What’s in the New Tax Deal?

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Lawmakers on the House Ways and Means Committee will attempt a rare feat on Friday when they begin debate on something that rarely comes together in an election year: bipartisan tax legislation.

A group of top Republicans and Democrats reached agreement this week on a $78 billion package that would expand a tax benefit that provides money to parents and restore three popular expired business tax breaks. That combination offers both parties an opportunity to claim wins as voters begin to head to the polls ahead of the election in November.

The legislation still faces a murky path through Congress, but tax writers are racing to pass it before the official 2023 tax filing season kicks off this month.

The agreement on a tax bill could foreshadow the kinds of trade-offs that lawmakers will face next year, when many other provisions of the 2017 tax law begin to expire. Although this package remains a work in progress, here is a look at what it includes at the moment:

In 2021, in the midst of the coronavirus pandemic, President Biden and Democrats in Congress temporarily beefed up the child tax credit, allowing most families to receive checks of up to $3,600 per child. That amount reverted to $2,000 per child in 2022, and the money was no longer directly deposited into bank accounts. Instead, qualifying families were able to receive a tax credit as part of their regular federal tax filing to the Internal Revenue Service.

The proposal under consideration in Congress aims to make the program more generous. It would phase in an expansion of the credit by allowing it to grow along with the rate of inflation and would make more of it refundable. That means families would be able to claim the full credit even if they owe little or even nothing in federal taxes.

Democrats have been agitating to expand the program, which was found to have reduced poverty during the pandemic. The left-leaning Center on Budget and Policy Priorities projected that the changes, which would apply for tax years 2023, 2024 and 2025, would lift as many as 400,000 children above the poverty line in the first year.

Still, some Democrats want a more generous expansion and are pushing for changes including a return to monthly checks instead of the current annual payment that families can receive when they file their tax returns. The White House’s initial reaction to the deal suggested that Mr. Biden would prefer a greater expansion to the child tax credit, but Democrats are unlikely to oppose a narrower increase.

Jared Bernstein, the chairman of the White House’s Council of Economic Advisers, told CNN this week that the administration was “very supportive” of expanding the credit.

Still, conservative voices such as The Wall Street Journal’s editorial board argue that the changes will serve to more deeply entrench a costly “cash welfare” program.

The expansion is estimated to cost $33.5 billion over three years.

The package would also increase the amount of federal money that states can receive to encourage the development of low-income housing. The legislation would authorize a 12.5 percent increase for the federal Low-Income Housing Tax Credit, which was originally meant to subsidize up to 70 percent of construction. The credit is generally reserved for the development of new properties that do not use other federal subsidies.

The deal would also lower the proportion of a building that must be financed by municipal bonds to 30 percent from 50 percent in order for its developer to qualify for the credit. Proponents argue that lowering the bond threshold would spur development by allowing states to spread their bonds over more projects. Both changes would last through 2025.

The provisions represent a major increase in resources for affordable housing and would help develop more than 200,000 additional affordable housing units, according to estimates. Senator Maria Cantwell, Democrat of Washington, insisted the measures — both of which were in a broader bipartisan bill she introduced to revise the low-income housing tax credit — be included in the tax deal.

“By doing this, we’re putting out the most cost-effective way to house people. It’s stimulative to the economy, and it helps with inflation,” Ms. Cantwell said, calling the measures the “most significant shot in the arm in 35 years” for affordable housing.

The measures are estimated to cost $6.2 billion over 10 years.

The bill restores lucrative corporate tax breaks ushered in by the 2017 tax law that had either expired or were set to expire in the next several years.

Among those are immediate deductions for domestic research costs that would otherwise need to be spread out over a five-year period. The bill also restores full and immediate deductions for capital expenses — like new factories and equipment — and eases limitations on deducting interest expenses.

Those deductions were intentionally phased out in order to contain the estimated $1.5 trillion cost of the 2017 tax law. But many economists and political analysts had predicted the credits would ultimately be extended, given that they benefit some of the biggest U.S. companies.

The left-leaning Institute on Taxation and Economic Policy criticized the changes under discussion as a corporate giveaway, saying they would benefit profitable companies such as Google, Apple and Meta that already pay too little in taxes. However, many Democratic lawmakers appear to be ready to accept this as a trade-off for expanding the child tax credit and the affordable housing subsidy.

Reinstating the tax benefits for businesses is projected to cost $32.8 billion over a decade.

The bill includes a version of legislation that the Senate Finance Committee passed last year that would deepen economic ties between the United States and Taiwan. It would effectively create a tax treaty that is intended to pave the way for more Taiwanese investment in the U.S. semiconductor industry.

The legislation would end double taxation between the United States and Taiwan, which has strained business ties for years. Currently, Taiwanese companies and people doing business in the United States are taxed in both the United States and in Taiwan. U.S. companies operating in Taiwan are also taxed in both places, making cross-border investments more costly.

The legislation would not come into effect until Taiwan provides the same benefits to end double-taxation Americans with income subject to tax there.

If enacted, the measure would allow Republicans and Democrats to demonstrate their support for Taiwan at a moment of heightened tension with China, which considers the island part of its territory.

To pay for the tax bill, lawmakers have proposed halting a pandemic-era employer tax benefit that has been a magnet for fraud and cost the federal government billions more than had been projected.

The Employee Retention Credit, created in 2020 and expanded in 2021, was intended to encourage companies that were struggling during the pandemic to keep employees on their payrolls.

It was initially projected to cost the federal government $85 billion. But widespread abuse has bloated that tab and, as of late last year, the government had paid out about $230 billion in refunds.

Businesses can continue making claims until next April, but the legislation under consideration would stop the program at the end of this month. That could produce savings of $78 billion, according to the Joint Committee on Taxation.

While that would cover the cost of the bill, at least on paper, budget watchdogs note that the overall price tag could actually be much higher. That is because many of the provisions in the bill, while confined to a certain period of time, are likely to be extended by lawmakers when taxpayers begin to fret about their tax bills increasing.

“Even with these offsets, this package will add to the deficit over the next few years and could set the stage for substantially more debt over time,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget.

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What’s in the New Tax Deal?

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