumer-Johnson deal was reached,” House Appropriations Committee member Rosa DeLauro said in a statement Sunday.
“There is a mutual understanding that the only way to finally end the funding saga in 2024 is to write government funding bills that can win the support of both Democrats and Republicans in the House of Representatives and in the Senate,” she added.
The announcement of the tax proposal came jointly from the Republican-led House Ways and Means Committee and the Democratic-led Senate Finance Committee, representing a rare moment of bipartisan harmony in a divided and often divisive Congress.
Although the standoff over the trade-off between the CTC and the business deduction lasted for more than a year, with Democrats often praising the CTC and Republicans talking up the business deduction, there was support for both sets of policies on both sides of the aisle.
“I also had legislation in 2017 in the Tax Cuts and Jobs Act that doubled the child tax credit from $1,000 to $2,000. I really think we can find common ground just on the child tax credit,” Ways and Means Chair Jason Smith said in late 2022.
Business and industry groups are welcoming the news of reinstated deductions on research expenses, interest payments and the depreciation schedule.
“Recovery of immediate R&D costs, full-cost purchases of equipment, machinery and technology, and a more reasonable business interest deduction will increase domestic investment, support U.S. innovation and create U.S. jobs,” said the chief Business Roundtable lobbyist Joshua Bolten in a statement Tuesday.
But the actual economic efficacy of some of the business loans has long been a matter of debate and is not as clear as industry groups claim. This is especially the case with the research and experimentation (R&E) credit.
A 2012 Treasury Department study “estimates that only 82 percent of the present value of the average current annual R&E credit will ultimately be used,” meaning the remaining 18 percent is simply a handout to companies.
Another study cited by the Congressional Research Service found that the R&E credit became less effective when used by larger and larger companies within the OECD, falling from a 1.4 benefit-cost ratio for companies with less than 50 employees to 0.4 ratio for companies with more than 250 employees.
Updated at 2:54 p.m
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