[Senate Hearing 118-776]
[From the U.S. Government Publishing Office]
S. Hrg. 118-776
THE PRESIDENT'S FISCAL YEAR 2025 BUDGET
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
MARCH 21, 2024
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
63-029 PDF WASHINGTON : 2026
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland TIM SCOTT, South Carolina
SHERROD BROWN, Ohio BILL CASSIDY, Louisiana
MICHAEL F. BENNET, Colorado JAMES LANKFORD, Oklahoma
ROBERT P. CASEY, Jr., Pennsylvania STEVE DAINES, Montana
MARK R. WARNER, Virginia TODD YOUNG, Indiana
SHELDON WHITEHOUSE, Rhode Island JOHN BARRASSO, Wyoming
MAGGIE HASSAN, New Hampshire RON JOHNSON, Wisconsin
CATHERINE CORTEZ MASTO, Nevada THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts MARSHA BLACKBURN, Tennessee
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 4
ADMINISTRATION WITNESS
Yellen, Hon. Janet L., Secretary, Department of the Treasury,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Barrasso, Hon. John:
Letter to Secretary Yellen from Senator Barrasso et al.,
March 21, 2024............................................. 39
Crapo, Hon. Mike:
Opening statement............................................ 4
Prepared statement........................................... 41
Grassley, Hon. Chuck:
Distribution Table 2024...................................... 42
Whitehouse, Hon. Sheldon:
Letters submitted for the record............................. 44
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 52
Yellen, Hon. Janet L.:
Testimony.................................................... 5
Prepared statement........................................... 53
Responses to questions from committee members................ 54
Communications
America's Credit Unions.......................................... 93
Center for Fiscal Equity......................................... 95
(III)
THE PRESIDENT'S FISCAL YEAR 2025 BUDGET
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THURSDAY, MARCH 21, 2024
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:02
a.m., in Room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Menendez, Carper, Cardin, Brown, Bennet,
Casey, Warner, Whitehouse, Hassan, Cortez Masto, Warren, Crapo,
Grassley, Cassidy, Lankford, Daines, Young, Barrasso, Johnson,
Tillis, and Blackburn.
Also present: Democratic staff: Jonathan Goldman, Senior
Tax Counsel, International; Eric LoPresti, Detailee; Joshua
Sheinkman, Staff Director; and Tiffany Smith, Deputy Staff
Director and Chief Counsel. Republican staff: Courtney Connell,
Chief Tax Counsel; Jamie Cummins, Senior Tax Counsel; Michael
Gould, Tax Counsel; Gregg Richard, Staff Director; and James
Williams, Tax and Economic Policy Advisor.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. As much as we value the free press, we are
going to have to move on, because the Secretary is on a very
tight schedule.
Welcome, Madam Secretary. And today, of course, we are
having a hearing on the budget.
The hearing always covers a range of economic issues, so we
will start with a look at the State of the economy as we meet
this morning. Right now, the United States has the strongest
major economy in the world. You do not have to take my word for
it. Trump advisor Stephen Moore agreed with that statement in a
recent interview.
Wages are rising significantly faster than inflation, which
has come down. The labor market has never been better for
workers. There has been real progress on income inequality.
This is a period of booming entrepreneurship in America, as new
business applications are up.
Go back 4 years, when COVID cases were filling up the
hospitals and Americans were stuck at home wondering if and
when they would be able to stock up on toilet paper, forecasts
for the economy were dire. The economy under President Biden
has smashed those negative forecasts to bits. Nearly every
other country in the world with a developed economy would love
to trade places with the United States in 2024.
Now, if you listen to Donald Trump, you would believe that
the United States is on a fast track to the Dark Ages. What
does he want to do when it comes to big economic policy? For
one, Trump allies are developing a new tax agenda, cooking up
big plans for tax hikes on working Americans and middle-class
families. There will be more tax breaks for multinational
corporations, and big handouts to those up at the very, very
top--the billionaires. Donald Trump wants to repeal the
Inflation Reduction Act. Colleagues, we spent a lot of time
working on that in this committee room. He wants to, as part of
that repeal, include the funding for the IRS that has vastly
improved customer service and cracked down on wealthy tax
cheats.
All in all, Donald Trump's proposals would run bigger
deficits and pile up more debt. That would make it impossible
to shore up bedrock American programs like Medicare and Social
Security. Recently Donald Trump told an interviewer, in the
first interview on economics in quite some time, that Donald
Trump believes there is lots of room for cuts to these vital
programs, particularly Social Security. His campaign had to
walk it back, because they know his real plans on these issues
are a loser for the public.
In my view, Americans want a strong economy. They want a
fair shake for people who do not have big fortunes and
political power, and they want policies that drive down the
cost of living in our country. That is not what Donald Trump
has on offer, but that is exactly what we are zeroing in on.
For example, last year I introduced the Billionaires Income
Tax. There are now 18 Senate cosponsors.
President Biden's budget includes his own proposal, which
is focused on ending the scheme that allows billionaires to pay
what they want, when they want to, and sometimes nothing at all
for years on end. And it all involves, as the Secretary notes,
three words. If a billionaire does not want to pay taxes for a
long time, they can just buy, borrow, and die. Do those three
things, and you do not pay much if any taxes, and here is how
it works. The billionaire acquires an asset that just gains in
value. Maybe they just buy five or six houses. You cannot live
in but one at a time, but they buy all these houses, just sit
on them, borrow against them, and then when they die, all the
taxes are reconfigured.
Meanwhile, people who earn a wage are paying taxes out of
each and every paycheck. That is a basic unfairness. I share
the President's view that we are capitalists. We want people to
be successful, make plenty of money. But we also believe in
fairness, and that is what is on the line now. And the
billionaires tax ought to be the centerpiece of the effort to
save Social Security for future generations and uphold the
Medicare guarantee.
We also want to keep upgrading taxpayer service--already
vastly improved thanks to the Inflation Reduction Act funding--
while giving every American the opportunity to file tax returns
directly with the IRS. By the way, this whole approach has been
bipartisan in this committee for many years. I am looking at
our friend from Tennessee. Dan Coats at one time was on this
committee and wrote a bipartisan bill with me to do just that.
Direct File opened widely in a handful of States last week.
In just a matter of days, tens of thousands of Americans have
filed or started their returns using this new system, and they
are saving big on fees when they do so. That is progress that
is going to have to continue. Donald Trump's allies want to
stop it. They will side with the tax prep companies against
typical taxpayers, and it is safe to say that Donald Trump
himself is no champion of tax enforcement against the
billionaires and the people at the top.
Before I wrap up, I want to mention one other topic that
members of this committee know a fair amount about. It has now
been 7 full weeks since 357 members of the House voted to pass
legislation that was developed by Republican Chair Jason Smith
and myself over a period of many months. The legislation
restores important incentives, particularly for small business
research and development incentives, and expands the Child Tax
Credit. Now, I have listened to many of my Republican Senate
colleagues, and I have made it clear that I will work with
anybody who wants to find a way to get this done quickly.
You have heard all this talk, Madam Secretary, about, well,
maybe you put it off until 2025. There are some big businesses
that might be able to survive that, but these innovative, small
companies that look at that R&D break as a lifeline, they are
not going to make it until 2025.
The number one concern I have heard from Republicans is the
Child Tax Credit lookback policy. I heard that from a number of
colleagues. They think that, as structured by Chairman Smith
and I, this would somehow discourage work. I do not happen to
agree with that. The Joint Committee on Taxation does not
happen to agree with it.
But in order to make for a bipartisan bill--it has been a
long time since we have had a bipartisan tax bill around here;
some of my colleagues have not even seen one--I have offered to
take the lookback provision out of what Chairman Smith and I
developed, if it helps us get this bipartisan bill over the
finish line. Working with community leaders, Madam Secretary,
we have found a way to do this and still lift the same number
of kids out of poverty.
I want colleagues of both parties on the committee to know
that the offer to remove the lookback policy that was in the
Smith-Wyden legislation is still on the table as of this
morning, if we can find common ground and move ahead. And as I
mentioned, this idea of waiting until 2025, Madam Secretary,
particularly for these innovation-oriented small businesses--
Senator Hassan has led the effort to point this out over
several years--I think would cause us to do significant damage
to the economy, and certainly to the innovation ethic that
colleagues on both sides of this dais have supported.
Now, I will wrap up by way of saying I believe that there
are more than 60 members of the Senate who want to act on this
in a bipartisan way. So I am going to keep at it. You know,
members may be tired of hearing about it after a few days, but
I sure believe that it is important to do bipartisan tax work
now that actually helps people. And if anything, it sets the
table for 2025.
With that, I turn it over to Senator Crapo.
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman. Madam Secretary,
thank you for being here.
Last week, President Biden released his staggering $7.3-
trillion budget proposal. As expected, it was filled with
familiar partisan tax-and-spend proposals, doubling down on an
agenda that was rejected even when the Democrats had majorities
in both the House and the Senate.
The President proposes nearly $5 trillion in new and
increased taxes. Tax increases of that magnitude will affect
all Americans through lower paychecks and higher household
expenses. However, the most notable tax increase Americans
would face under the Biden budget is one that went
conspicuously unmentioned: the tax increase that would result
for households earning less than $400,000 if the tax cuts from
Republicans' Tax Cuts and Jobs Act, the TCJA, are not extended.
While the administration continues to spread misleading
information about the TCJA, they cannot deny that if the TCJA
individual tax cuts are not extended, individuals making less
than $400,000 would face more than $2 trillion in the tax
increase, breaking the President's pledge.
As many TCJA provisions are set to expire after next year,
the differences between Biden's plan and the Republicans'
actions have never been more stark. The TCJA led to one of the
strongest economies in generations. Prior to the pandemic, the
TCJA's progrowth policies translated into wage increases,
record-low unemployment, higher incomes, stronger wage and
wealth gains for lower-income Americans than higher-income
Americans, and reduced inequality. In fact, the largest wage
gains were concentrated in the bottom quarter of the wage
scale.
For American businesses, TCJA introduced a competitive tax
rate while broadening the base, including by enacting the first
global minimum tax of its kind, GILTI, and putting an end to
corporate inversions. It also led to record-high corporate tax
receipts, both nominally and as a share of gross domestic
product.
Instead of taking note of TCJA's successes, President Biden
for the fourth time proposes trillions of dollars of tax hikes
on American businesses. The Biden proposal proposes increasing
the corporate tax rate to 28 percent, which according to the
U.S. Tax Foundation would result in the United States having
the second-highest combined rate among developed countries.
Economists agree a tax increase on American businesses will be
passed on to working families in the form of higher prices and
lower wages.
The administration's failure to prioritize American
businesses and workers extends to its international tax
negotiations. Instead of defending the U.S. global minimum tax,
GILTI, the administration again uses the OECD's global tax code
to justify hiking taxes on American companies at rates far
exceeding those imposed by other countries. Even more
unfathomable is the administration agreeing to a deal that
punitively treats vital congressionally enacted investment
incentives like the R&D tax credit, while blessing identical
activities if delivered as government subsidies. But the global
tax code is not the only concerning part of the international
tax negotiations. The administration should have deep
reservations about signing on to the OECD's global tax treaty
at month's end. The Joint Committee on Taxation's recent
analysis indicates that this deal reduces revenue; fails to
provide certainty or stability; and would not halt
discriminatory taxes targeting American companies, which was
the sole impetus for entering these negotiations.
The list of tax increases goes on. Tax hikes on American
energy production that would decrease our energy independence
and eliminate good-paying jobs; a tax hike on savings and
investments; a tax hike on generational family businesses.
While the list of tax increases grows, so does one tax
giveaway, the green energy tax incentives included in the
Inflation Reduction Act, which benefit China and foreign
manufacturing, and have ballooned from an estimated cost of
$270 billion over 10 years to $663 billion over 10 years.
In stark contrast to the Republicans' achieved objective of
lower taxes and competitive rates across the board, President
Biden's vision for American workers and companies is clear:
higher taxes and uncompetitive rates for the majority to
support government subsidies for a few.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo.
Welcome, Madam Secretary. I know you've got a hard stop at
12:30. We have great member interest on both sides, so,
colleagues, we are all going to have to stick to 5 minutes, and
I will just go out on a limb here. Senator Crapo and I will
stick to that, and we will make sure everybody gets in.
Okay, Madam Secretary, welcome.
STATEMENT OF HON. JANET L. YELLEN, SECRETARY, DEPARTMENT OF THE
TREASURY, WASHINGTON, DC
Secretary Yellen. Thank you, Chairman Wyden, Ranking Member
Crapo, and members of the committee. Thank you for the
invitation to testify.
Well, for the past 3 years, the Biden administration has
driven a historic economic recovery. GDP growth is strong,
inflation has come down significantly, and the labor market is
remarkably healthy. Real wages and household median wealth have
increased since before the pandemic. Families are putting their
additional income and accumulated savings back into the
economy, and we see many signs of optimism, from the record 16
million small business filings under this administration to
improved consumer sentiment over the past 3 months.
President Biden and I recognize that many American families
still face challenges, such as high prices, so we are taking
additional actions to bring down the cost of key household
expenses, like energy and health care. We are also focused on
expanding our economy's capacity to produce and create good
jobs, while reducing the deficit.
As we implement the bipartisan infrastructure law, the
CHIPS and Science Act, and the Inflation Reduction Act, we are
creating economic opportunity for Americans regardless of where
they live and whether they have college degrees. We have seen
companies announce $650 billion in clean energy and
manufacturing investments since the start of the
administration.
The modernization of the IRS, made possible by the IRA and
discretionary appropriations, is enabling Americans to receive
the support they deserve, including by driving significant
improvements in customer service. Investments in the IRS are
also enabling enforcement actions against tax evasion by the
wealthiest Americans, which cost our country over $150 billion
a year--actions such as recovering $500 million in taxes owed
by millionaires to launching a new initiative to end abuse of
corporate jet write-offs.
The President's budget proposes additional investments to
lower costs for workers and families and to strengthen our
economy while reducing the deficit. It proposes making health
care more affordable for millions of Americans by making
permanent the expansion of tax credits for health insurance
programs enacted in the American Rescue Plan Act and extended
in the Inflation Reduction Act. And the budget includes
expanding the Earned Income Tax Credit, Child Tax Credit, and
the Low-Income Housing Tax Credit, proposals which would
contribute to lowering child poverty and giving working
families more breathing room in their household budgets. We can
make these investments while reducing the deficit by $3
trillion over a decade, through a combination of smart savings
and tax proposals.
President Biden and I continue to urge Congress to act so
that the United States plays its part in the global minimum tax
deal, which is currently being implemented in jurisdictions
around the world, to end the race to the bottom in corporate
taxation. We have also proposed implementing a billionaire
minimum tax so that the top 100th of 1 percent pay their fair
share; raising the tax on corporate stock buybacks to encourage
businesses to reinvest profits in their workers and grow their
companies; and closing estate and gift tax loopholes that allow
wealthy Americans to pay less than they would otherwise owe. We
will also continue to oppose misguided proposals that will grow
the deficit by offering large tax breaks to the wealthy and big
corporations. As a whole, the budget will enable us to continue
to grow our economy and support workers and families, while
upholding our commitment to fiscal responsibility and reducing
the deficit.
I will be happy to take your questions.
[The prepared statement of Secretary Yellen appears in the
appendix.]
The Chairman. Thank you, Madam Secretary. You just set a
land speed record for a Secretary getting through their
statement, and we thank you.
Madam Secretary, tax dodging in America has many faces.
Whether it is a crooked Swiss banker hiding American income, a
billionaire deducting the personal use of private jets and
superyachts, or the nearly 1,000 millionaires who somehow got
away without even filing a tax return until the IRS really
began to crack down, we have seen these tax dodges in a whole
assortment of different strategies. The biggest loophole, as I
indicated, is ``buy, borrow, and die.'' You know, buy, borrow,
and die is a glidepath for billionaires to pay little or
nothing, as I said, for years on end. Can you explain, Madam
Secretary, why it is so important for billionaires to start
paying taxes on this income, because that is what it is?
Secretary Yellen. I agree with you. Under current law, some
of the wealthiest Americans pay very little tax, because they
receive their income as capital gains, and those capital gains
aren't taxed until realized and may escape income taxation
entirely at death.
So the President's budget would impose a minimum tax of 25
percent on total income, inclusive of unrealized capital gains.
It would apply to the wealthiest 100th of 1 percent of
taxpayers with more than $100 million in wealth. And the
proposal would put an end to the situation that exists today,
in which wealthy households, as you noted, borrow against their
wealth. They use that borrowed wealth to finance a lavish
lifestyle, while at the same time reporting that their wealth
generates little or no income for tax purposes.
Your proposal for a Billionaires Income Tax would address
the same root problem using a slightly different approach,
marking to market the value of publicly traded assets every
year, and imposing a deferral charge on other assets. And both
the President's proposed approach, like yours, would really put
an end to the problem of wealthy taxpayers with large
investment gains reporting little income for tax purposes and
often escaping any taxation at death.
The Chairman. I remember the announcement. The President
apparently was surprised one day when they said, ``What do you
think of Ron Wyden's proposal?'' He said, ``I like Ron Wyden's
proposal,'' and then I was surprised a few weeks later because
the President--and I appreciate it--looked at some of our
concepts. So we have a good strategy.
Let's go next to the employee retention tax credit, which
has been riddled by fraud. Chairman Smith and I both have said,
we have 95 percent of the claims coming in essentially tainted
by fraud. If Congress does not cut off these employee retention
claims by passing this bipartisan legislation, would you expect
fraudulent claims to continue to flood the Internal Revenue
Service?
Secretary Yellen. Well, I would. The administration has
serious concerns about improper ERC claims. We have seen claims
made by entities that did not exist or did not have employees
during the period of eligibility. Right now, the IRS is
actively auditing and conducting criminal investigations that
are related to the false ERC claims.
And the legislation that you have proposed, I believe, the
administration believes makes critical investments in America
to grow our economy and lower costs for families. It advances
bipartisan priorities like increasing the supply of housing,
helping parents provide for their children, and supporting
American innovation by investing in research and development.
And I think it is a tremendous positive that the bill pays
for these key investments by really protecting honest small
business owners and ending a pandemic-era program that is just
like----
The Chairman. Let me get my last question in under the gun.
So this committee, in effect, started breaking 50 years' worth
of gridlock on climate change. For 50 years, there has not been
anything on carbon taxes, there has not been anything on cap
and trade. In late Spring of 2021, we came together around a
private-sector approach without mandates. It rewarded reducing
carbon emissions, and particularly it was technologically
neutral, which authorities said was right at the heart of what
we ought to do to have a new kind of system.
Can you commit that the Treasury Department is going to
issue the proposed rules for these technology-neutral
incentives by June?
Secretary Yellen. Well, what I will commit is, it is a very
high priority for us. We are working hard on it. I cannot give
you a precise date, but we are working on it. All of these tax
rules involve collaboration with the Department of Energy and
EPA.
But these are at the top of our priority list. We want to
get it out soon, and these will be important successors to the
production tax credit and investment tax credit that have been
driving explosive growth in the wind and solar industry.
The Chairman. Thank you.
Senator Crapo?
Senator Crapo. Thank you.
Secretary Yellen, according to the White House, under
President Biden's 2025 budget, no one earning less than
$400,000 per year will pay a penny in new taxes. I agree with
that. I agree it is a bad idea to raise taxes on Americans
suffering from record inflation at this point. Interestingly
though, the President's budget is essentially silent on
extending the individual tax provisions of the Tax Cuts and
Jobs Act, many of which expire next year. This first question
can be just a simple ``yes'' or ``no.'' Are you aware that the
Tax Cuts and Jobs Act, which Republicans passed in 2017,
reduced the taxes for Americans of all income groups, including
those earning less than $400,000?
Secretary Yellen. Yes; and the President has made clear
that he will oppose raising back the taxes for working people
and families making under $400,000, when those provisions
expire.
Senator Crapo. So he would support extending those tax
cuts?
Secretary Yellen. He will.
Senator Crapo. Good. That is good news.
The TCJA also nearly doubled the standard deduction. Would
that be included in what the President will continue to agree
to support extending?
Secretary Yellen. Well, I cannot give you details, other
than saying that whatever agreement is reached, he is committed
to not raising taxes on households making under $400,000.
Senator Crapo. All right.
I think that this next one you have already answered too,
but I want to ask it specifically. The TCJA also doubled the
Child Tax Credit to $2,000 per child. Would you agree that if
the TCJA Child Tax Credit provisions are not extended, this
would also result in a tax hike for Americans making under
$400,000?
Secretary Yellen. Well, as I said, he is committed to not
raising taxes on households making under $400,000 and has
expressed commitment to the importance of the Child Tax Credit,
which has dramatically lowered child poverty.
Senator Crapo. Well, this is good news. I am understanding
you to say that the President will support extending these
policies in the TCJA that would result in an increase in taxes
on people making under $400,000.
I would also like to follow up, however, on the President's
serious proposals for increasing taxes on the corporate rate.
The bottom line there is, if the President's proposal to
increase the corporate tax rate to 28 percent is adopted, it
will make it the highest combined corporate rate in the world,
which will again result in corporate inversions; capital
leaving the United States; increased prices for Americans,
adding on to inflation; and reduced wages. Is the President
seriously considering causing those kinds of economic impacts
when we need to have our economy stay strong and have our wage
growth be vibrant?
Secretary Yellen. I agree with you that we need a strong
economy, and we would not want to see capital flee from the
United States to foreign shores. That is the reason for
supporting the OECD's tax pact, which many countries, including
the UK, Japan, the European Union, and others are now putting
into effect. They are putting into effect a 15-percent minimum
tax on multinational corporations.
Senator Crapo. Well, let me move to the OECD now, because
as you know, the budget once again proposes to align U.S.
global minimum tax with certain aspects of Pillar 2, but
proposes a much more onerous version of it, including a rate
40-percent higher than the OECD deal, which is 21 percent
versus 15 percent, and without any substance-based exclusion as
provided under the deal.
Last year, the administration's budget estimated that that
proposal, combined with adopting Pillar 2's Undertaxed Profits
Rule, would raise over a trillion dollars. But this year's
budget estimates for those two combined proposals come in at
more than half a trillion dollars lower. Is the year-over-year
$500-billion estimated decrease a result of countries adopting
Pillar 2 rules into law over the last year?
Secretary Yellen. Yes, in the sense where standard
procedure is to estimate what the tax savings or expense would
be under the assumption the United States adopts a policy, but
does not assume that everyone else does. So, when there are
changes abroad, it does change the estimates.
Senator Crapo. Well, my time is expiring. I will just say
that the JCT has estimated that if both the rest of the world
and the U.S. enacted Pillar 2 next year, the U.S. would lose
over $50 billion in revenue. This is a revenue-loser for
America, and is damaging to our economy.
Thank you, Mr. Chairman.
The Chairman. Senator Menendez?
Senator Menendez. I am pleased to have supported the
American Rescue Plan, which restored the Child Tax Credit to
offer vital assistance to diligent, hardworking families. This
expansion aids children from diverse backgrounds and supports
communities where parents face disproportionate representation
in low-wage positions, due to systemic discrimination and other
obstacles to advancement. With additional expansion,
approximately 16 million children could see benefits within the
initial year, with over one-third of all Black and Latino
children under 17 seeing benefits as well.
So, Secretary Yellen, is expanding the Child Tax Credit a
way to create more economic stability for eligible families,
and isn't having monthly payments as a way in which it is
ultimately paid out a critical element of reducing child
poverty?
Secretary Yellen. Yes. I believe the Child Tax Credit has
been, and if expanded in the future would reduce child poverty
absolutely dramatically. In 2021, when we had monthly payments,
that was something that the IRS, in spite of all of the funding
shortages it had and difficulties, quickly put into effect very
effectively.
What we saw was that 5.3 million people moved out of
poverty, including 2.9 million children. There were----
Senator Menendez. So, it clearly is one thing that
government can do----
Secretary Yellen. Absolutely----
Senator Menendez [continuing]. That can dramatically help
particularly children get out of poverty. So I look forward to
the chairman's bill being brought to the floor.
Currently, 43 million people have outstanding student debt
totaling $1.6 trillion, which keeps hardworking Americans from
achieving financial security. Previously, student loan debt
that was canceled was considered taxable income by the IRS, and
thus individuals who received that cancellation would face a
large surprise tax bill, which undermines the importance of
loan forgiveness in the first place. I am proud to have had my
Student Loan Tax Relief Act included as part of the American
Rescue Plan. That provision made any college loan forgiveness
tax-free, ensuring borrowers whose debt is fully or partially
forgiven aren't hit with thousands of dollars in surprise
taxes--ensuring that that does not happen.
But the provision sunsets in 2025, and I am worried that
any forgiven student debt in the future will result in a
burdensome tax bill. So, Madam Secretary, isn't it just common
sense to have canceled student debt be considered tax-free?
Secretary Yellen. Certainly, the administration was
supportive of that, and I do not know that they have taken a
position going forward. But President Biden has felt very
strongly about wanting to relieve the burden of this debt.
Senator Menendez. Right, and in his desire to relieve debt,
which I share, it just does not make sense to then have it
taxed at the end of the day. So I hope we can extend it.
I was pleased to see that the budget calls for a permanent
extension of the New Markets Tax Credit. This credit has
brought over $1.4 billion to New Jersey alone, bringing much-
needed private investment to community development entities
that provide loans, investments, and financial counseling to
low-income communities across the State. Madam Secretary, what
possibilities will making this credit permanent lock in for
low-income communities?
Secretary Yellen. Well, I think it is a tremendously
important tool for bringing much-needed investment into
communities, especially some of the poorest communities that
really can benefit from it and are suffering from a severe
shortage of investment, and we would like to see it made
permanent.
Senator Menendez. Well, according to an analysis from the
Urban Institute, the New Markets Tax Credit leads to the
creation of jobs through funding for manufacturing and other
businesses, expansion of health-care services, construction and
housing services for vulnerable populations, and much more. And
so, if we allow it to lapse, then we will miss out on all of
that economic investment, not just for those communities, but
for others.
Finally, the one disappointment that I do have, Mr.
Chairman, about this budget is the State and local property tax
deduction, which is about middle-class families in New Jersey
and across the country. We have not restored it. It was the
oldest provision of the tax code, and while it expires next
year, I just want to wave the saber to say that when it
expires, we are going to fight like hell to make sure it does
not continue to expire.
With that, thank you very much, and I give you back 8
seconds.
The Chairman. Thank you.
Senator Grassley?
Senator Grassley. Yes. Let's start with the President's $5-
trillion tax hike and the fact that he says that nobody under
$400,000 is going to pay anything. And then let's go to the
website in your Department's Office of Tax Analysis. It
provides a distributional analysis for all major taxes. I ask
unanimous consent to put this in the record, Mr. Chair.
The Chairman. Without objection, so ordered.
[The analysis appears in the appendix beginning on p. 42.]
Senator Grassley. This analysis shows that households with
income below $310,000 bear approximately 37 percent of the
corporate tax under current law. The fact is that millions of
middle-class Americans with 401(k)s or IRAs bear the burden of
the corporate taxes, as do workers, in the form of lower wages.
So my question, based on Treasury's own analysis of the
corporate tax burden, is, is it not true middle-class Americans
will shoulder the burden of the President's tax hike, to the
tune of hundreds of billions of dollars?
Secretary Yellen. So, I think, when you change taxes on
corporations, what the impact is on families involves a web of
channels that are speculative. They are included in models that
sometimes the Treasury uses for the purpose of analysis. But a
tax that is levied on corporations that has no obvious direct
effect on households, I do not believe the President would
regard as raising taxes on families making under $400,000.
Senator Grassley. Well, we all know that corporations are
just a tool to pass through taxes to either management,
consumers, or workers, and I think that it is realistic to say
that the President's tax is going to hit people with either
lower wages or salaries, or the consumers are going to pay it.
Secretary Yellen. I think if you look at the entire budget
and the President's overall program, what you will see is a
budget that not only reduces the deficit by about $3 trillion,
but also invests in our economy in ways that especially benefit
low-income workers and the middle class. It reflects an
approach I have called modern supply-side economics, which is
already showing itself to be tremendously effective in
generating investment in our economy, and is creating jobs all
throughout the country.
Senator Grassley. I want to move on. The President's budget
purports to stabilize the national debt as a share of the
economy, at levels that rival World War II records. Even the
Bloomberg editorial board, in a recent article that expressed
support for much of the President's agenda, questioned the
administration's math.
This is because the budget relies on rosy economic and
interest rate assumptions, along with many other gimmicks. This
includes assuming the 2017 tax law expires, which would mean a
$2-trillion tax hike on those earning under $400,000, a direct
violation of the President's pledge. Rather than being fiscally
responsible, doesn't the President's budget, by making no real
effort to address runaway spending, set the middle class up for
larger tax hikes down the road? Isn't that what the budget
does?
Secretary Yellen. Well, I would strongly disagree with that
description of the budget. First of all, the economic
assumptions, if anything, are less optimistic than current data
suggests. Economic growth has proven stronger, the labor market
stronger than is reflected in our economic assumptions. The
economic assumptions do show a rise in interest rates, which
does impact that surface cost. But the most important metric of
sustainability of fiscal policy is real net interest paid on
the debt, and that is stabilized in the President's budget.
Senator Grassley. Let me sum it up this way. You are
telling us something much more optimistic than what we hear
from our own Congressional Budget Office.
The Chairman. The time of the gentleman has expired.
Senator Cassidy is next.
Senator Cassidy. Hey, Madam Secretary, thank you for being
here.
Madam Secretary, as we know, Social Security goes insolvent
in 8 to 9 years. The President has not put out a plan; he has
put out a series of talking points. He calls them general
principles, but there is nothing detailed in that report. In
it, he very loudly is saying that he is going to raise taxes on
those over $400,000 a year, as he said 4 years ago when he was
campaigning for office the first time, but he has still not
updated. Now, I will note that there has already been $4.9
trillion in new taxes proposed for those making over $400,000 a
year.
It seems to be the go-to place, fill in the blank, we are
going to tax those over $400,000 a year for whatever. Of that
$4.9 trillion, none of that has been dedicated to Social
Security. So, with that context, if you are going to address
the unfunded accrued liability for Social Security, what would
the tax rate have to be or what would the total amount of taxes
have to be on those making over $400,000 a year?
Secretary Yellen. I do not have that computation to offer
you, but the President has in the past discussed the
possibility of raising the ceiling on what income would be
included. Of course, he would protect those--his pledge is to
protect households making under $400,000.
Senator Cassidy. But let me ask, because the President
theoretically has a plan, and if I am rubbing my forehead, it
is just because it seems worse than I thought. If there has not
been a computation, if there has not been a calculation of what
the tax rate would have to be on those making over $400,000 a
year, has Treasury really not looked at, well, are we charging
$4.9 trillion for the deficit for Medicare, for a lot of other
things, and now we have to add Social Security, but we have not
done the math to figure out how much that tax rate would have
to be?
Secretary Yellen. The President does not have a plan. He
has principles. He wants to work with Congress to find a way to
protect Social Security and extend its solvency beyond 2031.
Senator Cassidy. Now, if the President wishes to work with
Congress, why does he continually demagogue Republicans on
anything that does not exactly line up to what apparently suits
his reelection? If I am frustrated--there is going to be a 23-
to 25-percent cut for those receiving benefits now, which will
double the rate of poverty among the elderly--double the rate
of poverty among the elderly--in 8 years, and he does not have
a plan. Madam Secretary, how could he justify not having a plan
when he has been in office for 3 years already?
Secretary Yellen. He believes it is important to work with
Congress and----
Senator Cassidy. Madam Secretary, he has not worked with us
at all. On this Senate Finance Committee, we have not heard--at
least I haven't, and I have been very active in this issue--we
have not heard from the President one peep, except to hear
demagoguery rhetoric yelled at us on State of the Union
addresses as regards Social Security.
So, can the American people who rely upon Social Security--
when can they expect the President to come to us and ask to
begin to work on that plan?
Secretary Yellen. Well, the President has laid out a plan
for Medicare----
Senator Cassidy. That is not my question.
Secretary Yellen. Which is----
Senator Cassidy. He has laid out general principles, as you
said earlier, but he has certainly not come to us and said, ``I
want to enter negotiations.''
Secretary Yellen. It is true that he started with
Medicare----
Senator Cassidy. Then let me ask you on that. On Medicare,
there is a certain ratio of public funds supporting Medicare
relative to the trust fund, and when it exceeds a certain
threshold, it is called an emergency, and within 15 days, the
President is supposed to submit a plan. Last year we hit that
threshold. This year we hit it again, and I have not seen a
President's plan submitted.
Secretary Yellen. The President did lay out a plan for
Medicare. It involves extending trust fund solvency by modestly
increasing Medicare tax rates on incomes above $400,000, and
then closing loopholes in existing Medicare taxes.
Senator Cassidy. I'm sorry. Did the President include the
SMI in that plan, the SMI covering Parts B and D? I don't think
he covered B and D.
Secretary Yellen. This is with respect to the hospital
trust fund.
Senator Cassidy. So Medicare, of course as we know, also
includes Parts B and D, and the funding and the cost of those,
which are almost entirely out of the general fund, about 85
percent out of general fund, are going to exceed expenditures
from the hospital trust fund.
The President's plan did not include those two areas. I am
a doctor. I know how important Medicare is, and the President
has not submitted a plan for that, which is the fastest-growing
portion of the plan, in order to address it. Madam Secretary,
this has been a very disappointing performance by a man who
wants to once more be our President for the next 4 years, on
two programs incredibly important to our seniors.
With that, I yield.
The Chairman. The time of the gentleman has expired.
Secretary Yellen. I believe the President has laid out a
plan for the hospital trust fund, and he has laid out a budget
that contains $3 trillion of deficit reduction, and that
provides enough general revenues to be able to support the
expenditures that are projected for Part B.
The Chairman. Senator Johnson?
Senator Johnson. Madam Secretary, welcome.
In your testimony, you repeat what OMB Director Young also
said, that the President's budget reduces the deficit by $3
trillion. President Obama in his final budget, Fiscal Year
2017, his cumulative deficit was about $6 trillion. Four years
later in President Trump's final budget for Fiscal Year 2021,
his cumulative deficit over 10 years was $5.6 trillion. I mean,
neither one of those Presidents ever projected a deficit more
than a trillion dollars. Since President Biden came into
office, he has yet to produce a budget where he proposed a
deficit of less than $1.3 trillion.
So, we went from President Trump's budget in Fiscal Year
2021 of $5.6 trillion; a year later President Biden projects a
10-year deficit of $14.5 trillion. The following year, another
$14.4 trillion. Last year's budget, he was projecting $17
trillion of 10-year cumulative deficit. This budget now is
$16.3 trillion. Now I see President Biden's budget going up $8
trillion over Trump's, then going up another $3 trillion over
his own budget, and now coming down a trillion less than last--
not even a trillion, about $700 billion less. Where do you come
up with saving $3 trillion in deficit?
Secretary Yellen. Well, that is a straightforward
calculation, which compares the budget that he has proposed
with the baseline that would exist if current law continues.
Senator Johnson. Madam Chair, again the baseline he came in
with was $5.6 trillion. He bumped that baseline to $14.5
trillion, maintained the $14.5 trillion, bumped that to $17
trillion. So, he increased it $3 trillion, then I guess brought
it down $700 billion.
Again, where do you get a $3-trillion reduction in deficit,
other than just making it up, pulling it out of thin air, which
is what you have done?
Secretary Yellen. Well, the President is not pulling it out
of thin air. He has proposed a number of savings----
Senator Johnson. Where is the calculation? Tell me how you
calculate a $3-trillion decrease in the deficit when you go
from $5.6 trillion to $14.5 trillion, $14.5 trillion, $17
trillion, and now $16 trillion. Where is a $3-trillion
reduction in deficit ever shown in the President's own budgets?
Secretary Yellen. Well, I think if you look at the budget
and you examine the tables, the table----
Senator Johnson. I am looking at the budget. I have the
numbers here. I can do the math.
Secretary Yellen. Table S-3 gives the budget baseline, and
then Table S-4 gives the proposed budget, and you compare those
two and you will see exactly where those numbers come from.
Senator Johnson. Okay. Provide me that calculation please.
I would like to see that, because I am giving the numbers here,
so I would appreciate the calculation.
Let me ask you a question. Do you know how much the Federal
Government spent in total only 4 years ago in Fiscal Year 2019?
Secretary Yellen. Well, that was pre-pandemic.
Senator Johnson. I realize that.
Secretary Yellen. I do not have that number in front of me,
but----
Senator Johnson. Well, it was $4.4 trillion. You know how
much the U.S. population has grown since that point in time?
Secretary Yellen. A few percent.
Senator Johnson. Yes, less than 2 percent. Do you know how
much you are proposing--what percent increase you are proposing
spending next year? We went up from $4 trillion, $4.4 trillion;
the population grew at 2 percent.
Secretary Yellen. The population aged, and because we have
an older population, spending on Social Security, Medicare----
Senator Johnson. The answer to the question is, you are
increasing spending 63 percent, almost $3 trillion over what we
spent, $4.4 up to $7.3 trillion. How can you justify that?
The Chairman. Senator Johnson, let's let the Secretary
answer your question.
Secretary Yellen. Well, the President has proposed a budget
that I regard as fiscally responsible. You were looking at one
metric, which is the dollar value of the deficit. I think a
more relevant economic measure is real net interest as a share
of GDP.
We have a strongly growing economy, with a much larger GDP,
and if you look at Table S-1, you will see that the proposed
budget stabilizes real net interest over 10 years at a
historically normal level. The President's budget helps
Americans lower costs that are tremendously burdensome to them.
It provides adequate funding to the Internal Revenue Service so
that they can collect taxes that are due and shrink what is an
utterly enormous tax gap amounting to about $150 billion.
The Chairman. The time of the gentleman has expired.
Senator Johnson. The President's massive deficit spending
has caused the value of the dollar to decrease from a dollar to
85 cents during his administration. That is what the
President's budget has done.
The Chairman. The time of the gentleman has expired.
Senator Bennet?
Senator Bennet. Thank you. Thank you, Mr. Chairman.
Thank you, Madam Secretary for being here. Thank you for
your testimony, and I also want to say ``thank you very much.''
I am not going to ask you any questions about it today, but
thank you very much for working with us on the Colorado TABOR
issues and the other issues that we have raised. I feel like we
are constantly pounding on your door for help, and you have
been very willing to help understand the situations that we are
facing, including our efforts to try to protect working
families in Colorado from tax increases, the result of a
different opinion about TABOR. So, thank you for that.
You know, it might surprise people here to say that I worry
a little bit about the rise in interest rates, and what that is
going to mean in terms of our ability to be able to not just
deal with our deficits, but also make sure we do not erode
substantially the discretionary spending that we have. We have
had 10 years or more of 0-percent interest rates, which I think
is the result in part of--and we might disagree about this,
Madam Secretary--but I would say overly aggressive monetary
policy from the Fed that kept rates at zero for probably longer
than they should have, and with an expansive quantitative
easing that I think had the effect of driving problematic
income inequality--or wealth inequality, I guess I should say--
as a result of the appreciation of asset prices here.
I think we are sort of dealing with the back end of that
now, and it is worrisome. But things are going to set in at a
more normalized rate for families and for the Federal
Government, and the young people around here have never seen an
interest rate environment really that was more normal, like 4
percent or 5 percent. They may have seen 0 percent for a
decade. That is not the way it used to be, and that is not the
way it will be, and I think that is not the way our economy
should run. I think we are at a moment where we need to think
about how we bring in line our revenues and our expenditures.
One of the things that drives me crazy, though--I never
hear it from my colleague who was banging on this dais a few
minutes ago--is the degree to which tax cuts for the wealthiest
people in America have created so much of the deficit situation
that we are dealing with. I mean, take the Bush tax cuts, take
the Trump tax cuts, and I think more than 60 percent of the
delta that he is talking about in terms of our deficit is the
result of those tax cut provisions. Most wealthy people I know,
they might like to have tax cuts, they might philosophically
believe that tax cuts are good, but they certainly do not need
the money.
When I think about things like the Child Tax Credit, which
cut childhood poverty in half in this country, that has, I
would argue, enormous fiscal benefits as well as just moral
benefits. It just seems crazy to me that we are continuing to
use this trickle-down economics as an argument to borrow a
whole bunch of money to give the wealthiest people in America
tax cuts.
I mean, think about this, Mr. Chairman. When you take the
Bush tax cuts and the Trump tax cuts together, about a quarter
of those cuts went to the top 1 percent of Americans, about a
quarter of those cuts. That is about $2.5 trillion that went to
the top 1 percent of Americans. That is 1.6 million people.
Americans at the bottom quintile--you know, that is 10 million
people by the way, 10 million versus the people at the very
top--they got $100 billion out of those two deals.
So, could you talk a little bit about that, Madam
Secretary, the way in which--you know, if you, I guess, were
helping set the priorities in this country, maybe if you were
being fiscally responsible, the first thing you might not do is
cut taxes for the very wealthiest people in America, without
paying for a single cent of it.
Secretary Yellen. I completely agree. And if you look at
CBO calculations, look at what was projected in terms of tax
collections, I believe that in 2017, before TCJA passed, CBO
was projecting revenues would be about 18 percent of GDP. And
instead, they were about 16\1/2\ percent last year, and CBO was
projecting around 17 percent.
So, a significant part of the deficit comes from that, and
what President Biden is proposing to do is to ask wealthy
people, high-income people, to pay their fair share. It is
important that they be successful, that we have an economy
where people can invent things and run businesses and earn
healthy profits. But then they need to pay their fair share,
and with tax rates on dividends and capital gains--they are
lower than many people pay on ordinary income, with step-up of
basis, with no taxation of unrealized capital gains.
The wealthy pay--I believe a recent calculation shows that
some of the very wealthiest pay on average about 8 percent of
their total incomes in taxes, and that should be remedied. And
it provides a very ample pool to invest in our economy and to
grow the economy from the bottom up and the middle out.
Senator Bennet. Thank you.
The Chairman. As much as I agree with Senator Bennet, we
have to move on.
Senator Blackburn, you are next.
Senator Blackburn. Thank you, Mr. Chairman. Madam
Secretary, thank you so much for your time today.
I do want to get to the budget. Before I do, I want to ask
about Treasury's activities and your activities with Communist
China. I am so concerned about what appears to be appeasement
coming from Treasury. And of course we know China has practiced
intellectual property theft, and you have the genocide that is
taking place against the Uyghurs. They are in Xinjiang, and the
Trump administration had sanctioned the Xinjiang Production and
Construction Corps, because they are a paramilitary
organization with a 50-percent stake in more than 2,800 Chinese
companies.
What we have received are reports that, under your
leadership at Treasury, you all have not fully enforced these
sanctions or issued new sanctions against subsidiaries of this
entity. That is disturbing, so I would like to know what
specific actions you are taking to ensure that this Chinese
Communist Party entity is sanctioned to the fullest extent of
the law, and what you are doing to identify individuals and
entities to sanction, to put further pressure on Communist
China for its ongoing genocide and its crimes against humanity.
Secretary Yellen. Well, I absolutely agree with you that
Treasury and the Biden administration should be sanctioning
human rights violations that are occurring in Xinjiang. And
there is no appeasement, I want to assure you, on this matter.
Senator Blackburn. Okay.
Secretary Yellen. If you are aware of some specific matter
that you think involves a problem, I will put your staff in
touch with mine to try to clarify what we are doing. But there
has not been, to the best of my knowledge, any weakening of
these sanctions. We take them seriously.
Senator Blackburn. Okay. Well, Treasury sits on the Forced
Labor Enforcement Task Force and has the ability to make
recommendations for Chinese entities to be added to the Uyghur
Forced Labor Prevention Act entity list. Currently, the
majority of entities were put on the list by the Departments of
Commerce and Homeland Security, and you have broad capabilities
for identifying bad actors, such as through the Office of
Foreign Asset Control. Yet Treasury has not made
recommendations for new actors to be added to the entity list.
So, as you review this, if you could let me know why you have
not and what you plan to do about that, that would be helpful.
Secretary Yellen. I would be glad to get you a briefing on
it, but I do want to emphasize that these human rights
violations are a very serious concern, and our sanctions and
use of our authorities are intended----
Senator Blackburn. Yes, and we would like to see those used
to the fullest extent of the law, and it is disturbing to hear
that they are not.
Let me ask you one other thing. It is National Ag Week, and
I just was talking to some of our producers in Tennessee. U.S.
ag exports dropped by $17 billion last year, and China did not
live up to their ag purchase. We hear this from our soy and our
cotton farmers in Tennessee, and there were some great
provisions put in place under President Trump's Phase One deal.
So, have you or your staff raised this to Chinese officials in
your meetings?
Secretary Yellen. Yes. The U.S. Trade Representative has
tried to hold China to the agreement to carry out the
commitments that they made. China has failed to do so, and we
have not lowered any of the tariffs that we put in place. I
think as you are aware, we have taken many other actions to
deal with unfair Chinese practices, including threats to our
national security.
Senator Blackburn. Yes, yes. Madam Secretary, I will send
you this in writing, but I do want to talk to you about Pillar
1 and Pillar 2, because the cost to the U.S. on Pillar 1 is
$1.4 billion, and the revenue loss from Pillar 2 is estimated
to be in the range of $60 to $120 billion, and that is a Joint
Tax number.
And we are very concerned about that. You look at that, and
then you look at what is happening with ag products, and we are
quite concerned about where these actions are taking us.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague. And, Madam Secretary,
would you like to give a quick response. I know we are staying
within 5 minutes, or would you like to just get back to my
colleague in writing?
Secretary Yellen. I could give a brief response on Pillar
1, if that is okay.
The Chairman. Great.
Secretary Yellen. We are attempting to negotiate in the
OECD a Pillar 1 agreement that will bring significant benefits
to American businesses that have been hit with unfair and
discriminatory tax burdens in many parts of the world. We are
really trying to eliminate that, and we are also trying to get
tax certainty for American companies that face significant and
costly disputes about transfer pricing and other matters.
There would be substantial benefits to American businesses
from this agreement, if we concluded it. Our own internal
estimate is--there is a lot of uncertainty--but our own
internal estimate is about $500 million. I think in the grand
scheme of things, when you look at what the benefits are for
the United States, that that needs to be evaluated. We have not
concluded a deal and are not ready to bring it to you yet.
The Chairman. The time of my colleague has expired. I know
we will be talking a lot about this in the days ahead.
Senator Lankford?
Senator Lankford. Mr. Chairman, thank you. And I would hope
that we would spend a lot more time talking about Pillar 1 and
Pillar 2 in the days ahead. Let me just do a quick follow-up
question on that.
Secretary Yellen, the Pillar 1/Pillar 2 agreements, are
these planned to be an executive agreement only, or is it
planned to be able to come through this committee? Anything on
the tax policy issues for the Finance Committee--
congressionally required, constitutionally required to be able
to have a tax issue for an American entity to actually come
through Congress, or do you plan for this to be executive only?
Secretary Yellen. I mean, I believe a Pillar 1 agreement
would involve congressional action. It is not something that
could be just signed into law and effective with an executive
order. It requires----
Senator Lankford. Pillar 1 or 2, or either of them?
Secretary Yellen. Pillar 2 also needs to be adopted by
Congress.
Senator Lankford. Right; thank you.
Secretary Yellen. We have proposed that.
Senator Lankford. You talked about just American business
having uncertainty. This is an issue right now obviously where
people do not know what the tax policy is, and do not know if
it is even going to come through this committee. It is good to
be able to hear the plan is, whatever agreement, whatever
requirement is done, it is your intention to actually bring it
through Congress.
Secretary Yellen. We will bring it to Congress, and we have
tried to keep this committee informed on a bipartisan basis.
Senator Lankford. Thank you. I appreciate that.
The IDCs--I noticed in the budget the intangible drilling
costs for oil and gas production. I thought it was interesting
in the President's budget, in the proposal, every other
business in America that does manufacturing can deduct their
normal business expenses, but in the President's proposal, it
is except oil and gas production. They cannot and should not be
able to deduct normal business expenses. Is there a reason why
those particular manufacturing locations should not be able to
deduct normal expenses and every other manufacturer in the
country should?
Secretary Yellen. Well, in general, subsidies to fossil
fuels are something that the President wants to phase out.
Senator Lankford. Right, but this is not a subsidy.
Intangible drilling cost is not a subsidy. That is the cost of
actual production. That is the cost of all the equipment, of
everything else around it. That is not a subsidy. Every
manufacturing business can write off their normal business
expenses. I guess my question is, why do those manufacturers
not get to write off their business expenses and everyone else
does?
Secretary Yellen. Yes, because the fossil fuel industries
have benefited from many subsidies over many years. That makes
it difficult for clean energy to be taken up.
Senator Lankford. Well, I noticed recently that Treasury
and the State Department have reduced the sanctions on
Venezuela, and that we are now buying oil from Venezuela when
we were not for the last 4 years.
So I guess my question is, the President's proposal is to
make it harder to produce American energy, but there is still
an acknowledgment that we need oil still, and so now we are
buying oil from Venezuela when previously we were not. If you
go back 2 years ago, even the first 2 years of the Biden
administration, we were not buying any oil from Venezuela,
knowing that it is the Maduro regime and all that they are
doing to their people.
But there is a proposal to increase taxes on American
companies, but buy more from Venezuela. Why would that be?
Secretary Yellen. The relief that was put into place
reflected progress that seemed to be made in Venezuela, in
respect to our foreign policy, our goals for----
Senator Lankford. Would that be the same with Iran, because
I know for some of the Iranian sanctions, there was a--The New
York Times reported 27 tankers that have been insured by an
American company. They were able to be able to bring in and put
Iranian oil on the world market, when we have pretty strict
sanctions on Iran.
Secretary Yellen. We have very strict sanctions on Iran,
and I am not aware of anything that we do that is permissive in
terms of Iranian oil exports.
Senator Lankford. I will have my team share this New York
Times article with you that detailed how Iran is avoiding
American sanctions, and it is not as tight as it was, and that
there are even American companies providing insurance for
Iranian tankers moving oil now in a way that it wasn't in the
past.
Secretary Yellen. I would be happy to look at it, but we
are very focused on trying to impose the strictest possible
regime on Iran.
Senator Lankford. As well we should be. Iranian proxies
have attacked American forces 200 times, and they have taken
the lives of Americans, even in the last few months.
One last question, just on one of the 30D clean vehicle
credits that is out there. I know the President's been very
focused on the Made in America requirements. He talked about
that during the State of the Union address.
We had testimony, sitting at that same table just a few
days ago, of an American company that is producing a product,
or was attempting to produce a product, but China got a waiver
from Treasury for a product that was coming in. So the American
company dropped it and said, ``We're not going to do it
anymore, because Treasury gave a waiver to the Chinese product
to be able to go in and get this 30D clean vehicle credit.''
It seems to be a gap still that Treasury is giving waivers
to some Chinese companies that literally undercut an American
company in production. It is one that I am not going to have
you try to walk through, because you could not have known that.
But literally, sitting at that table just a few days ago
was an American company saying, ``I am having to struggle with
the Treasury right now because they are giving waivers to
Chinese companies.''
Secretary Yellen. I am not aware of any waiver that we have
given. There are--30D has Foreign Entity of Concern
restrictions that are coming into play this year and next, and
they essentially make it impossible for any electric vehicle to
qualify for the 30D credit if it contains minerals that are
extracted or processed in China, or battery components that are
produced there, and that is a very stringent requirement that
is coming into play.
Senator Lankford. We will have staff follow up.
The Chairman. The time of the gentleman has expired.
I am going to put into the record of the hearing that our
technology neutrality requirements give everybody in the energy
field an opportunity to get rewards for reducing carbon
emissions.
Senator Cardin?
Senator Cardin. Thank you very much, Mr. Chairman.
Secretary Yellen, welcome; a pleasure to have you here.
I want to talk a little bit about the President's budget as
it relates to affordable housing. We have a shortage of
affordable housing in the country, so the stock itself is one
of the concerns. There is a challenge on affordability issues
generally for housing, and then there is the wealth gap in
America, in which housing can help fill the wealth gap.
So I have introduced, along with Senator Young, bipartisan
legislation, the Neighborhood Homes Investment Act. It is
included in the President's budget, and I just want to give you
an opportunity to talk about the priority in the budget as it
relates to affordable housing.
Secretary Yellen. So, the President and our administration
have been very focused on the burdens that American families
face, because in so many parts of the country it is impossible
to find affordable housing. So many households find themselves
spending half or more of their income just to put a roof over
their heads.
And so, the President's budget contains a package of
proposals to increase the supply of affordable housing. The one
that he focused on most in the State of the Union would provide
first-time homebuyers, as well as sellers of--potential sellers
of starter homes, because they may have very low-interest
mortgages, are reluctant to sell these homes and create a
supply on the market.
This would create tax credits that would stimulate and make
it easier for first-time homebuyers to do that. In addition,
there is a neighborhood homes credit that would provide a
credit for builders and homeowners who are seeking to
rehabilitate homes and encourage residential development in
neighborhoods and communities where property values are low.
Senator Cardin. And I am very pleased to be working with
Senator Young on that. I want to just compliment Senator Wyden.
I want to thank you very much for including affordable housing
in the tax package, so hopefully we will be able to get it on
the floor. But we need to do more, and I just appreciate the
President's budget on this.
Another one of those tools is the New Markets Tax Credit
program. I know Senator Menendez has talked about that. The
permanency of that credit would give predictability to
investors and is included also in the President's budget. I
have been working with Senator Daines on that, and I hope that
we will be able to get that done also. I want to just
compliment the administration for including that provision in
their budget.
I want to ask you one more question about SECURE 2.0, the
retirement bill that passed last year. It has a very important
provision in regard to the Saver's Credit and refundability.
Now, I know we are still a couple of years away from its
implementation, but I want to make sure we stay on schedule.
So, can you give us some assurances that the implementation of
SECURE 2.0--particularly as it relates to those provisions that
are particularly important for low-income families, working
families--how that is coming along?
Secretary Yellen. It is an important provision. The IRS and
Treasury have already started preparing for implementation in
2027. They have convened a working group that has experienced
staff. There are a number of technical rules, IRS system
issues, and external communications. This group meets
informally regularly. They meet with outside stakeholder groups
to try to get a better handle on what they need to do to be
ready for 2027 when it goes into effect.
Senator Cardin. And I would appreciate it if you would keep
us informed as to how that is being implemented.
And last, let me just ask you about the implementation of
the production tax credit in regards to nuclear power
production, the 45U.
Secretary Yellen. Forty-five U?
Senator Cardin. Yes, how that is coming along.
Secretary Yellen. We are working on rules on that. I can't
give you a definite date at which we expect to get that rule
out. But it is part of our work program. We are investing a
huge amount of energy in trying to get at the rules associated
with the green tax credits in the IRA.
Senator Cardin. Thank you.
The Chairman. I thank my colleague. I would just say to
colleagues on both sides, if everybody sticks to the 5-minute
rule, we can get everybody in.
Senator Daines?
Senator Daines. Mr. Chairman, thank you. Secretary Yellen,
good to have you here today.
My observation has been the administration has a pattern of
saying one thing and doing something else, and that is creating
harm for Montanans. First, you said inflation was transitory. I
remember being right here in this same room when you said the
inflation was transitory, and we were challenging that
assumption. And then we had Bidenflation's 40-year high level
cost the average taxpayer $34,000 in lost wages, and wipe out
over 26 million low-income earners' life savings. Finally, it
took severe economic hardship for you to admit the truth, and
that was the inflation that you said was transitory did not in
fact end up being transitory, just like members of your own
party predicted.
Next, Americans were assured sky-high interest rates driven
by President Biden's out-of-control spending would go back to
normal. But just last week, you admitted these rates would most
likely never come down to the levels seen in the prior
administration.
Then you and President Biden enacted the so-called
Inflation Reduction Act to, in this administration's terms,
finally force businesses--and I am using your terms--to pay
what you all believe to be their fair share. This is the same
Inflation Reduction Act that every single Senate Democrat voted
for and is now funding projects to make our border more green,
rather than more secure. It is funding projects for all-
electric buildings, solar panels, and EV chargers at the
border.
Finally, the Biden budget unveiled a slew of additional tax
increases, tax hikes on American companies, delivering yet
another blow to taxpayers. For years, President Biden has vowed
no tax increases on individuals earning less than $400,000. But
the truth is this administration has already broken that
promise. Inflation is a tax on all Americans. High interest
rates have kept families from buying homes and hindered the
growth of small businesses. Now President Biden is choosing to
let the Tax Cuts and Jobs Act expire and increase the corporate
tax rate, forcing American families and workers to bear the
cost of these policies.
Secretary Yellen, are you refuting the evidence showing
that both an increased corporate rate and letting TCJA expire,
increase taxes on those earning less than $400,000?
Secretary Yellen. The President has pledged that he will
not raise taxes on anyone making under $400,000, and when TCJA,
the individual income tax provisions in it expire at the end of
2025, he wants to work to make sure that households earning
under $400,000 do not see an increase in their tax bills.
Senator Daines. Well, I will take that as a ``no,'' and I
will move on.
Perhaps the most egregious fiscal decision we have seen
from the administration is the complete dereliction of duty to
the disastrous OECD Pillars 1 and 2 negotiations. You
completely bypassed Congress's authority and entered into a
terrible deal that will harm the competitiveness of U.S.
businesses.
The role of the Treasury Secretary is, according to your
website, ``to enable economic growth, stability, and to create
job opportunities.'' I assume that is American job
opportunities. These negotiations do the direct opposite of
each of those. Through unprecedented extraterritorial taxes,
you have bargained a deal that would not only raise taxes on
U.S. companies, but also send that money overseas to Communist
China and line the pockets of European bureaucrats. This thus
completely disregards your role as Treasury Secretary and uses
American companies as a piggybank for foreign governments.
According to the Joint Committee on Taxation, both Pillar 1
and Pillar 2--again, according to JCT--will lose revenue. Can
you provide justification for supporting this deal?
The Chairman. And, Madam Secretary, just excuse me. We have
an equal number of Democrats and Republicans in the queue, so
when you are done giving your response, we are going to move
on.
Secretary Yellen. Well, I would strongly disagree with the
way you have characterized the impact of Pillar 1 and Pillar 2.
Pillar 2 is a historic agreement that ends the race to the
bottom that we have seen around the world in corporate tax
rates. It levels the playing field. The United States to date
has been the only country with a minimum tax on multinational
foreign earnings.
Senator Daines. Do you refute the JCT data that says it
loses revenue?
Secretary Yellen. I think we need to--I do not want to
answer that, because there are several things to take into
account. Our estimate is that Pillar 2 and the UTPR that goes
with it result in a big increase in tax revenue for the U.S.
The Chairman. The time of the gentleman has expired.
Senator Carper?
Senator Carper. Thanks so much. Madam Secretary, thank you
for a lifetime of service to our country. It is great to see
you.
Secretary Yellen. Thank you so much.
Senator Carper. It is a pretty cold, crisp morning here in
our Nation's capital, but we know that last summer was the
hottest summer in years. Last year was the hottest year on
record, and we know what is causing it. It is too much carbon
and other similar kinds of substances in the air, leading to
global warming.
As it turns out, one of the best ways to address it--we are
doing a lot of good stuff: methane emission reduction programs;
HFCs, hydrofluorocarbons, stepping them down; electric
vehicles; oh gosh, Diesel Emission Reduction Act legislation--a
lot of things that we have passed and are implementing.
One of the things that can help a whole lot is hydrogen,
and hydrogen in the hubs, and we are all over that, and the
administration is all over that. I think it is a pretty good
bipartisan issue. But you know the Treasury--I helped write,
Senator Wyden and I helped write, with the help of a few
members of our staff, a provision called 45V for hydrogen. The
idea is to produce more hydrogen to help us decarbonize our
economy. But Treasury has--well, let me just ask. Has Treasury
considered how its 45V proposed rule affects the domestic
supply chain for clean hydrogen components needed to achieve
what we will call a ``lift-off'' with respect to hydrogen, to
really get us rolling on producing more hydrogen to meet our
decarbonization needs?
Has Treasury considered how its 45V proposed rule--if you
will, the guidance that you guys have been working on--how it
will affect the domestic supply chain for clean hydrogen
components needed to achieve a lift-off on the hydrogen side?
Secretary Yellen. Well, we did put out a proposed rule for
45V. We worked very closely with the Department of Energy and
the EPA in order to craft a rule that would make sure that
companies qualifying for the largest credit were really
producing hydrogen in ways that would greatly diminish
emissions, that was truly clean, and that would not have
indirect effects in boosting greenhouse gas emissions.
There were some difficult areas. We have asked for guidance
on a number of contentious matters, and we are trying to now go
through and review some of the guidance that we have received
and continue working. If you have particular views----
Senator Carper. We have. Senator Wyden and I have met with
your folks and others in the administration to say, ``These are
our concerns. This is what we are hearing from the folks who
are producing hydrogen, want to produce hydrogen, in order for
them to be successful and for our hydrogen hubs to work.''
So let me just--I just want to plant that. It sounds like
you are on it. That is good.
Secretary Yellen. We would be happy to work with you on
that.
Senator Carper. Good. Thank you, and we appreciate that. As
you finalize the guidance as it relates to what I just asked,
how is Treasury considering the impact of the hydrogen tax
credit on the viability and success of these hydrogen hubs and
creating these hydrogen hubs around the country, to create a
lot of hydrogen, to help meet our hydrogen needs?
We can use hydrogen for--oh gosh, we can use it for cars,
trucks, vans, airplanes, all kinds of stuff. We can use it for
producing electricity. We can use it for manufacturing
operations. So, it can be hugely helpful in this battle. But my
question would be, how is Treasury considering the impact of
the hydrogen tax credit on the viability and success of
hydrogen hubs that we are creating?
Secretary Yellen. Well, I think maybe with the hubs, we
will be able to meet the requirements in order to qualify for
the largest credit. There are some issues around those that are
relying on nuclear. A question is, what is the impact of
allowing nuclear to be used in the hubs, when it is nuclear
that is already being supplied onto the grid? We are required
to take account of indirect emissions.
Senator Carper. To your point, we could use nuclear in the
process of creating hydrogen. We can use--what do you call it,
water, hydro--we can use hydro, through electrolysis, to create
hydrogen. We just want to make sure, at the end of the day, we
have the guidance from Treasury that will enable that to
happen.
Thank you, and thanks again for all your service. You do
good work.
Secretary Yellen. Thank you very much, Senator.
Senator Carper. Thanks for coming and testifying today.
The Chairman. Thank you, Senator Carper.
Now, in order of appearance, the next three would be
Senator Brown, Senator Barrasso, and Senator Whitehouse, so
that members know the order.
Senator Brown?
Senator Brown. Thank you, Mr. Chairman. And, Madam
Secretary, nice to see you again. And whenever I see you, I
think about the most important work that I have done in this
body and your help with that on the Child Tax Credit, and how
you have made such a difference in 2 million families, the
families of 2 million children in my State, and 60 million
around the country. So, thank you. I'll always be indebted to
you for that.
Secretary Yellen. Thank you, Senator.
Senator Brown. I want to ask you about something where I do
not agree with you so much, and that is about the proposed
Treasury regs that hurt my State, dealing with the production
tax credit for clean hydrogen. I walked in and heard much of
what Senator Carper was talking about, and I want to echo his
concerns about 45V, the proposed rules, what happens when
people in Washington--who so often don't know, have no idea
about the real-world impact in States like Ohio and Michigan
and Pennsylvania and Wisconsin--make policy.
Ohio's Appalachian hydrogen hub, or ARCH2, received a
Department of Energy grant done right. This hub can help create
thousands of good-paying jobs. The problem, as we have talked
about, is that Treasury's hydrogen regulations work against
this DOE-supported project, not for it.
The 45V proposals undermine the good work done by DOE and,
frankly, this Congress. Treasury regulations would eliminate
grandfathering for projects built by 2028, by requiring them to
switch to hourly matching. I don't want to bore my colleagues,
but when you build a hydrogen facility, you must decide from
the start whether you are qualifying for the credit using the
annual matching system everyone already uses, or whether you
are using a brand new untested hourly matching system.
You can't just flick a switch down the road and flip from
one to the other. To be clear, the administration must change
course on this. My question is, Madam Secretary, will you
revise the Treasury regulations to support the Appalachian
economy--an economy that is so often left behind by Presidents
of both parties--and as a compromise, allow taxpayers to
continue operating their projects in the same manner as before
and after any transition date?
Secretary Yellen. So, the Treasury guidance that we issued
in the NPRM on 45V was developed through extensive consultation
with external stakeholders and with experts at the Department
of Energy and EPA. The objective here was to advance the
production of hydrogen with all the benefits it offers in the
United States, but to make sure that there are environmental
safeguards. And many companies are moving forward with projects
that include the safeguards. We have asked for comment on
various provisions. We have heard concern about hydrogen hubs
and how they will be treated under this regulation. We welcome
feedback, and you know we will listen to the input we get as we
revise the regulation.
Senator Brown. Well, thank you. This still isn't good
enough, but we will continue the discussions with you and other
agencies until we get this right. I have additional concerns,
Mr. Chairman, about the three pillars under 45V, which I will
submit as questions for the record.
But I want to talk about 45X, and I wanted to ask about
another credit critical to future manufacturing. That's the 45X
advanced manufacturing tax credit. Our tax code must support
American manufacturers building out genuine domestic supply
chains. We shouldn't give the Chinese Communist Party the
chance to exploit tax credits designed to support genuine
American manufacturing.
I am working with colleagues from both sides of the aisle
to tighten restrictions on the 45X credit, to ensure that
taxpayer money is not going to Chinese companies and other, the
term is ``Foreign Entities of Concern.'' I am glad Senator
Lankford mentioned this earlier.
As you prepare 45X regs, will you ensure that companies
connected to Foreign Entities of Concern cannot just import--
this is what they do--foreign parts qualifying for the credit
by merely doing the assembly here? Will you ensure that those
companies don't, can't do that?
Secretary Yellen. Well, the company is supposed to receive
the credit only if they are producing in the United States. The
purpose is to benefit U.S. workers and to onshore supply
chains. And so, we will try to put in effect rules that
accomplish that. There are antiabuse provisions that, if there
really is essentially no production in the United States, I
think would capture that. But we will be sensitive to that.
Senator Brown. Thank you. And that is way more than just
the assembly made from parts overseas, when the intellectual
property stays overseas and all that.
Fifteen more seconds, if I could, Mr. Chair, about the
House tax bill. I know that Chairman Wyden negotiated that in
good faith, brought Senator Crapo and others into the
negotiations. We all knew what was going on.
It passed the House 357 to 70. Only three Democrats on the
Ways and Means Committee voted ``no''; all the Republicans
voted ``yes.'' It extends the Child Tax Credit; protects
residents of my community, East Palestine, OH from a tax bill.
It contains low-
income housing credits and really, really, really supports
American manufacturing with R&D.
I will submit a question about what those benefits are if
we pass that, and thank the chairman for----
The Chairman. I thank my colleague. And as much as I would
like to continue the conversation, Senator Barrasso, you are
up.
Senator Barrasso. Thank you, Mr. Chairman. Madam Secretary,
thank you. I just came from the Energy Committee, where we are
discussing energy for America which is affordable, available,
and reliable for the American people.
So, energy producers in my home State of Wyoming and across
the country are facing a whole-of-government assault from this
administration on that component of energy. President Biden has
shown time and time again that he is going to use every tool at
his disposal to target the American energy industry. He is
making life very difficult for the men and women who are
working to provide American families and our allies with
affordable, available, reliable energy. And President Biden has
recently banned leases for oil and gas. He has halted
permitting for natural gas pipelines and storage facilities.
Last month, he announced a new export ban on liquified
natural gas, and once again the Biden administration is
proposing more than $110 billion in new tax increases on energy
production. My former colleague, Mike Enzi, used to always talk
about a book that reminded me of this, listening to Senator
Brown. It was called The Hidden America. It says ``from coal
miners to cowboys, the people who keep the lights on and who
keep food on that table, the people that many, many in America
don't see, don't know about, and the impact that they have on
their lives.''
So this tax proposal that you and the President have come
across is going to deny our energy producers the ability to
recover costs associated with the production. Your proposal
repeals necessary and ordinary deductions that give producers
parity to every other business, large and small, in America. To
me, the tax code is being weaponized. Under your policies, many
energy companies would cease to exist. These are the very
companies that keep the lights on in our homes, that put gas in
our cars, provide the building blocks for materials that go
into everyday products. So what would you say to the small
energy producer in Wyoming, for example, who is concerned that
they are not going to be able to continue to operate if they
cannot deduct these expenses?
Secretary Yellen. Well, I would say that first of all, we
will need oil and gas through a substantial transition, and oil
production has, I believe, reached new highs. It has expanded
quite a lot over the last year or two. But on a long-term
basis, clearly the goal is to move to clean energy, which is
important for reducing greenhouse gas emissions so that we can
be on a livable planet. We want to make sure that that
transition proceeds in a way where we do not destroy the planet
in the process.
And there have long been tax preferences for oil and gas
and coal that we believe distort markets by encouraging more
investment in fossil fuels than would occur under a neutral
system. So, there are a set of proposals that are intended to
level the playing field, to reduce those advantages that the
fossil fuel sector has enjoyed, and to speed the process of
reducing greenhouse gas emissions.
Also, I would say that this supports energy security,
because in global markets where, although the U.S. plays a
significant role, we also have countries in the Middle East and
Russia playing critical roles in the global oil market.
Geopolitical events can have very significant domestic
spillovers, and we will not experience that when we increase
our dependence on wind, solar, hydrogen, electric vehicles.
Senator Barrasso. Madam Secretary, thank you. I appreciate
it. And as you are well aware, emissions in the United States
have been down and down and down and down over the last 15 to
20 years, and it is what is happening around the world where
emissions are going up.
I would say we are all here trying to make energy as clean
as we can as fast as we can, and do it in ways that do not
raise costs for consumers, because they are the ultimate
deciders about how our country is governed and how we rule and
how we move forward.
You know, this morning I sent a letter to you and your
Department signed by 24 Senators--I am sure you have not seen
it yet--on the energy tax proposals, which I believe are
disastrous. Chairman Wyden, I ask unanimous consent to include
this into the record.
The Chairman. Without objection, so ordered.
[The letter appears in the appendix beginning on p. 39.]
Senator Barrasso. The letter outlines concerns about the
tax proposals on oil, natural gas, and coal producers that we
have been discussing. So, I just want to give you a chance to
clarify your energy tax proposals. In the Treasury Green Book,
the summary of the administration's tax proposals says, ``These
oil, gas, and coal preferences encourage more investment in the
fossil fuel sector than would occur under a neutral system.
This market distortion is detrimental to the long-term energy
security.''
Do you believe that oil, natural gas, and coal production
are detrimental to the energy security of the United States,
because I think you just said it is? Because if we don't have
the solar and--so it sounded to me like you were saying that
additional coal production and oil and gas is detrimental to
our country.
The Chairman. The time of the gentleman----
Secretary Yellen. I did not say that. I said the distortion
is detrimental, because it impedes clean energy production. We
need oil and gas, but there needs to be a more level playing
field.
The Chairman. Okay.
Senator Barrasso. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Whitehouse?
Senator Whitehouse. Thank you. First of all, let me say
that if there is a Biden whole-of-government assault on fossil
fuel, the industry seems to be weathering it very well,
considering that production is now higher than ever, and indeed
higher than ever in any country ever.
Let me offer you a few ``thank you''s, if I may, Madam
Secretary. First of all, contrary to Senator Brown, I would
actually applaud the IRA hydrogen rule 45V. Thank you very much
for doing that.
Secretary Yellen. Thank you.
Senator Whitehouse. If you find that specific hydrogen
projects that we would like to see go forward need some
adjustment in order to make them credible in the market, I am
happy to have those conversations. But I think you certainly
started in the right place, and I am grateful.
I want to thank you also for the FinCEN rulemakings. The
world is swarming with international corruption and a dark
economy that supports it, and FinCEN's rulemakings and the
resources we have been able to get to FinCEN, I think, have
been very helpful. I know you are now defending the Corporate
Transparency Act from a spectacularly misguided decision, and I
look forward to supporting you in that. And then your work on
the global minimum tax has, I think, been extremely helpful.
People like to say that it does not help with competition,
but in fact it really does help with competition. And one of
the competitions that is constantly overlooked is small
businesses versus really big businesses that can go and hide
revenues and move jobs overseas, and get all these benefits,
and then compete with and crush small businesses that cannot
play in that space and take advantage of those tricks. So,
thank you for leveling that playing field.
Secretary Yellen. Thank you; thank you.
Senator Whitehouse. I saw your enthusiastic nodding through
my comments, so----
Secretary Yellen. I agree with what you have said.
Senator Whitehouse. We are not going to solve the climate
predicament that we are in under present policy. Pretty much
every survivable scenario--or habitable may be the better way
to say it, scenario--requires carbon pricing. The two things
that are pending right now are the social cost of carbon that
OMB has directed everyone to respond to--and I would love to
see Treasury and other agencies respond to that OMB directive--
and then the Carbon Border Adjustment Mechanism, the CBAM,
coming out of Europe for us.
Not only would I like to see the Biden administration
figure out who is in charge on that, I would like to have them
figure out that you should be in charge on that. And in any
event, I hope that you will participate energetically in the
interagency process as they figure out how to respond to that,
because a robust international tariff on carbon emissions is
exactly how you solve the problem that Senator Barrasso
mentioned of the pollution in the rest of the world. China is
not going to reduce its pollution out of kindness. It is going
to reduce its pollution because we are sending a powerful
economic signal that gives them a huge incentive to lower their
pollution.
So, I would encourage you to get involved in that as much
as you possibly can, because I think you may be the Biden
administration's best Cabinet official on climate things.
And last, I just wanted to go over our ongoing discussions
about 501(c) enforcement, which has not--it is indirectly under
you because it is happening in the IRS, and we are going to
continue working with Administrator Werfel about it.
But you and I have had correspondence that I will put into
the record, initially in February 2021, about our conversation
during your confirmation hearings. Treasury got back to us with
a letter June 23, 2023, and we have sent a follow-up letter to
both you and Commissioner Werfel September 25, 2023. I would
like to ask unanimous consent to submit those three letters.
The Chairman. Without objection, so ordered.
[The letters appear in the appendix begining on p. 44.]
Senator Whitehouse. Here is the problem. We have now over a
billion dollars in dark money floating around in our elections.
It is creepy as hell, and it is corrupting. The tricks that
have come to facilitate it are having a whole series of 501(c)s
that break the 50-percent rule, because they all sit in the
same room at the same table and take the million-dollar check
and take 50 percent, and then pass the 50 percent to the next
fake entity down the table, which takes half of that and passes
it to the next fake entity down the table.
By the time you are done, you've got five fake entities
around the table, and 97 percent or whatever it is of the money
is going through potentially to the same SuperPAC. There is a
lot of fakery, and nobody is looking at it at the IRS.
The other problem is that every 501(c)(4) has its little
twin 501(c)(3), and nobody is policing the corporate veil
between the 501(c)(3)s, which are supposed to do zero politics,
and the 501(c)(4)s, which are limited to 50 percent politics.
So, we really need investigation into that area.
Thank you for calling an end to the creepy appropriations
riders, but the riders do not prevent investigation, and I
would urge you to investigate.
The Chairman. I thank my colleague.
Senator Hassan is next.
Senator Hassan. Thanks, Mr. Chair, and thanks to you and
Ranking Member Crapo for this hearing. And, Madam Secretary,
thank you so much for being here.
Secretary Yellen, I wanted to ask you about a barrier that
American businesses face in working to out-compete their
counterparts in China. Currently, when a Chinese company
invests $1 million in R&D, the Chinese Government gives them an
immediate $2-
million tax deduction. By contrast, when an American business
invests $1 million in R&D, our tax code provides an immediate
$100,000 tax deduction.
How does this unlevel playing field harm our efforts to
out-
compete China?
Secretary Yellen. Well, that certainly creates an unlevel
playing field, and it is something that I think harms American
businesses in comparison with China. I think the Wyden-Smith
legislation would help correct that. It restores the incentives
to engage in R&D by restoring that tax incentive, as well as
doing a lot of other good things including the Child Tax
Credit. It pays for those things in ways that essentially
enable us to address the fraud and scams that are now serving
not to help, but actually to harm, small businesses.
Senator Hassan. Well, thank you. I certainly agree. We need
to restore the full R&D deduction in our tax code to better
level the playing field with China, to support investments and
innovative products, and to create jobs here at home. So I am
really hopeful that the Senate will come together as soon as
possible to pass the pending bipartisan tax package, the Wyden-
Smith package, which would restore the R&D deduction and cut
taxes for hardworking families.
There is also strong bipartisan support for making
homeownership affordable by expanding the Low-Income Housing
Tax Credit, which is also part of the bipartisan tax package
that we were just talking about.
Another bipartisan effort I am working on with Senator
Tillis would cut taxes for families who purchase a home with
mortgage insurance because they cannot afford the full 20-
percent down payment. Specifically, the bill would restore and
expand the tax deduction that these families can take for their
mortgage insurance payments. Secretary Yellen, how can
providing tax cuts to homebuyers and expanding programs like
the Low-Income Housing Tax Credit make homeownership more
affordable?
Secretary Yellen. Well, you note that there is a huge
shortage of affordable housing, and the proposals that you have
described would help to address what has been a very
longstanding problem. I think they are important in making sure
that rents, especially for lower-income individuals, are
affordable. LIHTC currently is the biggest support we have for
housing, affordable housing, and we would be happy to work with
you also on the mortgage insurance proposal.
Senator Hassan. I appreciate that very much.
Last question. I want to talk a little bit about supporting
retirement plans for employees who work for small businesses.
Currently, small businesses can get a tax cut to help cover the
cost of starting a retirement plan for their employees. It is
worth $250 per employee. Due to the structure, the smallest
businesses with only a few employees get a very small tax
credit that does not fully cover the cost of starting a
retirement plan because, regardless of how many employees you
have, there is still a basic overhead for starting up the plan.
I am working on a bipartisan bill with Senator Budd that would
address this issue by ensuring that the smallest businesses get
a tax cut of at least $2,500 to cover retirement plan startup
costs.
Madam Secretary, how can tax cuts for small businesses help
increase access to retirement plans for their workers?
Secretary Yellen. Well, I think it is critically important
that American workers have access to retirement plans, so that
they can look forward to a secure retirement, and clearly U.S.
tax policy has been designed to promote those ends. So, if the
smallest businesses face disproportionate costs, it makes sense
that a proposal like the one you just mentioned could promote
that goal.
Senator Hassan. Well, I appreciate that very much. And we
also know that in small businesses, women--and especially women
in vulnerable and marginalized communities--are often going in
and out of the workforce in small businesses. So this is a way
to really address some of the coverage gaps. So I look forward
to working with you and your team on that. Thank you.
Secretary Yellen. Thank you, Senator.
The Chairman. The time of my colleague has expired.
I would just appreciate--we are constantly coming back to
the research and development effort, which you have
consistently made bipartisan and done so for years. So I very
much appreciate your leadership.
Next is Senator Warren and then Senator Cortez Masto.
Senator Warren. Thank you very much, Mr. Chairman.
So last week, the IRS launched a pilot program called
Direct File, a first-of-its-kind tool for Americans to file
their taxes online directly with the IRS for free--for real.
So, this is a big win for taxpayers.
The average American spends about $150 and 9 hours on
average just preparing their taxes. Why? Because TurboTax and
other big tax-prep companies advertise their services as free,
then suck people in and then pile on fees and charges. That is
how they make money.
Now the IRS is starting small with a pilot that the
Treasury Department requested, to gather feedback from
taxpayers, to figure out how to improve the tool. Direct File
is live right now in 12 States, including Massachusetts, for
about a third of taxpayers, mostly people with pretty simple
taxes. Secretary Yellen, from what you can tell so far in the
pilot, have taxpayers found Direct File accessible and easy to
use?
Secretary Yellen. Well, I think they have, and I think a
good example would be the very first individual who used it was
interviewed for an AP story----
Senator Warren. Sort of Patient Zero? Is that----
Secretary Yellen [continuing]. And she was really thrilled.
She said that she had saved $400, that it was easy to use, and
it actually--she is somebody who I think does not like
computations. She found it gave her the confidence to be able
to do her own taxes using this tool, rather than having to go
to a paid preparer.
And of course the feedback that we got before launching it
formally--people who tried a trial version of it liked it very
much. We saw a clear need to provide a simple and free tool,
and we are really hoping to build on what we learned.
There is a little bit more time to go. We expect many more
filers to use it. They will give feedback on what their
experience was. This is something that should be easy, user-
friendly, and free. There is feedback within the program, a
chat function. You can call someone if you have a question. We
will try to improve it over time, start small, build on it.
Senator Warren. Free and easy; those are two great words
here. I like this. This is a five-star review, and I am really
pleased to see what the IRS is doing with the funding that
Congress provided.
Secretary Yellen. Absolutely. This is because there was the
IRA funding.
Senator Warren. Yes, yes. So, a recent report said that
expanding the tool, if the tool eventually goes nationwide and
is available in all the States and available in more situations
where you file your taxes, that it could save taxpayers $23
billion a year. That would be a return of over $100 for every
$1 that the IRS invests in this program, and that is why Deputy
Secretary of the Treasury Wally Adeyemo said this year's pilot
would be, and I will quote him, ``The first step in an
iterative process, and a way to use lessons learned to inform
the growth of the tool.''
So let me ask you, Secretary Yellen, if taxpayers continue
to give Direct File these kinds of rave reviews, will you
expand it and extend it in 2025?
Secretary Yellen. Well, look. We are going to evaluate the
feedback we get, but if they like it, it would be very natural
to continue to build on it. There is a lot more functionality
that can be built into this system, and one day we hope that,
for example, information the taxpayers receive, W-2s and other
things, could be used to pre-populate the program, making it
even more useable and friendly.
Senator Warren. I am so glad to hear this. You know, look.
No one is excited to go pay their taxes, but if you are going
to pay your taxes, making it free, making it easy, trying to do
everything we can to make government work for the American
consumer, I think, is terrific.
And so, I just want to say to all the taxpayers tuning in
from Massachusetts or any of the 11 other States that are now
in the pilot project, go to DirectFile.irs.gov, click on, and
see if you are eligible to try this free and easy opportunity
to pay your taxes.
Secretary Yellen. That is great, terrific.
Senator Warren. Thank you. Thank you, Madam Secretary.
Secretary Yellen. Thank you, Senator Warren.
The Chairman. I thank my colleague. And I would just say,
this has been a very important exchange, and it is little-
known, Madam Secretary, that the original roots of Direct File
were bipartisan. Senator Dan Coats used to sit way down at the
end. He was a junior member like me. We teamed up. So this has
been a very important exchange between you and Senator Warren,
and I look forward to the progress we are going to make.
Okay. Senator Cortez Masto?
Senator Cortez Masto. Thank you. Madam Secretary, it is
great to see you again.
Secretary Yellen. Thank you.
Senator Cortez Masto. Similar to my colleague from Wyoming,
I just came from the Energy and Natural Resources Committee as
well. So, I want to talk to you a little bit about it.
But I do--I think for the record, I would also like to echo
really what you were saying. And this is from the words of the
chairman of the Energy Committee here in the Senate, who just
penned an opinion in The Washington Post, who wanted to
congratulate President Biden for the ``record-breaking energy
production we are seeing in America today. The United States is
producing more oil, gas, and renewable energy than ever before.
We are exporting more fossil fuel energy than we import, and
our country has never been more energy-independent than we are
today.'' And he cites the Bipartisan Infrastructure Law, as
well as the Inflation Reduction Act that we have all worked on
to get us there today.
And I start there, because this is important for me from
Nevada, talking about the benefits of renewable energy that
have really promoted jobs, good union jobs in Nevada and across
the country. Our economy--it helps us, and it helps us be
energy-independent. A lot of that work started here in Senate
Finance as well. The chairman talked about this, the important
role that the tax code plays in helping us with those projects,
to continue those investments long-term, to keep us energy-
independent.
So my first question for you--and you are probably not
going to be surprised, because I penned a letter to you--is
around 45X, which is the extraction tax. As you know, I am
concerned with the proposed rule. It is a proposed rule right
now for 45X. It is the Advanced Manufacturing Production Tax
Credit on critical mineral extraction and processing, namely
the administration's decision to exclude raw materials and
extraction costs in the proposed rule.
Really, extraction of minerals is a key part of building
our secure supply chain. Not just coal mining; it is hard rock
mining. It is the critical minerals we need for that renewable
energy future that we are all leaning into.
And so my question to you is if you are willing to
elaborate now on where Treasury's viewpoint is on this issue. I
know you are in the comment period, but I do think having
extraction costs as eligible is the clear intent--I know, of my
intent when we drafted and passed this legislation.
Secretary Yellen. Well, let me just say that expanding the
full supply chain of critical minerals in the United States is
certainly an administration priority. The proposed rules sort
of focus the incentive on the cost of the value-added activity
that is happening in the United States when you transform
inputs into eligible components. We thought that that was the
way to thus support the goal of building a domestic supply
chain. But we specifically, in the NPRM, asked for comments on
how to design the rules in a way that would appropriately
credit extraction costs, without creating economic distortions
or risking waste, fraud, or abuse.
We recognize there are a range of views on this. We are
reviewing the comments we received. This is an important issue,
I agree with you, and it is our goal to make sure that critical
minerals are produced in the United States.
So we welcome your input, and we are reviewing comments
that we have received, and we will try to figure that in as we
go forward.
Senator Cortez Masto. Thank you; I appreciate that.
Let me talk a little bit about another issue I have worked
on, which is Tribal tax reform. I was pleased to see that the
Green Book includes a proposal to treat Tribal health loans and
scholarships with the same preferential tax treatment as other
health professional programs. This is part of legislation that
I have been working on to address Tribal tax reform in this
committee.
I will say we are looking at other areas. For example, my
bill addresses a number of issues in the tax code where Tribal
Governments and citizens are not treated the same as non-Tribal
entities. For example, Tribes are not able to issue tax-free
bonds for infrastructure, and Tribal employee benefit plans are
not treated in the same way as State Government plans. These
are issues I have heard from them, talked with them, and want
to continue to try to address, to bring that to committee,
because I think it is important, in a bipartisan way, for all
of our Tribes across the country.
But my question to the administration is, would you be
willing to work with us?
Secretary Yellen. Absolutely.
Senator Cortez Masto. Thank you.
Secretary Yellen. We are very concerned with Tribal
matters. I think you know that we have established a first-ever
Office of Tribal and Native Affairs in Treasury. They are
working very closely with our Office of Tax Policy. There are a
lot of issues around Tribal tax issues we want to get right. We
would like to work with you on this.
Senator Cortez Masto. Thank you. I appreciate that. And
again, for the chair and ranking member, I think Tribal tax
parity is really an opportunity for us to focus on this in this
committee going forward.
The Chairman. My colleague has always been a little bit too
logical for Washington sometimes, but I strongly, Madam
Secretary, support what the Senator is saying, and she is our
go-to person for the committee.
Senator Young sprinted to get here to ask his questions,
and, Senator Young, you are up.
Senator Young. Thank you, Mr. Chairman.
Madam Secretary, I share the concerns raised by my
Republican colleagues about the Biden administration's handling
of the OECD tax negotiations. Every single member of this
committee, Republican or Democrat, should be outraged, outraged
at the way President Biden has undermined Congress's
constitutional role in tax writing. The President has used you,
your office, and the Treasury Department to make an end run
around Congress by rewriting American tax laws. It has been
done in collusion with bureaucrats in Paris, all the while
raising taxes on American employers and giving our tax base
away to Europe.
What is even more frustrating to me is that the OECD
minimum tax manages to both raise taxes on U.S.-based
businesses, and likely reduces U.S. tax revenue at the same
time. Now, at this same hearing last year, I raised concerns
with how the OECD Pillar 2 deal, as currently negotiated by you
and your team, would completely undermine important tax credits
such as the research and development credit. I have not heard
of any significant movement from Treasury on that front since
the time of that hearing, until earlier this week, on Tuesday,
your Deputy Assistant Secretary for International Affairs,
Scott Levine, was quoted saying that while he ``believes
favorable tax treatment for the U.S. R&D credit will be
resolved with OECD administrative guidance, it's possible it
will be necessary for the Biden administration to revert'' to
what he called ``Plan B.''
He went on to clarify that this ``Plan B'' referred to
``legislation--legislation--that would have to be passed by
this body.'' Now, Madam Secretary, this is the first that I had
heard of the need for legislation to address the
administration's failure to secure U.S. interests in the Pillar
2 model rules.
This needs to be fixed. I said it last year; I will say it
again now. You need to go back to the table and negotiate, and
if you are unable to fix this with the OECD, please tell me
more about this Plan B. Please tell me more about this Plan B
so we know what is coming, including how much this hypothetical
legislation is going to cost the American taxpayer.
Secretary Yellen. So, countries participating in the OECD
process understand that the treatment of the R&D tax credit is
a critical issue for us, and we believe we have an opening to
negotiate with them to try to resolve this in a way that will
be favorable.
Senator Young. And that will be through OECD administrative
guidance presumably, and if that fails, according to Deputy
Assistant Secretary Levine, we will be resorting or reverting
to Plan B.
Secretary Yellen. Well, look. We have resolved a number of
issues favorably through administrative guidance that affect
the United States, such as the treatment of partnerships, the
Low-
Income Housing Tax Credit, the green energy credits, and----
Senator Young. That was the administrative guidance. But if
that fails, Plan B is--and I have a minute left. Plan B; tell
me more about Plan B, Madam Secretary.
Secretary Yellen. I do not think there is a detailed Plan
B.
Senator Young. Not yet.
Secretary Yellen. But it is clear that refundable tax
credits would not be penalized by the global minimum tax. And
so, it is conceivable that this could be restructured----
Senator Young. It is conceivable----
Secretary Yellen [continuing]. To clearly qualify, and we
would stand ready to work with you to accomplish that.
Senator Young. Do you commit to providing this committee
with updated revenue estimates for Pillar 2, and for the
proposed Plan B legislative action within the next say 60 days?
I mean, this committee needs to know what to expect and what
sort of Plan B to prepare for.
Secretary Yellen. We are working to resolve this issue, and
we will stay in close touch with you as we do that.
Senator Young. Can we get this information in the next 60
days, Madam Secretary?
Secretary Yellen. We will let you know how the negotiations
are proceeding. I am not promising to provide estimates of a
Plan B that has not been worked out, or does not exist, while
we are working to resolve this.
Senator Young. It sure would be nice to have Treasury's
assistance to contingency plan for the failure of providing
some inference of what OECD's administrative guidance looks
like, because I am not highly optimistic that that will be
resolved, and thus we would be required, per the Deputy
Assistant Secretary, to exercise Plan B, which is quite vague.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague, and I think this is an
important issue to be clear on. First of all, Senator Young has
always been a champion of research and development, and we
appreciate it.
I would only say that because Article 1 of the Constitution
gives the Congress the authority in terms of taxes and trade,
whatever the administration proposes in this area will come to
us, and we will try, as we always have, to work in a bipartisan
way. So I thank my colleague for it, and I think it all starts
with Article 1, and we will go from there.
So, Madam Secretary, it has been a long morning. We
appreciate your patience and, under normal circumstances I
would give a passionate closing statement. But I want to let
you get on your way.
I think we understand that Americans--and I think whatever
political party you are in, you want a strong economy, you want
a fair shake if you don't have big fortunes and lobbyists, and
we want policies that drive down our costs in medical and
housing and energy. And in my view, it really starts with the
bipartisan effort that got 357 votes in the House of
Representatives. Folks, you cannot get 357 members of the
Congress to agree on ordering a soda, and yet virtually every
Democrat and every Republican said, ``We are together.'' We
want to get this done, and we continue to try to find common
ground here.
As I have talked to my colleagues who are in the room, when
I have visited with Republican Senators, they have said their
number one concern about the Smith-Wyden proposal was the
lookback provision, because they thought that in some way this
could discourage work. Now, the Joint Committee on Taxation
said specifically they do not share that view. But in the
effort to find common ground, we have offered--and it is on
offer today as of 12:15, right now--to remove the lookback
provision in an effort to find common ground and do something
bipartisan.
Colleagues, people hardly can remember the last time the
Congress did a significant tax bill in a bipartisan way. We are
on the precipice of being able to do that, with 357 votes and a
willingness to keep talking and try to find common ground. The
clock is really ticking down, you know? The filing deadline is
on, and I just, as we wrap up, say that in terms of this agenda
for the American people--and Senator Young correctly talked
about research and development--this is all about what is
actually going on out there. I have talked to a lot of these
small companies that are research-
oriented; some of them in North Carolina apparently are in the
press.
They heard about the idea that well, maybe Congress will
just wait, just wait till 2025, and some of them have said,
``We are not going to be around in 2025.''
So, Madam Secretary, thank you for your time this morning.
We have a lot of work to do, and I think it begins with a
bipartisan effort that got kicked off in the House of
Representatives with 357 votes.
Our door is open to make sure that we can find common
ground over here and get a big vote over here. And with that,
Madam Secretary, we are adjourned.
Secretary Yellen. Thank you.
[Whereupon, at 12:16 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Submitted by Hon. John Barrasso,
a U.S. Senator From Wyoming
United States Senate
WASHINGTON, DC 20510
March 21, 2024
The Honorable Janet Yellen
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Secretary Yellen:
We write with grave concern regarding the administration's continued
hostility towards American energy production. Working families and
small businesses are facing immense challenges including high energy
prices. At the same time, our allies and partners across the globe are
asking for reliable American energy resources to escape their
dependence on Russian energy and to deal with the energy crisis.
Instead of increasing U.S. energy production, the administration is
focused on increasing energy taxes. The administration has once again
doubled down on weaponizing the tax code against U.S. energy producers.
The Department of Treasury's General Explanations of the
Administration's Fiscal Year 2025 Revenue Proposals (Green Book) is
filled with crippling tax hikes on the production of oil, gas, and
coal.
The latest Green Book calls for $5 trillion in new tax increases, which
will fall on a wide range of industries, as well as workers. These
taxes will fall on workers and families in the form of lower wages and
higher prices. The broad tax hikes alone will deliver a heavy blow to
energy production while simultaneously suppressing growth in numerous
sectors of the economy. But, the administration has decided to go even
further by specifically imposing additional burdens on energy producers
by removing virtually every longstanding tax provision in the Internal
Revenue Code designed to support traditional energy production.
Specifically, the Green Book calls for more than $110 billion in
targeted tax increases on oil, gas, and coal production.
What is most troubling is that the administration explicitly
acknowledges its intention to chill investment in conventional energy
production, stating, ``These oil, gas, and coal tax preferences distort
markets by encouraging more investment in the fossil fuel sector than
would occur under a neutral system. This market distortion is
detrimental to long-term energy security and is also inconsistent with
the administration's policy of supporting a clean energy economy,
reducing our reliance on oil and reducing greenhouse gas emissions.''
It is alarming that the administration believes utilizing our Nation's
abundant natural resources will be detrimental to long-term energy
security. Sadly, the administration would willingly suppress energy
production knowing it means fewer jobs and higher prices for the
American people. The Green Book proposals are neither policy neutral
nor do they consider the fact that conventional energy production is
the highest taxed industry in the world, and pays high rates of tax to
the Federal Government--as well as State and local governments. This
relentless action from the administration lacks the foresight necessary
to realize the detrimental impact that these repeals will have.
Many of the President's targeted tax hikes would repeal cost recovery
provisions and deny necessary and ordinary deductions which give energy
producers parity with other sectors of the economy. One example of this
is the proposed repeal for the expensing of Intangible Drilling Costs
(IDCs), which are widely utilized by independent producers to deduct
expenses related to drilling. These expenses include labor, site
preparation, repairs, equipment rentals, and survey work. Often times
these items represent between 60 and 80 percent of total production
costs.
Another important cost recovery mechanism the administration seeks to
eliminate is Percentage Depletion. This is a type of depreciation for
mineral-based assets that allows for a deduction from taxable income to
reflect the declining production of reserves over time. Percentage
Depletion is in line with standard depreciation for other assets and is
necessary to recover costs associated with maintaining production on
marginal wells, mines, and deposits. The entities benefitting from
Percentage Depletion are often independent and family-owned production
companies, as well as farmers and ranchers who may rely on small
royalty payments.
There are more than a dozen other related energy tax provisions in the
crosshairs of the administration's tax plan, all of which pale in
comparison to the lavish subsidies and refundable tax credits afforded
to the renewable energy industry. These proposals undermine the
industry responsible for providing 80 percent of the Nation's energy,
as well as the foundation for modern manufacturing. The administration
is attacking the industry providing our allies with an alternative to
relying on foreign adversaries for their energy needs. No other Nation
produces, or refines, with the same environmental standards we see with
American-made energy.
America is fortunate to have abundant energy resources. Our Nation
needs to be focused on unleashing American energy and innovation
instead of throwing away one of our biggest economic and geopolitical
advantages. When facing a whole-of-government assault, American energy
producers cannot continue to make long-term investments, which provide
stability and energy security both at home and overseas. These crushing
tax proposals, paired with the administration's heavy-handed
regulations and mandates, would threaten American families' access to
affordable and reliable energy, while giving our adversaries the upper-
hand in global energy markets.
Sincerely,
John Barrasso, M.D. Mike Crapo
United States Senator United States Senator
John Cornyn James Lankford
United States Senator United States Senator
Thom Tillis Steve Daines
United States Senator United States Senator
John Thune Marsha Blackburn
United States Senator United States Senator
Bill Cassidy, M.D. Tim Scott
United States Senator United States Senator
Cynthia M. Lummis James E. Risch
United States Senator United States Senator
Shelly Moore Capito Kevin Cramer
United States Senator United States Senator
Cindy Hyde-Smith Ted Budd
United States Senator United States Senator
Eric S. Schmitt Rick Scott
United States Senator United States Senator
Katie Boyd Britt Lisa Murkowski
United States Senator United States Senator
John Kennedy Dan Sullivan
United States Senator United States Senator
John Hoeven Mike Braun
United States Senator United States Senator
______
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Mr. Chairman. Secretary Yellen, thank you for being
here.
Last week, President Biden released his staggering $7.3-trillion
budget proposal. As expected, it was filled with familiar partisan tax-
and-spend proposals, doubling down on an agenda that was rejected even
when Democrats had majorities in the Senate and House.
The President proposes nearly $5 trillion in new and increased
taxes. Tax increases of that magnitude will affect all Americans
through lower paychecks and higher household expenses.
However, the most notable tax increase Americans would face under
the Biden budget is one that went conspicuously unmentioned: the tax
increase that would result for households earning less than $400,000 if
the tax cuts from Republicans' Tax Cuts and Jobs Act (TCJA) are not
extended.
While the administration continues to spread misleading information
about the TCJA, they cannot deny that if the TCJA individual tax cuts
are not extended, individuals making less than $400,000 would face a
more than $2-trillion tax increase, breaking President Biden's pledge.
As many TCJA provisions are set to expire after next year, the
differences between Biden's plans and Republicans' actions have never
been starker. The TCJA led to one of the strongest economies in
generations. Prior to the pandemic, the TCJA's progrowth policies
translated into wage increases, record-low unemployment, higher
incomes, stronger wage and wealth gains for lower-income Americans than
higher-income Americans, and reduced inequality. In fact, the largest
wage gains were concentrated in the bottom quarter of the wage scale.
For American businesses, TCJA introduced competitive tax rates
while broadening the base, including by enacting the first global
minimum tax of its kind, GILTI, and putting an end to corporate
inversions. It also led to record-high corporate tax receipts, both
nominally and as a share of gross domestic product.
Instead of taking note of TCJA's successes, President Biden, for
the fourth time, proposes trillions of dollars of tax hikes on American
businesses. Biden proposes increasing the corporate tax rate to 28
percent, which, according to the Tax Foundation, would result in the
U.S. having the second-highest combined rate among developed countries.
Economists agree that a tax increase on American businesses will be
passed on to working families in the form of higher prices and lower
wages.
The administration's failure to prioritize American businesses and
workers extends to its international tax negotiations: instead of
defending the U.S. global minimum tax, GILTI, the administration again
uses the OECD's global tax code to justify hiking taxes on American
companies at rates far exceeding those imposed by other countries.
Even more unfathomable is the administration agreeing to a deal
that punitively treats vital congressionally enacted investment
incentives--like the R&D credit--while blessing identical activities if
delivered as government subsidies.
But the global tax code is not the only concerning part about the
international tax negotiations: the administration should have deep
reservations about signing on to the OECD's global tax treaty at
month's end. The Joint Committee on Taxation's recent analysis
indicates the deal reduces revenue, fails to provide certainty or
stability, and would not halt discriminatory taxes targeting American
companies, which was the sole impetus for entering the negotiations.
The list of tax increases goes on--tax hikes on American energy
production that would decrease our energy independence and eliminate
good-paying jobs; a tax hike on savings and investments; a tax hike on
generational family businesses.
While the list of tax increases grows, so does one tax giveaway--
the green energy tax incentives included in the Inflation Reduction
Act, which benefit China and foreign manufacturing, and have ballooned
from an estimated cost of $270 billion over 10 years to $663 billion.
In stark contrast to the Republicans' achieved objective of lower
taxes and competitive rates, President Biden's vision for American
workers and companies is clear: higher taxes and uncompetitive rates
for the majority to support government subsidies for a few.
Thank you for your service, Secretary Yellen. I look forward to
your testimony.
______
Submitted by Hon. Chuck Grassley,
a U.S. Senator From Iowa
Distribution Table: 2024 001
Distribution of Families, Cash Income, and Federal Taxes Under 2023 Current Law
(2024 Income Levels)
Number of Number of Family Cash Total Federal Individual Corporate Excises and Estate and Gift
Adjusted Family Cash Income Decile \1\ Families Individuals Income Taxes \2\ Income Taxes Income Taxes Payroll Taxes Customs Duties Taxes \3\
--- Millions of Families and Billions of Dollars ---
0 to 10 \3\ 17.8 22.4 98.5 0.1 -6.9 0.6 4.7 1.7 0.0
10 to 20 18.7 36.3 418.3 -20.2 -59.0 2.3 33.0 3.5 0.0
20 to 30 18.7 34.9 628.9 17.6 -48.6 3.8 57.3 5.1 0.0
30 to 40 18.7 33.6 839.0 63.8 -20.4 5.7 72.2 6.2 0.0
40 to 50 18.7 32.7 1,079.6 108.9 7.2 8.5 85.7 7.5 0.0
50 to 60 18.7 33.9 1,400.2 168.8 35.9 13.3 109.8 9.8 0.0
60 to 70 18.7 35.3 1,802.4 259.0 78.1 19.6 148.3 13.0 0.0
70 to 80 18.7 36.0 2,343.2 396.4 150.1 29.1 199.8 17.4 0.0
80 to 90 18.7 37.6 3,285.9 656.7 292.7 47.1 292.4 24.5 0.0
90 to 100 18.7 38.9 9,541.9 2,579.9 1,641.6 325.7 522.1 64.5 25.9
Total \3\ 186.9 343.1 21,214.7 4,238.0 2,070.1 459.8 1,528.0 153.9 26.3
90 to 95 9.3 19.1 2,367.9 539.9 273.9 40.5 208.0 17.5 0.0
95 to 99 7.5 15.7 3,222.5 793.9 480.5 77.7 213.5 22.3 0.0
99 to 99.9 1.7 3.7 2,067.6 614.0 445.1 79.9 74.2 13.8 1.0
Top .1 0.2 0.4 1,883.9 632.0 442.2 127.6 26.4 10.9 24.9
--- Percent Distribution ---
0 to 10 \3\ 9.5 6.5 0.5 0.0 -0.3 0.1 0.3 1.1 0.0
10 to 20 10.0 10.6 2.0 -0.5 -2.8 0.5 2.2 2.3 0.0
20 to 30 10.0 10.2 3.0 0.4 -2.3 0.8 3.7 3.3 0.0
30 to 40 10.0 9.8 4.0 1.5 -1.0 1.2 4.7 4.0 0.0
40 to 50 10.0 9.5 5.1 2.6 0.3 1.8 5.6 4.9 0.0
50 to 60 10.0 9.9 6.6 4.0 1.7 2.9 7.2 6.4 0.0
60 to 70 10.0 10.3 8.5 6.1 3.8 4.3 9.7 8.5 0.0
70 to 80 10.0 10.5 11.0 9.4 7.3 6.3 13.1 11.3 0.0
80 to 90 10.0 10.9 15.5 15.5 14.1 10.2 19.1 15.9 0.0
90 to 100 10.0 11.3 45.0 60.9 79.3 70.8 34.2 41.9 98.8
Total \3\ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
90 to 95 5.0 5.6 11.2 12.7 13.2 8.8 13.6 11.4 0.0
95 to 99 4.0 4.6 15.2 18.7 23.2 16.9 14.0 14.5 0.1
99 to 99.9 0.9 1.1 9.7 14.5 21.5 17.4 4.9 9.0 3.8
Top .1 0.1 0.1 8.9 14.9 21.4 27.8 1.7 7.1 94.9
--- Average Rates \4\ ---
0 to 10 \3\ 0.1 -7.0 0.6 4.8 1.7 0.0
10 to 20 -4.8 -14.1 0.6 7.9 0.8 0.0
20 to 30 2.8 -7.7 0.6 9.1 0.8 0.0
30 to 40 7.6 -2.4 0.7 8.6 0.7 0.0
40 to 50 10.1 0.7 0.8 7.9 0.7 0.0
50 to 60 12.1 2.6 1.0 7.8 0.7 0.0
60 to 70 14.4 4.3 1.1 8.2 0.7 0.0
70 to 80 16.9 6.4 1.2 8.5 0.7 0.0
80 to 90 20.0 8.9 1.4 8.9 0.7 0.0
90 to 100 27.0 17.2 3.4 5.5 0.7 0.3
Total \3\ 20.0 9.8 2.2 7.2 0.7 0.1
90 to 95 22.8 11.6 1.7 8.8 0.7 0.0
95 to 99 24.6 14.9 2.4 6.6 0.7 0.0
99 to 99.9 29.7 21.5 3.9 3.6 0.7 0.0
Top .1 33.5 23.5 6.8 1.4 0.6 1.3
October 30, 2023
U.S. Department of Treasury
Office of Tax Analysis
\1\ Cash Income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt interest, dividends, rental income, realized capital gains, unrealized gains at
death, cash and near-cash transfers from the government, retirement benefits, and employer-provided health insurance (and other employer benefits). Employer contributions for payroll taxes
and the Federal corporate income tax are added to place cash on a pre-tax basis. Families are placed into deciles based on cash income adjusted for family size, by dividing income by the
square root of family size.
\2\ The taxes included are individual and corporate income, payroll (Social Security, Medicare and unemployment), excises, customs duties, and estate and gift taxes. The individual income tax
is assumed to be borne by payers, payroll taxes (employer and employee shares) by labor (wages and self-employment income), excises on purchases by individuals in proportion to relative
consumption of the taxed good and proportionately by labor and capital income and excises on purchases by businesses and customs duties proportionately by labor and capital income, and the
estate and gift taxes by decedents. The share of the corporate income tax that represents cash flow is assumed to have no burden in the long run; the share of the corporate income tax that
represents a tax on supernormal returns is assumed to be borne by supernormal corporate capital income as held by shareholders; and the remainder of the corporate income tax, the normal
return, is assumed to be borne equally by labor and positive normal capital income. Payroll taxes also include the employer shared responsibility payment as part of the ``employer mandate''
under the Affordable Care Act.
\3\ Families with negative incomes are excluded from the lowest income decile but included in the total line. Families with negative income pay a significant share of the estate tax.
\4\ Average tax rates are calculated as total tax burden for the income group divided by cash income for the income group. Negative average tax rates are shown when net federal tax burdens are
negative for the income group.
Note: Percentiles begin for an average family (2 people) at family size-adjusted cash income of: $15,525 for 10 to 20; $30,301 for 20 to 30; $42,780 for 30 to 40; $56,512 for 40 to 50; $72,531
for 50 to 60; $91,675 for 60 to 70; $115,956 for 70 to 80; $151,983 for 80 to 90; $220,803 for 90 to 95; $310,680 for 95 to 99; $713,506 for 99 to 99.9 and $3,166,003 for Top .1.
Submitted by Hon. Sheldon Whitehouse,
a U.S. Senator From Rhode Island
Department of the Treasury
WASHINGTON, DC
ASSISTANT SECRETARY
For Legislative Affairs
June 23, 2023
The Honorable Sheldon Whitehouse
United States Senate
Washington, DC 20510
Dear Senator Whitehouse,
Thank you for your continued engagement with the Treasury
Department on addressing the challenges of dark money in politics and
for your leadership on this issue. We share your goal of increasing
transparency in the system and, for reasons discussed at greater length
below, we agree that Congress should lift the appropriations rider that
prevents the Department from clarifying the extent to which
organizations can engage in political or election-related activity
while maintaining their tax-exempt status under Section 501(c)(4) of
the Internal Revenue Code.
First, the Department agrees that dark money in politics is a
serious problem for our democracy and can undermine public trust in
government. As Secretary Yellen affirmed in congressional testimony,
``I understand the importance of this issue. . . . We really need to
get dark money out of politics. . . . I found out how very complicated
it has been. And I know, for example, that the IRS has been prohibited
from issuing guidance in this area for a number of years.'' She also
recently reiterated, in response to your thoughtful questions, ``I
agree with you that we absolutely need to get dark money out of
politics. We'll work with you to try to do that.'' The Department
remains committed to addressing this issue.
Second, we know that there are sound constitutional reasons for
promoting transparency in political activity. The Supreme Court
emphasized these principles in its decision in Citizens United v.
Federal Election Commission: ``The First Amendment protects political
speech; and disclosure permits citizens and shareholders to react to
the speech of corporate entities in a proper way. This transparency
enables the electorate to make informed decisions and give proper
weight to different speakers and messages.'' Indeed, the Court
specifically upheld disclaimer, disclosure, and reporting requirements
that aimed to help citizens better evaluate political advertisements
and to make informed choices in the political marketplace. The widely
accepted principle of promoting transparency and greater information in
the political system, recognized by an overwhelming majority of the
Court, remains equally sound today--and continues to be critical to
preserving the public's trust in our electoral system.
Third, the Department has limited tools to ensure that
organizations do not abuse their tax-exempt status under Section 501(c)
by engaging in a prohibited level of political activity. This is an
area of the law that could benefit from clearer rules and guidance.
Charitable organizations established under Section 501(c)(3), for
example, may not ``participate in, or intervene in (including the
publishing or distributing of statements), any political campaign on
behalf of (or in opposition to) any candidate for public office.'' But
the rules are more nuanced for 501(c)(4) entities that are ``not
organized for profit but operated exclusively for the promotion of
social welfare.'' For more than 60 years, the Department has
interpreted ``promotion of social welfare'' to exclude ``direct or
indirect participation or intervention in political campaigns on behalf
of or in opposition to any candidate for public office.'' But it has
also interpreted ``operated exclusively'' to mean ``operated
primarily'' and thus allowed entities to retain their tax-exempt status
even if they engage in some degree of political activity--and in a way
that does not require the disclosure of those who fund it under 52
U.S.C. Sec. 30120(a).
The Department is aware of the importance of providing guidance on
the contours of these rules, but its efforts to do so are now subject
to a clear appropriations rider. In 2013, the IRS issued an NRPM to
clarify the 501(c)(4) regulations, including what it means for an
organization to be engaged ``primarily'' in candidate-related political
activity. The IRS received more than 169,000 comments, demonstrating
the significant public interest in this topic. In 2014, IRS withdrew
the NPRM and announced it would issue a revised NPRM. Since 2015,
however, Congress has imposed an annual rider on appropriations for the
IRS. These riders have been intended to restrict the Department's
ability to clarify the criteria that govern an organization's
eligibility for tax exemption under 501(c)(4) when that organization
engages in political or election-related activities. As a result, until
Congress acts to remove the rider, the Department will be unable to
provide the regulatory clarity that could provide guidance to tax-
exempt organizations and potentially increase public transparency in
political spending by these organizations.
The most recent version of this appropriations rider states that
``[N]one of the funds made available in this or any other Act may be
used by the Department of the Treasury, including the Internal Revenue
Service, to issue, revise, or finalize any regulation, revenue ruling,
or other guidance not limited to a particular taxpayer relating to the
standard which is used to determine whether an organization is operated
exclusively for the promotion of social welfare for purposes of section
501(c)(4) of the Internal Revenue Code of 1986.'' The current rider
also attempts to restrict enforcement by providing that ``the standard
and definitions as in effect on January 1, 2010, which are used to make
such determinations shall apply after the date of the enactment of this
Act for purposes of determining status under section 501(c)(4) of such
Code of organizations created on, before, or after such date.''
You have raised several significant and understandable concerns
about the practical consequences of handcuffing efforts to cut back on
dark money in politics. For example, you have emphasized that,
following Citizens United, there is no limit on the amount of money a
group organized under section 501(c)(4) can spend on campaign and
election-related activity so long as that is not its primary activity.
Although a 501(c)(4) organization must include a disclaimer that it
paid for an
election-related communication, it does not need to publicly disclose
its donors. It can therefore be more difficult for the public to learn
what individuals or entities are funding an advertisement paid for by a
501(c)(4), compared to an advertisement paid for by a campaign or
committee which must submit public reports of its donors to the Federal
Election Commission. You have also raised concerns about the
proliferation of 501(c)(4) organizations and their political activity,
noting that it is not uncommon for an entity formed under section
501(c)(3)--which is prohibited by statute from intervening in political
campaigns--to share staff, board members, office space, or other
resources with a 501(c)(4) organization that may engage in such
activity. You have also raised concerns that the statutory and
regulatory requirements of section 501(c)(4) can be abused to enable
the proliferation of dark money in politics.
We share the overarching concern about the need to address abuses
of the tax code. Enforcement of the law has been hampered by a lack of
clarity regarding the scope of ``direct or indirect participation or
intervention'' in political campaigns on behalf of or in opposition to
any candidate for public office. In addition, IRS has been
significantly constrained in the past by its limited resources in all
areas of IRS enforcement authority, and not just in the tax-exempt
space. The IRS had been severely underfunded for decades, and its
budget has been declining even while the number of tax filers has been
growing. This is why we appreciate your strong support for advancing
the IRS funding provisions of the Inflation Reduction Act.
We support removal of the appropriations rider. We would welcome
the opportunity to re-engage with the public on how best to clarify the
requirements of section 501(c)(4) and increase transparency in
political spending, while appropriately protecting the speech and
associational interests of tax-exempt organizations. We have
appreciated your advocacy on this point, and we welcome efforts by you,
your Senate colleagues, and House colleagues to prevent the imposition
of this and other riders on future IRS appropriations.
Thank you, again, for your continued leadership and engagement with
Treasury on these issues. We look forward to continuing our productive
discussions. If you have any further questions, please do not hesitate
to contact the Office of Legislative Affairs.
Sincerely,
Jonathan C. Davidson
______
Congress of the United States
Washingon, DC 20515
September 25, 2023
The Honorable Janet Yellen
Secretary, Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
The Honorable Daniel Werfel
Commissioner, Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Dear Secretary Yellen and Commissioner Werfel,
We appreciate the Treasury Department's concern for the serious problem
dark money poses for our democracy and the Department's commitment to
increasing transparency, as expressed in your recent letter regarding
the political activities of groups organized under Section 501(c)(4) of
the Internal Revenue Code.\1\ We appreciate your call for Congress to
remove the appropriations rider preventing the Department from
clarifying the extent to which organizations can engage in political or
election-related activity while maintaining their tax-exempt status
under Section 501(c)(4).
---------------------------------------------------------------------------
\1\ See Letter from Assistant Secretary Jonathan Davidson to
Senator Sheldon Whitehouse (June 23, 2023).
As noted in your letter, the appropriations rider has prevented the
Internal Revenue Service (IRS) from issuing new regulations to clarify
the definition of political activity or from issuing any ``other
guidance'' that would help the Department clarify the criteria
governing an organization's tax-exempt status under 501(c)(4) when that
organization engages in political activities.\2\ We share fully your
view that Congress must remove the rider, allowing the Department to
provide additional clarity to tax-exempt organizations, and to increase
public transparency in election-related spending funneled through
501(c)(4) organizations.
---------------------------------------------------------------------------
\2\ Id.
Until this is achieved, we urge the Department and the IRS to use its
existing enforcement powers to deter bad actors from abusing tax-exempt
organizations to engage in impermissible political activity. Even with
the rider in place, current IRS rules contain clear prohibitions
against a 501(c)(4) organization dedicating half or more of its
activity to political campaign intervention, or a 501(c)(3)
organization engaging in any political campaign intervention, direct or
indirect.\3\ If the IRS finds a violation, it can revoke the group's
tax-exempt status, levy excise tax penalties, or refer the case to the
Department of Justice to conduct a review for criminal prosecution. As
I emphasized in a May 2022 hearing in the Finance Taxation and IRS
Oversight Subcommittee, and in my previous letters to the Department,
flagrant violations of law, if left uninvestigated, send a terrible
message and encourage mischief and corruption.
---------------------------------------------------------------------------
\3\ See 26 CFR Sec. 1.501(c)(4)-1(a)(2)(i); 26 U.S.C.
Sec. 501(c)(3); 26 CFR Sec. 1.501(c)(3)-1(b)(3).
For example, 501(c)(3) organizations continue to engage conspicuously
in political campaign intervention. Despite the 501(c)(3) status of an
organization called the Conservative Partnership Institute (CPI),
publicly available information about its activities indicates that CPI
is participating in prohibited political campaign intervention such as
selectively offering its facilities and services to Republican
candidates and political committees, and selectively featuring
Republican candidates at its events and on its social media.\4\ Such
activities appear clearly to contravene the IRS's regulations on
permissible activities for 501(c)(3) organizations.
---------------------------------------------------------------------------
\4\ See Letter from Senator Sheldon Whitehouse to Mr. Cameron T.
Seward (November 21, 2022) https://www.whitehouse.senate.gov/imo/media/
doc/Letter%20to%20CPI_11.21.2022_
FINAL.pdf; see also Tom Dreisbach, Experts say a Trump-backed charity
is pushing the boundaries of tax law, NPR (Aug. 31, 2022), https://
www.npr.org/2022/08/31/1119751840/experts-say-a-trump-backed-charity-
is-pushing-the-boundaries-of-tax-law.
Other 501(c)(3) groups seem virtually indistinguishable from their
501(c)(4) ``twins,'' with overlapping boards, staff and donors, and
shared locations, yet there has been no apparent effort to audit or
---------------------------------------------------------------------------
police the 501(c)(3)/501(c)(4) boundaries in such overlapped groups.
Additionally, reporting discrepancies by 501(c)(4) organizations--in
which groups report spending on political activity to the Federal
Election Commission (FEC) or its state equivalents while reporting to
the IRS that they did not engage in any political activity--present
prima facie cases of noncompliance with IRS rules. As mentioned in a
May 2022 letter, a report published by Citizens for Responsibility and
Ethics in Washington (CREW) identified over 2 dozen flagrant
inconsistencies between IRS filings and disclosures to the FEC or state
equivalents.\5\ Whether or not those inconsistencies are wrongful, they
at least merit investigation.
---------------------------------------------------------------------------
\5\ See Matt Corley and Adam Rappaport, The IRS Is Not Enforcing
the Law on Political Nonprofit Disclosure Violations, Citizens for
Responsibility and Ethics in Washington (Apr. 28, 2022), https://
www.citizensforethics.org/reports-investigations/crew-reports/the-irs-
is-not-enforcing-the-law-on-political-nonprofit-disclosure-violations/.
In one example, CREW found the National Rifle Association disclosed
nearly 11 million dollars in political spending to the FEC between 2008
and 2013, but reported zero dollars in political spending to the IRS
for the same time period.\6\ By matching political spending reports
with FEC data, the Department can work to identify instances of
reporting discrepancies and use its authority to refer clear instances
of misrepresentations, which would predicate potential ``false
statement'' offenses, to the Department of Justice for further
investigation and prosecution.
---------------------------------------------------------------------------
\6\ Id.
Unfortunately, numerous reports have found that the IRS is doing little
or nothing to enforce laws prohibiting impermissible political
activity. According to a 2015 bipartisan Senate Finance Committee
investigation, the IRS did not perform any examinations of 501(c)(4)
groups based on outside referrals alleging impermissible political
activity between 2010 and 2014.\7\ According to a GAO review, the IRS
conducted 226 examinations involving impermissible political campaign
intervention between 2010 and 2017 and most resulted in no
penalties.\8\ An investigation by the Treasury Inspector General for
Tax Administration estimated that over 1,000 referrals alleging
impermissible political activity out of 6,500 met the criteria for
forwarding to the Political Activities Referral Committee but were not
actually forwarded.\9\
---------------------------------------------------------------------------
\7\ ``The Internal Revenue Service's Processing of 501(c)(3) and
501(c)(4) Applications for Tax-Exempt Status Submitted by `Political
Advocacy' Organizations from 2010-2013,'' Committee on Finance, United
States Senate, Bipartisan Investigative Report as Submitted by Chairman
Hatch and Ranking Member Wyden (2015), https://www.congress.gov/
congressional-report/114th-congress/senate-report/119/1.
\8\ ``Campaign Finance: Federal Framework, Agency Roles and
Responsibilities, and Perspectives,'' U.S. Government Accountability
Office (Feb. 3, 2020), https://www.gao.gov/products/gao-20-
66r#::text=FEC%3A%20The%20FEC%20is%20responsible,%2C%20investigations%2
C%20
and%20civil%20litigation, 39.
\9\ ``Review of the Processing of Referrals Alleging Impermissible
Political Activity by Tax-
Exempt Organizations,'' Treasury Inspector General for Tax
Administration (Oct. 4, 2018), https://www.treasury.gov/tigta/
auditreports/2019reports/201910006fr.pdf.
Last year, the Inflation Reduction Act made an historic investment in
the IRS. Resource constraints are no longer a significant barrier to
effective enforcement. The prevalence of dark money in our political
system is a corrupting force undermining faith in our democratic
institutions. Removing the appropriations rider is a step towards
increasing transparency and providing guidance on the boundaries of
political activities for nonprofit organizations. In the meantime, the
Treasury Department and the IRS must use its audit and enforcement
powers to deter bad actors from engaging in impermissible political
activity. We urge the IRS to exercise its enforcement authority against
501(c)(3) and 501(c)(4) organizations that fail to adhere to the IRS's
---------------------------------------------------------------------------
existing regulations.
Sincerely,
Sheldon Whitehouse Bill Pascrell, Jr.
United States Senator Member of Congress
Ron Wyden Michael F. Bennet
United States Senator United States Senator
Elizabeth Warren Robert Menendez
United States Senator United States Senator
Chris Van Hollen Jimmy Gomez
United States Senator Member of Congress
Lloyd Doggett
Member of Congress
______
United States Senate
Washington, DC 20510
February 3, 2021
The Honorable Janet Yellen
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Secretary Yellen,
Congratulations on your swift confirmation. We write today to follow up
on the conversation at your Senate Finance Committee hearing regarding
Treasury's role in overseeing the political activity of social welfare
organizations organized under section 501(c)(4) of the Tax Code. As was
discussed at the hearing and we outline below, the IRS's regulation and
enforcement related to 501(c)(4) organizations has been woefully
inadequate in the post-Citizens United era. We urge you to undertake a
careful review of what the IRS has done, reform its approach, and rein
in abuse by ``dark money'' organizations.
Citizens United and Donor Disclosure
In Citizens United, the Supreme Court struck down provisions of the
Bipartisan Campaign Reform Act (``BCRA'') \1\ and allowed unlimited
spending in elections. That decision presumed that BCRA's disclosure
requirements, which remained intact, would create a regime of
``effective disclosure'' that would ``provide shareholders and citizens
with the information needed to hold corporations and elected officials
accountable for their positions and supporters.''\2\ That presumption
utterly failed: following Citizens United, ``effective disclosure''
collapsed. This collapse among non-profit groups took place largely
because of ambiguous and permissive Treasury regulation of political
spending.
---------------------------------------------------------------------------
\1\ Citizens United v. Fed. Election Comm'n, 558 U.S. 310 (2010).
\2\ Id. at 370. The justices upheld BCRA's disclosure requirements
by an 8-1 margin. Id. at 372.
Corporate special interests, and their sophisticated political
operatives, lawyers, and contributors, identified and exploited the
IRS's weak and outdated regulations. They funneled money into
organizations under section 501(c)(4) of the Internal Revenue Code
precisely because these organizations do not have to publicly disclose
their contributors,\3\ and then turned those organizations to political
work.
---------------------------------------------------------------------------
\3\ See, e.g., Trevor Potter & B. B. Morgan, The History of
Undisclosed Spending in U.S. Elections & How 2012 Became the Dark Money
Election, 27 Notre Dame J.L. Ethics & Pub. Pol'y 383, 463-64 (2013)
(discussing the formation of Crossroads GPS, a 501(c)(4) spin-off of
super PAC American Crossroads, formed to protect donors from
disclosure).
Once Citizens United allowed unlimited political spending in elections,
the value of hiding donors' identities exploded, and political activity
by 501(c)(4) groups exploded in parallel. Since 2010, 501(c)(4)
organizations have spent over $900 million on political expenditures,
compared to $103 million in the previous decade.\4\ In one
representative case, the American Action Network raised $41.9 million
in one year, $24.6 million of which came from a single anonymous
donor.\5\ According to an analysis of the 2020 election, 70% of outside
spending came from groups that do not fully disclose their donors,
meaning they have dark money or shell company donors.\6\
---------------------------------------------------------------------------
\4\ Outside Spending, OpenSecrets.org, https://www.opensecrets.org/
outsidespending/index.
php?type=A&filter=N (last visited Jan 26, 2021).
\5\ Scott Bland, Ryan-linked group Raised $24.6M From an Anonymous
Donor, Politico (May 18, 2018), https://www.politico.com/story/2018/05/
18/american-action-network-24-6-million-anonymous-donor-554680.
\6\ 2020 Election To Cost $14 Billion, Blowing Away Spending
Records, OpenSecrets.org (Oct. 28, 2020), https://www.opensecrets.org/
news/2020/10/cost-of-2020-election-14billion-update/.
Citizens United wrought a seismic shift in the political ecosystem.
These figures, while staggering, show only a facet of the massive,
sophisticated political operation of these big influencers. For
example, these figures do not include money spent on ``issue ads''
(often thinly veiled political attack ads), nor on official lobbying
expenditures, nor on conventions and retreats in exotic locations
designed to ``educate'' policy makers, nor on impact litigation and
amicus briefs that these organizations have turned into a burgeoning
legal influence industry, nor do they contemplate the value of private
---------------------------------------------------------------------------
threats and promises that the prospect of unlimited spending enables.
While the amount of spending is immense, the number of outside groups
doing the bulk of the spending is not. In 2016 alone, just ninety-five
501(c)(4) and 501(c)(6) trade associations made independent
expenditures of $50,000 or more, which totaled more than $185
million.\7\ The ten largest of those spenders were responsible for 77%
of this total, and the top three spenders were responsible for nearly
half.\8\ Our most powerful political forces now hide from open debate
and public accountability by virtue of having interposed a one-way
mirror between themselves and the public sphere. The result has been
widely described as a ``tsunami of slime.''\9\
---------------------------------------------------------------------------
\7\ Political Nonprofits: Top Election Spenders, OpenSecrets.org,
https://www.opensecrets.
org/outsidespending/nonprof_elec.php?cycle=2016 (last visited Dec. 3,
2019).
\8\ Id.
\9\ Joe Hagan, The Coming Tsunami of Slime, N.Y. Mag. (Jan 22,
2012), https://nymag.com/news/features/negative-campaigning-2012-1/.
---------------------------------------------------------------------------
The IRS Has Wrongly Given Up the Fight Regulating Non-Profit Political
Activity
The impotence of the IRS's existing 501(c)(4) regulations has been
thoroughly discussed.\10\ By law, 501(c)(4) groups must be set up
``exclusively . . . for the promotion of social welfare,''\11\ which,
according to the IRS's own regulations, ``does not include direct or
indirect participation or intervention in political campaigns on behalf
of or in opposition to any candidate for public office.''\12\
Nevertheless, Treasury regulations allow 501(c)(4) social welfare
organizations to engage in campaign activity so long as the ``primary''
activity of the organizations is social welfare.\13\
---------------------------------------------------------------------------
\10\ See, e.g., Letter from Senators to Department of Treasury and
IRS (Feb. 27, 2014), https://www.whitehouse.senate.gov/imo/media/doc/
2014-02-27%20501c4%20Rules%20Comments%20
Signed%20FINAL.pdf.
\11\ 26 U.S.C. Sec. 501(c)(4)-1(a)(1)(ii) (emphasis added).
\12\ Treas. Reg. Sec. 1.501(c)(4)-1(a)(2)(ii) (emphasis added).
\13\ Treas. Reg. Sec. 1.501(c)(4)-1(a)(2)(i).
The IRS permits 501(c)(4)s to engage in express political activity as
long as it is less than half of the organization's spending. The
remainder of that spending can be on ``issue ads'' or transfers to
other organizations that then spend the money on political ads.\14\ In
some cases, 501(c)(4) organizations have operated in a manner
indistinguishable from Political Action Committees,\15\ and some
operatives and contributors have created intricate webs of
organizations to further thwart disclosure and shield contributors from
scrutiny.\16\
---------------------------------------------------------------------------
\14\ See, e.g., Kim Barker, New Tax Return Shows Karl Rove's Group
Spent Even More on Politics than it Said, ProPublica (Nov. 25, 2013),
https://www.propublica.org/article/new-tax-return-shows-karl-roves-
group-spent-more-on-politics-than-it-said.
\15\ See, e.g., Tom Hamburger and Matea Gold, Crossroads GPS
Probably Broke Election Law, FEC Lawyers Concluded, Washington Post
(Jan. 15, 2014), https://www.washingtonpost.com/politics/crossroads-
gps-likely-broke-election-law-fec-staff-reports-concluded/2014/01/15/
15af18b
6-7d73-11e3-93c1-0e888170b723_story.html; Federal Election Commission,
First General Counsel's Report, MUR: 6396 (Crossroads Grassroots Policy
Strategies), Nov. 21, 2012.
\16\ See, e.g., Matea Gold, Koch-Backed Political Coalition,
Designed to Shield Donors, Raised $400 million in 2012, Washington Post
(Jan. 5, 2014), https://www.washingtonpost.com/politics/koch-backed-
political-network-built-to-shield-donors-raised-400-million-in-2012-
elections/2014/01/05/9e7cfd9a-719b-11e3-9389-09ef9944065e_story.html.
(Describing the Koch-backed coalition: ``Tracing the flow of the money
is particularly challenging because many of the advocacy groups swapped
funds back and forth. The tactic not only provides multiple layers of
protection for the original donors but also allows the groups to claim
they are spending the money on ``social welfare'' activities to qualify
for 501(c)(4) tax-exempt status.'').
These groups have an obvious imperative for ambiguous and unenforced
regulation, so they and their political allies have spent the last
decade deriding and threatening the IRS to keep it from cleaning up
these murky waters. In 2013, the Treasury Inspector General of the Tax
Administration (TIGTA) found that the IRS had singled out certain
conservative groups for increased scrutiny.\17\ Notably, the 2013
report did not look into whether other political groups were similarly
targeted.\18\ Nevertheless, big special interests used the finding to
batter the IRS. Powerful special interest groups and their political
allies slashed the IRS budget, threatened to impeach the then-
Commissioner, and even passed legislation prohibiting the IRS from
issuing clarifying rules regarding 501(c)(4) political activity.
---------------------------------------------------------------------------
\17\ Treasury Inspector Gen. for Tax Admin., Inappropriate Criteria
Were Used to Identify Tax-Exempt Applications for Review (May 14, 2013)
https://www.treasury.gov/tigta/auditreports/2013reports/
201310053fr.pdf.
\18\ Treasury Inspector Gen. for Tax Admin., Review of Selected
Criteria Used to Identity Tax-Exempt Applications for Review (September
28, 2017) https://www.treasury.gov/tigta/auditreports/2017reports/
201710054fr.pdf.
Their argument was not true: a more comprehensive 2017 audit of the
IRS's treatment of potential political groups found that left-leaning
groups had also been flagged for closer scrutiny.\19\ The new audit
found that instead of ideologically targeting certain groups, the IRS
under both Republican and Democratic administrations had looked into
groups across the political spectrum to enforce the rule against
``direct or indirect participation or intervention in political
campaigns.''
---------------------------------------------------------------------------
\19\ Treasury Inspector Gen. for Tax Admin., Review of Selected
Criteria Used to Identity Tax-Exempt Applications for Review (September
28, 2017) https://www.treasury.gov/tigta/auditreports/2017reports/
201710054fr.pdf.
However, the damage had been done. The IRS was cowed from regulating or
even investigating a small, powerful cadre of savvy political
operatives who formed and funded a flotilla of non-profit front groups,
through which anonymous money flows into elections, in contravention of
a clear statute and the IRS's own rules. Enforcement has become so weak
that abuses have become open and notorious.\20\ According to one
ProPublica study, from 2015-2019, the IRS failed to strip any non-
profit of its tax-exempt status, despite receiving thousands of
complaints of abuse from watchdog groups and concerned taxpayers.\21\
Flagrant discrepancies between sworn statements made to the IRS and
sworn statements made by the same group to election regulators have
been turned a blind eye.\22\
---------------------------------------------------------------------------
\20\ Infra, note 22.
\21\ Maya Miller, How the IRS Gave Up Fighting Political Dark Money
Groups, ProPublica (April 18, 2019), https://www.propublica.org/
article/irs-political-dark-money-groups-501c4-tax-regulation.
\22\ In 2012, ProPublica investigated 501(c)(4) filings from 104
organizations that had reported electioneering activity to the Federal
Election Commission or state equivalents, saying ``here is what we
spent on elections.'' ProPublica cross-checked those claims with what
the organizations had reported to the IRS. Thirty-two groups had told
the IRS they spent no money to influence elections, either directly or
indirectly. Both statements cannot be true. See Kim Baker, How
Nonprofits Spend Millions on Elections and Call it Public Welfare,
ProPublica (Aug. 18, 2012), https://www.propublica.org/article/how-
nonprofits-spend-millions-on-elections-and-call-it-public-welfare; see
also, Hearing: ``Current Issues in Campaign Finance Law Enforcement,''
U.S. Senate Committee on the Judiciary, Subcommittee on Crime and
Terrorism, Apr. 9, 2013.
The dark money problem was exacerbated under the Trump administration,
which promulgated a rule in 2020 that allows 501(c)(4)s to withhold
their donor information from the IRS on their annual Form 990
reports.\23\ Dark money got darker.
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\23\ 85 FR 31959.
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Next Steps
Treasury and the IRS are not alone to blame for the dark money problem
infecting our body politic. Republican appropriations riders have tied
Treasury's and the IRS's hands, preventing promulgation of new
regulations regarding 501(c)(4) political activity. We are heartened
that the Senate and House are poised to take up and pass the For the
People Act (H.R. 1/S. 1), which would shine more light on dark money.
However, absent a legislative fix, Treasury and the IRS should shift to
a more robust 501(c)(4) enforcement regime, and thoroughly investigate
the situation so those appropriations riders can be reviewed.
Most immediately, Treasury should work with the Department of Justice
and other law enforcement agencies investigating the attack on the
United States Capitol on January 6, 2021. According to reports, a
number of dark money organizations helped organize and fund the rally
that eventually led to the armed attack on the Capitol.\24\ Treasury
and the IRS should provide any assistance necessary to help law
enforcement in its investigations into the groups behind this tragic
assault on our democracy, and should review whether organizers of the
assault should keep their tax-exempt status.
---------------------------------------------------------------------------
\24\ See Brian Schwartz, Pro-Trump Dark Money Groups Organized the
Rally that Led to the Deadly Capitol Hill Riot, CNBC.com (Jan. 9,
2021), https://www.cnbc.com/2021/01/09/pro-trump-dark-money-groups-
organized-the-rally-that-led-to-deadly-capitol-hill-riot.html.
Treasury should also work with the Department of Justice in its
response to the Americans for Prosperity Foundation v. Becerra case for
which the Supreme Court recently granted certiorari. The case involves
a challenge, brought by the non-profit counterpart of the hyper-
political, Koch-backed Americans for Prosperity, to a California
regulation that requires non-profits to report the same donor
information confidentially to the State of California that the groups
report to the IRS. Americans for Prosperity, and an armada of dark
money-funded amici, are seeking constitutional protection for the dark
money scheme. We have already seen dark money groups assert such a
constitutional right in response to Congressional inquiries. Such a
ruling would imperil federal disclosure rules upon which the IRS relies
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to enforce its own regulations.
Under the Trump administration, the United States weighed in on the
side of the dark money groups in Becerra. We urge Treasury and the IRS
to work with the Department of Justice to reverse this position in the
litigation and argue for the values of transparency.
On the enforcement side, we urge Treasury and the IRS to enforce
existing 501(c)(4) regulations, including investigating open and
notorious inconsistent statements that predicate investigation as to
whether they are criminal false statements. Specifically, the IRS
should investigate dark money groups that report to the IRS that they
do not engage in political activity while at the same time reporting to
election commissions that they do indeed make political expenditures,
in some cases in the millions of dollars.\25\ We urge Treasury to work
with election regulators and the Department of Justice on these cases.
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\25\ Supra, note 22.
More generally, we encourage Treasury and the IRS to bear in mind that
the corrosive effect of dark money on American elections is amplified
by dark money's dark shadow: threats and promises. What dark money can
do, dark money can also threaten (or promise) to do. These threats and
promises can have a powerful political effect, and unlike the actual
spending, threats and promises never appear in the form of a visible
advertisement.\26\ This element of the dark money threat has been
repeatedly overlooked, but it should be overlooked no longer.
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\26\ See American Tradition Partnership v. Bullock, 132 S. Ct.
2490, Cert. Brief of Amici Sens. Sheldon Whitehouse and John McCain in
Support of Respondents.
Anonymous money bears particularly on Congress's inability to tackle
the climate crisis. Perhaps no industry has more utilized dark money
than the fossil fuel industry, which unleashed an army of dark money
groups to propagate fake science and which enforced its power against
Republicans who dared to support climate legislation.\27\ Prior to
Citizens United, bipartisan climate bills abounded; following Citizens
United, there have been exactly zero meaningful bipartisan climate
bills, despite the mounting threat. Reining in dark money is essential
to integrity in government and to a government responsive to the
people, not special interests.
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\27\ E.g., Albert R. Hunt, Flood of Money in U.S. Elections Is a
Scandal Waiting to Happen, N.Y. Times (April 26, 2015) (discussing the
primary defeat of Rep. Bob Inglis after fossil fuel-backed groups
abandoned him over his efforts to address climate change).
We seek no infringement on First Amendment speech rights. Basic,
commonsense disclosure requirements restrict no one's right to speak,
nor to spend money to influence elections. As Justice Brandeis said,
``Sunlight is the best disinfectant''; as Justice Scalia said,
``[r]equiring people to stand up in public for their political acts
fosters civic courage, without which democracy is doomed.''\28\
Disclosure is what permits citizens to do the work of citizenship in a
republic, knowing the identity of political actors contesting for
power.
---------------------------------------------------------------------------
\28\ Doe v. Reed, 130 S. Ct. 2811, 2837 (U.S. 2010) (Scalia, J.,
concurring).
As members of the Senate both before and after Citizens United, we can
personally attest to the corrosive influence of dark money. We hope
that under your leadership Treasury will reexamine how it regulates
dark money groups and restore transparency to our political landscape.
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We look forward to working with you on this supremely important issue.
Sincerely,
Sheldon Whitehouse Elizabeth Warren
United States Senator United States Senate
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
This morning the Finance Committee welcomes Treasury Secretary
Janet Yellen for a hearing on the budget. This hearing always covers a
range of economic issues, so I want to start with a look at the state
of the economy as we meet here this morning.
Right now, the U.S. has the strongest major economy in the world--
as even Trump advisor Stephen Moore agreed in a recent interview. Wages
are rising significantly faster than inflation, which has come way down
from its peak. The labor market has never been better for workers.
There's been real progress on income inequality. This is an era of
booming entrepreneurship in America, as new business applications are
up.
Go back 4 years, when COVID cases were filling up hospitals and
Americans were stuck at home wondering if and when they'd be able to
stock up on toilet paper, the forecasts for the U.S. economy were dire.
The economy under President Biden has smashed those negative forecasts
to bits. Nearly every other country in the world with a developed
economy would love to trade places with us in 2024.
But if you listen to Donald Trump, you'd think the U.S. is on a
fast track to the Dark Ages. What does Trump want to do when it comes
to the big economic policy issues facing this committee? For one, the
Trump allies developing a new tax agenda are cooking up plans for big
tax hikes on working Americans and middle-class families. They're
planning more tax breaks for corporations and handouts to millionaires
and billionaires. Trump wants to repeal the Inflation Reduction Act,
including the funding for the IRS that has vastly improved customer
service and cracked down on wealthy tax cheats.
All in all, he'd run even bigger deficits and pile up more debt.
That would make it impossible to shore up bedrock American programs
like Medicare and Social Security. Recently he told one interviewer--in
the first serious interview he'd done in months--that he believes
there's lots of room for cuts to those programs. His campaign had to
walk it back, because they know his real plans on these issues are a
loser with the American people.
In my view, what Americans want is a strong economy; they want a
fair shake for people who don't have big fortunes and political power;
and they want some policies that drive down the cost of living in
America. That's not what Donald Trump has on offer, but that's exactly
what Democrats are focused on delivering.
For example, late last year I introduced the Billionaires Income
Tax, now up to 18 Senate cosponsors. President Biden's budget includes
his own similar proposal, which is also focused on ending the scheme
known as ``buy, borrow, die.''
A billionaire acquires an asset that steadily gains value. They
borrow against it to turn it into income. And if they hold it until
they die, the tax disappears. Meanwhile, people who earn a wage are
paying taxes out of each and every paycheck. That's a basic unfairness
the Congress must address. The Billionaires Income Tax ought to be the
centerpiece of the effort to save Social Security for future
generations and uphold the Medicare guarantee.
Democrats want to do even more to crack down on ultra-wealthy
individuals and big corporations who rip off typical Americans by
cheating on their taxes. We want to keep upgrading taxpayer service--
already vastly improved thanks to Inflation Reduction Act funding--
including giving every American the option to file their tax returns
directly with the IRS.
The Direct File pilot program opened widely in a handful of States
last week. In just a matter of days, tens of thousands of Americans
have filed or started their returns using this new system, and they're
saving big on fees by doing so.
That's progress that must continue. Donald Trump's allies want to
stop it. He'll side with the tax prep companies against typical
taxpayers, and it's safe to say that Trump himself is no champion of
tax enforcement among the uber-wealthy.
And before I wrap up, I also want to address another topic of
debate in the Senate. It has now been 7 weeks since 357 members of the
House voted to pass my bill with Chairman Smith that expands the Child
Tax Credit and restores R&D incentives. I've listened to my Senate
colleagues and spoken with many of them personally. All along I've said
I'll work with anybody who wants to find a way to get this done
quickly, and my door is open.
The number-one concern I've heard from Republicans is the Child Tax
Credit lookback policy. While I think the policy is important, I've
offered to take it out of the bill if it gets this over the finish
line. Working with groups, we have found a way to do this and still
lift the same number of kids out of poverty. As of this morning, my
offer on the lookback is still on the table.
I understand that some members prefer to wait and try to pass a
bill next year. The reality is, delay will have serious consequences. A
lot of innovative small businesses--for whom the R&D provision in the
bill is a lifeline--are telling me they aren't going to be around in
2025 if the Senate decides to wait.
I also believe there are a lot more than 60 members who want us to
act. So I'm going to keep at it. Members are probably going to get
tired of hearing from me over the next few days, but I'm hopeful that
the Senate is going to get this done soon.
______
Prepared Statement of Hon. Janet L. Yellen,
Secretary, Department of the Treasury
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for the invitation.
Over the past 3 years, the Biden administration has driven a
historic economic recovery. GDP growth is strong, inflation has come
down significantly, and the labor market is remarkably healthy. Real
wages and household median wealth have increased since before the
pandemic. Families are putting their additional income and accumulated
savings back into the economy, and we see many signs of optimism, from
a record 16 million small business filings under this administration to
improved consumer sentiment over the past 3 months.
President Biden and I recognize that many American families still
face challenges such as high prices, so we are taking additional
actions to bring down the costs of key household expenses like energy
and health care. We're also focused on expanding our economy's capacity
to produce and create good jobs, while reducing the deficit. As we
implement the Bipartisan Infrastructure Law, the CHIPS and Science Act,
and the Inflation Reduction Act, we're creating economic opportunity
for Americans regardless of where they live and whether they have
college degrees. And we've seen companies announce $650 billion in
clean energy and manufacturing investments since the start of the
administration.
The modernization of the IRS, made possible by the IRA and
discretionary appropriations, is enabling American taxpayers to receive
the support they deserve, including by driving significant improvements
in customer service. Investments in the IRS are also enabling
enforcement actions against tax evasion by the wealthiest Americans
that cost our country over $150 billion a year--actions such as
recovering $500 million in taxes owed by millionaires to launching a
new initiative to end abuse of corporate jet write-offs.
The President's budget proposes additional investments to lower
costs for workers and families and strengthen our economy while
reducing the deficit. It proposes making health care more affordable
for millions of Americans by making permanent the expansion of tax
credits for health insurance premiums enacted in the American Rescue
Plan and extended in the Inflation Reduction Act. And the budget
includes expanding the Earned Income Tax Credit, Child Tax Credit, and
Low-Income Housing Tax Credit--proposals which would contribute to
lowering child poverty and giving working families more breathing room
in their household budgets.
We can make these investments while reducing the deficit by $3
trillion over a decade through a combination of smart savings and tax
proposals. President Biden and I continue to urge Congress to act so
that the United States plays its part in the global minimum tax deal,
which is currently being implemented in jurisdictions around the world
to end the race to the bottom in corporate taxation. We have also
proposed implementing a Billionaire Minimum Tax so that the top .01
percent pay their fair share; raising the tax on corporate stock
buybacks to encourage businesses to reinvest profits in their workers
and grow their companies; and closing estate and gift tax loopholes
that allow wealthy Americans to pay less than they would otherwise owe.
We will also continue to oppose misguided proposals that will grow the
deficit by offering large tax breaks to the wealthy and big
corporations.
As a whole, the budget will enable us to continue to grow our
economy and support workers and families while upholding our commitment
to fiscal responsibility and reducing the deficit.
______
Questions Submitted for the Record to Hon. Janet L. Yellen
Questions Submitted by Hon. Mike Crapo
Question. The President's budget proposes to increase the Child Tax
Credit akin to its temporary expansion during the pandemic under the
American Rescue Plan Act (ARPA). The proposal expands the credit to
$3,000 a child and $3,600 for children under 6, makes the credit fully
refundable regardless of work or earned income, and facilitates
advancing 100 percent of the credit in monthly installments. In effect,
the credit would be transformed from a tax credit to assist working
families into a near universally available subsidy untied to work.
Available data suggests that the ARPA expansion of the Child Tax
Credit dramatically increased the budgetary cost of this tax benefit.
The President's budget, however, only accounts for the expanded Child
Tax Credit through the end of 2025, which does not show the full
budgetary impact of the credit over a normal 10-year horizon.
What was the total 1-year cost of the ARPA expansion of the Child
Tax Credit?
Answer. The Joint Committee on Taxation estimated that the ARPA
expansion of the Child Tax Credit would cost $110 billion. The IRS paid
$93.6 billion in advance Child Tax Credit payments in 2021, and
taxpayers claimed an additional $115.9 billion in refundable Child Tax
Credit or additional Child Tax Credit on their tax year 2021 returns.
These actuals include both amounts in the baseline pre-ARPA and the
increment attributable to the ARPA. It is not possible to directly
observe the amount that would have been paid for tax year 2021 absent
the ARPA changes.
Question. By what percentage did the 2021 budgetary cost of the
expanded Child Tax Credit increase from its budgetary cost in 2020?
Answer. In 2021, Treasury estimated that the tax expenditure for
the Child Tax Credit in Fiscal Year 2021 was $106.6 billion. In 2022,
Treasury estimated that the tax expenditure for the Child Tax Credit in
Fiscal Year 2022 was $214.9 billion. Fiscal Year 2021 substantially but
not entirely corresponds to the Tax Year 2020 credit, and Fiscal Year
2022 substantially but not entirely corresponds to the Tax Year 2021
credit. In addition, because these estimates come from different
reports, caution is warranted in comparing the two estimates.
Question. If the President's proposed expanded Child Tax Credit
were made permanent, what is the budgetary cost over a normal 10-year
horizon?
Answer. The FY 2025 Greenbook proposes to increase the Child Tax
Credit amounts through 2025 and make permanent full refundability and
advanceability. This proposal costs $310 billion over the period FY
2025-FY 2034. The cost of a permanent version of the proposal would
depend on what assumptions are made about other tax policies in effect
at the time.
Question. TCJA enacted the Foreign-Derived Intangible Income (FDII)
deduction to work in tandem with GILTI to help protect the U.S. tax
base. FDII ensures companies holding their IP in the U.S. to sell
around the world are taxed at the same effective rate of income as
companies who hold their IP abroad and are subject to GILTI.
Last year, the administration's budget proposed to repeal FDII. As
one of the witnesses from the May 2023 Finance Committee international
hearing said in a QFR response, ``Repealing FDII would create a clear
incentive for U.S. companies to hold their IP offshore and to develop
future IP offshore.'' And given the adoption of Pillar 2 Qualified
Domestic Minimum Top-up Taxes (QDMTTs) outside of the U.S., that result
would lead to a further loss of U.S. revenue.
Since last year's hearing, I understood that the administration had
changed their position on repealing it. A QFR from last year's Ways and
Means hearing on the administration's FY 2024 budget asked whether you
intend to defend FDII at the OECD, which is considering whether FDII
should be classified as a ``harmful tax practice.'' In response, you
answered ``FDII is current law and as such we intend to defend this law
at the Forum on Harmful Tax Practices.'' Despite that statement, this
year's budget once again proposes to repeal FDII.
Please explain the discrepancy between your stated position that
the administration is defending FDII at the OECD and the budget
proposal repealing it.
Please provide an update on the status of FDII at the Forum on
Harmful Tax Practices and whether the administration is still committed
to defending it.
Answer. The administration believes that FDII is not a ``harmful
tax practice'' under the criteria that the FHTP must use to conduct
this analysis. The administration nevertheless believes that FDII
should be repealed because it is not an effective way to encourage U.S.
R&D. FDII does not provide meaningful incentives for smaller
businesses, creates incentives for large multinationals to move
tangible property offshore, and disadvantages companies with a focus on
domestic sales than export sales. The revenue raised from a repeal of
FDII could be deployed to incentivize U.S. R&D more directly and
effectively.
However, it bears repeating that the administration's reasons for
seeking to repeal FDII have nothing to do with FDII's status at the
FHTP. We continue to defend the rule in OECD discussions and have
repeatedly engaged the OECD Secretariat to advocate this position.
There has been no change in our commitment to defend the rule since our
previous statement. FDII continues to be in ``under review'' status at
the FHTP and we continue to discuss the topic with the Secretariat in
preparation for a full presentation and analysis at a future FHTP
meeting.
Question. The Corporate Alternative Minimum Tax (CAMT), enacted by
the partisan Inflation Reduction Act (IRA), applies for taxable years
beginning after December 31, 2022. Tax filing season for Tax Year 2023
is underway but to date, the Treasury Department and the Internal
Revenue Service (IRS) have not issued proposed regulations for the
CAMT.
Last summer, Treasury and IRS provided penalty relief for
corporations that did not pay estimated tax in connection with the
CAMT, ``[i]n light of challenges associated with determining whether a
corporation is an Applicable Corporation and the amount of a
corporation's CAMT liability.''\1\ Just last week, Treasury's Tax
Legislative Counsel indicated proposed regulations may still be months
away. With the tax filing deadline and another quarterly estimate
quickly approaching, corporations must be able to determine whether or
not it is an Applicable Corporate and the amount of its CAMT liability
without proposed regulations. Despite these challenges, the President's
budget proposes retroactively increasing the CAMT from 15 percent to 21
percent for taxable years beginning after December 31, 2023.
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\1\ https://www.irs.gov/pub/irs-drop/n-23-42.pdf.
Please provide an update on the status of proposed CAMT
---------------------------------------------------------------------------
regulations.
Answer. On September 12th, Treasury and the IRS issued a notice of
proposed rulemaking for the Corporate Alternative Minimum Tax
(CAMT).\2\ The comment period for these proposed rules was extended
through January 16, 2025, and we will carefully consider all
stakeholder feedback before issuing final guidance. Completion of these
regulations is a priority for our team.
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\2\ https://www.federalregister.gov/documents/2024/09/13/2024-
20089/corporate-alternative-minimum-tax-applicable-after-2022.
Question. Does Treasury plan to provide any additional relief due
to the implementation challenges and delay in proposed CAMT
---------------------------------------------------------------------------
regulations?
Answer. On September 12th, 2024, Treasury and the IRS issued Notice
2024-66,\3\ which provides penalty relief for all estimated payments of
CAMT liability for tax years beginning in 2024. This notice
incorporates prior penalty relief provided for estimated payments due
for the first and second quarters of 2024 in Notices 2024-33 and 2024-
47.\4\ Treasury and the IRS had previously issued Notice 2023-42,\5\
providing penalty relief for estimated payments for CAMT liability for
tax years beginning in 2023.
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\3\ https://www.irs.gov/pub/irs-drop/n-24-66.pdf.
\4\ https://www.irs.gov/pub/irs-drop/n-24-33.pdf.
\5\ https://www.irs.gov/pub/irs-drop/n-23-42.pdf.
Question. JCT projected the CAMT would raise $34.679 billion for FY
2023.\6\ For that fiscal year, please provide how much actual revenue
was collected from the CAMT.
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\6\ https://www.jct.gov/publications/2022/jcx-18-22/.
Answer. Tax payments attributable to CAMT liability are not
distinguishable from other corporate tax payments when received by the
Treasury. Thus, it is not possible to provide actual CAMT liability for
FY 2023 until all corporate tax returns for Tax Year 2023 are received,
processed, and analyzed. As many large corporate taxpayers request
extensions, it will still be some time before all returns reporting
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CAMT liability are processed and analyzed.
Question. Why does the President's budget propose increasing the
CAMT rate when the administration has not successfully implemented the
original provision to date?
Answer. The President's FY 2025 budget proposes increasing the
corporate tax rate to 28 percent and increasing the minimal rate on
multinationals' foreign earnings to 21 percent. Increasing the
corporate alternative minimum tax rate in line with these other two
rate increases ensures the CAMT serves as an effective floor on
corporate taxes.
Question. The enacted version of the Financial Data Transparency
Act (FDTA) makes clear that the rulemaking authority is vested in the
Secretary of the Treasury. Prior to enactment, earlier versions of FDTA
sought to vest the rulemaking authority in the Office of Financial
Research (OFR). This was changed in the enacted law. This makes sense
given that the Dodd-Frank Act gave OFR very limited rulemaking
authority. While the FDTA allows the Secretary of the Treasury ``to
delegate the functions required under the amendments made by this
subtitle to an appropriate office within the Department of the
Treasury,'' it is unclear whether Treasury has done so and to what
degree.
Has Treasury fully delegated rulemaking authority for the FDTA to
the OFR or any other office within Treasury?
Answer. Treasury's Under Secretary for Domestic Finance is
responsible for leading Treasury's efforts in the joint FDTA
rulemaking. The OFR, whose Director reports to the Under Secretary for
Domestic Finance, has been delegated authority to help coordinate
Treasury's participation in the interagency joint rulemaking,
consistent with Treasury's co-equal role among the covered agencies
charged with issuing the joint rule. For example, the OFR has
contributed to the drafting of the joint proposed rule and has
facilitated staff-level meetings among the participating agencies.
However, the OFR has not been delegated authority to approve a proposed
or final joint rule under the FDTA. Treasury's Office of the Chief Data
Officer has also actively participated in this effort.
Question. If so, why was that office chosen?
Answer. The standardization of data reported to financial
regulators is an issue within the scope of Treasury's Office of
Domestic Finance. The OFR is participating in this effort because it
has significant expertise on financial data standards, represents
Treasury in domestic and international organizations that develop those
standards, and interacts with other Federal financial regulators on
them. These activities are consistent with the OFR's statutory
purposes, which include ``standardizing the types and formats of data
reported and collected'' under section 153(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act. Treasury's Office of the
Chief Data Officer is also involved because of its data-related
expertise.
Question. To what degree is Treasury still involved in the
rulemaking effort? Will Treasury make the ultimate decision on the
rulemaking?
Answer. Treasury is actively involved in the interagency FDTA
rulemaking effort, and a duly authorized Treasury official will
ultimately determine whether to approve the proposed and final rules
under the FDTA.
______
Questions Submitted by Hon. Sherrod Brown
Question. The Inflation Reduction Act was designed to reshore
American manufacturing jobs and capabilities at multiple levels of the
supply chain. The proposed regulations for the 45X tax credit would
exclude many value-adding processes and inputs, such as extracting
feedstock and acquiring reactants, from the activities eligible for the
credit.
Having now received significant input from industry about the
supply chains for critical minerals, do you agree that these
regulations should be revised to better reflect congressional intent
and apply to additional productive manufacturing activities?
Answer. Expanding production of critical minerals in the United
States is an administration priority, and the section 45X Advanced
Manufacturing Production Credit is a key part of our strategy to do
that. On October 24, 2024, Treasury and the IRS issued final
regulations on section 45X that provide clarity and certainty to
taxpayers and include changes to further accelerate the buildout of
domestic critical mineral supply chains.
Notably, the final regulations allow taxpayers to include both
direct and indirect materials costs and domestic extraction costs, in
the calculation of production costs for applicable critical minerals
and electrode active materials, provided certain conditions are met.
Included direct and indirect materials costs must not relate to the
purchase of an existing eligible component, and included domestic
extraction costs must be incurred by the taxpayer that claims the
credit for the applicable critical mineral or electrode active
material. These requirements maximize the incentive for domestic
critical mineral production, while safeguarding against potential abuse
and over-crediting.
We carefully considered all feedback, including yours, before
issuing final regulations.
Question. Please provide an update on the section 40B SAF credit
guidance.
Will Treasury include the greenhouse gas emission reduction
strategies promised in the Department's December announcement,
including climate-smart agriculture practices, carbon capture and
storage, renewable natural gas, and renewable electricity?
Answer. On April 30, 2024, Treasury and the IRS released Notice
2024-37, providing additional guidance on the Sustainable Aviation Fuel
(SAF) credit under I.R.C. Sec. Sec. 40B and 6426(k). In conjunction,
the agencies comprising the SAF Interagency Working Group (IWG) jointly
announced the 40BSAF-GREET 2024 model. This model provides another
methodology for SAF producers to determine the lifecycle GHG emissions
rates of their production for the purposes of the SAF credit. Treasury
and IRS issued prior guidance regarding the SAF credit in Notice 2023-
6, 2023-2, I.R.B. 328, and Notice 2024-6, 2024-2 I.R.B. 34.
The modified version of GREET incorporates new data, including
updated modeling of key feedstocks and processes used in aviation fuel
and indirect emissions. The modified GREET model also integrates key
greenhouse gas emission reduction strategies such as carbon capture and
storage, renewable natural gas, and renewable electricity.
Treasury's April 30th guidance also incorporates a USDA pilot
program for the use of certain climate-smart agriculture practices for
SAF feedstocks through the USDA Climate Smart Agriculture Pilot
Program.
In addition, on May 31, 2024, Treasury and IRS issued Notice 2024-
49, providing guidance on producer registration for the Clean Fuel
Production Credit under section Sec. 45Z. The Clean Fuel Production
Credit provides a credit for the production of clean transportation
fuel, including SAF and non-SAF transportation fuel, beginning on
January 1, 2025. We intend to provide additional guidance on section
45Z by the end of the administration.
Question. In 2022, Congress passed the Inflation Reduction Act,
legislation meant to incentivize the domestic supply chain for clean
energy and to reduce our reliance on our adversaries, like China. I
want to ensure that taxpayer money is not going to Chinese companies
and other foreign entities of concern. I believe the Chinese Communist
Party is already trying to exploit this historic legislation.
As I noted in a March 13, 2024 Senate Finance hearing, ``we want
these companies that are getting tax incentives to actually produce
here, not just assemble here, not just import from 12 countries and get
a tax break when they do the assembly here, but the intellectual
property is not here, and most of the equipment's not here.'' The IRA
was intended to support the development of genuine domestic supply
chains in the United States, not create loopholes for foreign
adversaries who desire to keep existing supply chains in place. For the
IRA to have the intended impact of onshoring our key clean energy
supply chains, such as for electric vehicle batteries, we have to
ensure strict and responsible implementation of the legislation. I am
concerned that our adversaries may be utilizing ambiguity in current
guidance from the Department of Treasury to evade the intention of the
legislation.
One example includes, companies manufacturing lithium-ion battery
separators outside of the United States, including in China, and
importing the separator or as they call it, ``base film'' material,
after it has been manufactured abroad, and only applying ``coating'' in
the United States. A battery cannot function without a separator, a
component manufactured utilizing a complex process. Batteries operate
utilizing both coated and uncoated separators depending on the use-
case. Calling a separator ``base film'' to argue that it is a raw
material and not the actual component, as defined by Treasury's
previous guidance, is just one example of our foreign adversaries
looking to work around or change the intent of the legislation that was
meant to onshore our supply chain.
Do you believe that the intention of the IRA was to incentivize
U.S.-based manufacturing of all critical components of the domestic
battery supply chain, such as battery separators? Do you believe that
the intention of the IRA was to incentivize the entirety of the battery
component supply chain versus strictly nontransformational
modifications or assembly?
Answer. The IRA incentivizes the building of a resilient industrial
base in the United States, strengthens the supply chains that are vital
for energy security with our allies and partners, and lowers
transportation costs for everyday Americans. It encourages the
onshoring and friendshoring of the production activities related to
critical components of the battery supply chain, including critical
minerals and battery components.
Question. Do you believe that companies, including those controlled
by China and other adversaries, who import separators and just apply a
``coating'' in the U.S., but do not ``manufacture'' the separator
domestically, should be eligible for the tax credits created and/or
enhanced by the IRA such as 30D or 45X?
Answer. For purposes of section 30D, the final regulations define a
battery component to include a coated separator. In general, the base
film and coating of a separator are battery materials, not battery
components, because they are processed rather than manufactured or
assembled. For purposes of section 45X, the final regulations define
electrochemically active materials to include separators.
Question. If you do allow companies who solely coat separators in
the U.S. to qualify for these tax credits, there is concern that by
considering the ``base film'' a ``raw material'' versus a manufactured
battery component, it could be imported from
Chinese-owned companies and other FEOCs. How will your department
ensure that separators or ``base film'' are not imported by domestic
battery manufacturers from FEOCs for placement in U.S. lithium-ion
batteries or EVs applying for these tax credits?
Answer. To be a new clean vehicle for purposes of the section 30D
credit, the vehicle battery may not contain critical minerals
extracted, processed, or recycled by a FEOC nor battery components
manufactured or assembled by a FEOC. To the extent a clean vehicle
battery contains base film with applicable critical minerals, it would
be subject to these FEOC restrictions. The section 30D final
regulations adopt a robust up-front review process, conducted by the
IRS in consultation with the Department of Energy, to help ensure
compliance with the FEOC restrictions.
Question. Please provide an update on the department's progress in
drafting guidance for commercial clean vehicle tax credits under 45W.
Congress's intent--in both statute and in accompanying statements for
the Congressional Record--was for mobile machinery, including
commercial lawnmowers and forklifts to be included under the scope of
45W, as an important step to encourage the conversion from gas to
electric.
Will the guidance reflect this intent?
Answer. Treasury and the IRS understand that taxpayers need
additional guidance on eligibility for the 45W credit, among other
issues. We are actively working to provide this additional guidance. We
intend to address a comprehensive set of issues, including mobile
machinery, in future guidance.
Question. The IRS's new Direct File program is already making a
difference for taxpayers in 2024, and I believe over time it can grow
to radically democratize access to the tax system, including increasing
the coverage of critical credits like the EITC and CTC. I'm eager to
ensure Direct File is available to Ohio taxpayers.
What steps are you taking to recruit more States to join Direct
File next filing season? How are you ensuring that States have the
information and advance notice they need to properly prepare State
filing systems that integrate with Direct File?
Answer. In May, the IRS and Treasury announced that Direct File
will become a permanent offering from the IRS and invited and
encouraged all 50 States and DC to participate as soon as next year.
We've heard from a number of States already who are interested in
joining, and many have cited the success of the pilot and the stability
of Direct File being permanent as key reasons behind their interest.
The IRS has had ongoing conversations with States dating back to
last summer to keep States apprised of Direct File's development and
the technical requirements States will need to meet to bring Direct
File to their State and integrate their State filing systems with
Direct File.
The IRS is proactively reaching out to all State departments of
revenue and taxation, both individually and through convenings that
took place in early June, to ensure that they received the invitation
to join Direct File, explain the technical requirements, and advise
States in their efforts to join Direct File. Treasury has similarly
engaged all State Governor offices with the same support.
Question. Section 48 of the IRS code, as revised by the Inflation
Reduction Act, now provides an investment tax credit to turn raw biogas
captured from landfills, wastewater treatment plant, and from animal
and crop waste at farms and food processing facilities into a useful
fuel. Specifically, Congress included this provision in the IRA to
support investment into projects that turn biogas into new productive
uses, including upgrading biogas to renewable natural gas. Congress did
this by incorporating the Agricultural Environmental Stewardship Act
(AESA) into the IRA to specify that that ``cleaning and conditioning''
equipment is part of a biogas system, considered ``covered property''
under the tax credit. ``Cleaning and conditioning'' equipment's
inclusion in the AESA and as incorporated in the IRA was intended to be
inclusive of ``gas upgrading equipment'' without limitation, in
recognition of the higher-quality fuel needed in expanded and advanced
end uses.
Counter to the intent of the law, Treasury originally proposed to
contravene the IRA by excluding ``gas upgrading equipment,'' which is
interchangeable with ``cleaning and conditioning'' equipment, from the
definition of a ``qualified biogas property.''
Subsequently, Treasury issued what it termed a correction of its
proposed regulations. It still maintained that gas upgrading equipment
is not qualified biogas property since it is ``not a functionally
interdependent component (of qualified biogas property).'' Instead, it
now proposes that gas upgrading equipment may qualify if it is an
integral part of an energy property owned by the same taxpayer, if it
is used directly in the intended function of the energy property, and
is essential to the intended function.
I am very concerned that this vague language still leaves
agriculture and other biogas projects trying to create a renewable,
waste derived substitute for fossil natural gas guessing as to whether
their gas upgrading equipment will qualify. Also, the integral part
test excludes equipment if it is owned by a different taxpayer than the
rest of the biogas property. However, there are situations involving
existing biogas systems, where a new party will build and operate the
expensive, complicated gas upgrading equipment. This is of benefit to
existing facilities interested in extending the life and reach of their
projects, but also for new facilities seeking to partner with investors
to reduce emissions. These situations are common and still excluded
from the biogas ITC despite Treasury's correction.
Will Treasury revise the regulatory definition of qualified biogas
property to match the language and intent of the Agricultural
Environmental Stewardship Act (AESA) (as incorporated into the IRA) and
directly provide in the regulations that qualified biogas property
includes all ``cleaning and conditioning'' equipment including gas
upgrading equipment needed to create pipeline quality renewable natural
gas?
If yes, will Treasury ensure that the revisions allow separate
ownership of portions of the biogas system to reflect the reality that
landfills, wastewater treatment plants, or farm-based anaerobic
digesters may be owned separately from gas cleaning equipment added to
the sites to transform raw biogas into renewable natural gas?
Answer. Please see the response to the following question.
Question. As noted, biogas is derived from organic wastes that come
from different sources, such as landfills, wastewater treatment plants,
and agricultural operations already present throughout the U.S. Biogas
projects including gas upgrading equipment facilitate the
interchangeability of biogas with fossil natural gas. Congress's intent
in drafting biogas section 48 ITC in the IRA was to allow common
industry ownership structures to take advantage of the ITC to
incentivize biogas-derived renewable natural gas development,
deployment, and utilization. Unfortunately, the proposed rulemaking
does not recognize the diversity of ownership structures and the need
for flexibility to address the complexities inherent in the emerging
RNG industry. Instead, the proposed rule would require the taxpayer to
own at least a fractional interest in the entire unit of energy
property to claim the ITC.
As noted, there are situations where new biogas upgrading equipment
and other investments are being made into existing biogas systems such
as landfill collections systems or on-farm anaerobic digesters. In
these situations, it may not be legally or commercial possible for the
entire biogas system to be owned by one party. Will Treasury ensure
that its rules maximize investment into systems to turn the biogas
output of these facilities into pipeline quality renewable natural gas
by allowing for multiple owners of qualified biogas property?
Answer. Please see the response to the following question.
Question. As proposed, the regulations would also generally apply
the ``80/20 rule'' for investments to qualify for the ITC, which
requires upgrades to existing properties to account for at least 80
percent of the overall value of the facility. As noted, the biogas
opportunity in the U.S. includes adding gas upgrading equipment to
existing landfill collection systems, municipal wastewater facilities
and existing agriculture anaerobic digesters. Without the upgrading
equipment, the raw biogas from these facilities would not be able to be
moved into commerce to displace fossil natural gas. However, these
investments may run afoul of the ``80/20 rule,'' since the existing
biogas operations can often exceed 20 percent of the value of the
entire system.
Will Treasury ensure that the final regulations do not impose an
80/20 requirement or other barriers to gas upgrading projects at
existing landfill, wastewater treatment and agriculture biogas
projects?
Answer. Treasury and IRS issued final regulations on the section 48
credit on December 4, 2024. The final rules clarify general rules for
the credit and its definitions of eligible property, informed by 350
written comments from stakeholders. This includes clarifying the
relevant definitions for qualified biogas property, with a number of
changes from the proposed regulations that address issues raised by
commenters.
______
Questions Submitted by Hon. Benjamin L. Cardin
Question. Treasury and the IRS have done a commendable job in
engaging stakeholders, issuing guidance, and informing the public of
the progress made in implementing the Inflation Reduction Act. However,
I am concerned that we that we do not have any insight regarding
Treasury's implementation plans for an important provision that I
authored--the zero-emission production tax credit of section 45U.
Section 45U is critical because it is designed to maintain the
nation's most significant generators of emission-free electricity--our
nuclear power fleet. Without such baseline production, we will never
meet our carbon reduction goals. Two key features of section 45U are
that the tax credit phases out if gross receipts from a qualified
nuclear facility exceed a threshold amount and that the credit is
transferable.
Although section 45U is already in effect, operators of nuclear
facilities need guidance from Treasury to determine whether they
qualify for a credit.
When can we expect to see guidance for section 45U, the nuclear
production tax credit, included in the Inflation Reduction Act?
If you need additional information in implementing this guidance,
will you be sure to engage Congress and the nuclear power industry?
Answer. Treasury and IRS are working expeditiously to implement the
Inflation Reduction Act clean energy tax credits, and stakeholder input
has been a key component of the process. Treasury released a request
for comments on the section 45U credit in Notice 2022-49,\7\ and we
have engaged with industry and other stakeholders extensively on that
credit and others. We do not have specific information at this time
about the timing of guidance on the section 45U credit. We will
continue to engage with stakeholders about how to provide clarity and
certainty on this important incentive.
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\7\ https://www.irs.gov/pub/irs-drop/n-22-49.pdf.
______
Questions Submitted by Hon. Debbie Stabenow
Question. Establishing U.S. supply chains for solar and other
technologies is essential for American energy security and what
Congress sought to accomplish with the IRA. Solar made up about half of
new energy generation added to the U.S. grid last year and will be a
major source of our energy generation mix as we transition to cleaner
sources. Chinese-headquartered companies now make up 99 percent of the
world's solar wafer and 80 percent of the world's polysilicon
production--two core components that make up half the value of the
solar panel.
I recently sent a letter along with many of my colleagues on this
committee, asking that Treasury work to ensure solar polysilicon and
wafer manufacturing are counted under the IRA's domestic content bonus
rules. This bonus is critical to ensuring that solar manufacturing
thrives in Michigan.
Last week, First Solar told this committee just how critical
onshoring these parts of the supply chain were to the U.S. solar
industry as a whole.
How is Treasury implementing the IRA to make sure that we meet our
solar energy security needs and support good-paying jobs in this
critical industry?
Answer. The domestic content bonus is one of several Inflation
Reduction Act provisions that promote domestic clean energy
manufacturing and secure supply chains. The section 45X Advanced
Manufacturing Credit and section 48C Advanced Energy Project Credit
also incentivize building clean energy manufacturing facilities in the
United States. Treasury and our interagency colleagues continue to
evaluate potential options to further the IRA's goal of incentivizing
U.S. solar manufacturing. As described in October remarks by Aviva
Aron-Dine, Performing the Duties of Assistant Secretary for Tax Policy,
we intend to update domestic content safe harbor guidance by the end of
the administration to make technical clarifications, improve accuracy,
and recognize the benefits of domestic supply chains by differentiating
the treatment of solar cells that are manufactured with domestically
produced versus imported wafers.
Question. I was an original cosponsor of the FABS Act, which serves
as the basis of the 48D investment tax credit enacted as part of the
CHIPS and Science Act. As a lead sponsor of this legislation, it was my
intent for this credit to help ensure that the critical upstream
manufacturing required to produce a semiconductor chip would be done
here in America. This includes the manufacture of semiconductive
substances, such as polysilicon, which give a semiconductor chip its
semiconductive properties. I was proud to support final passage of this
legislation to onshore our semiconductor supply chain.
As Treasury drafts final 48D guidance, how is it ensuring that this
tax credit provides support to build out a resilient U.S. semiconductor
supply chain, consistent with congressional intent?
Answer. Treasury and the IRS issued final rules for the section 48D
Advanced Manufacturing Investment Credit (CHIPS ITC) on October 22,
2024, in close coordination with the Department of Commerce. The 48D
statute specifies that the CHIPS ITC is only available for property
integral to the operation of facilities that manufacture semiconductors
or semiconductor manufacturing equipment. The final rules therefore do
not expand the scope of the CHIPS ITC to include additional products
and substances, such as polysilicon. The final rules clarify that
manufacturing of semiconductors includes semiconductor wafer
production, including the production of wafers used for photovoltaic
solar energy generation.
Question. Relatedly, the investment tax credit only incentivizes
manufacturing if the rules for claiming such a credit are predictable
and certain. Because the final regulations for section 48D have not
been released, certain taxpayers are unable to make investment
decisions or obtain financing based on the credit.
Could you please share when you expect to release the final
regulations?
Answer. Treasury and the IRS issued final rules for the section 48D
Advanced Manufacturing Investment Credit (CHIPS ITC) on October 22,
2024.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. I appreciate that the President's FY 2025 budget request
continues to prioritize critical funding for the Department of the
Treasury's Financial Crimes Enforcement Network (FinCEN). I am
supportive of FinCEN's efforts to ensure the timely and effective
implementation of the bipartisan Corporate Transparency Act (CTA) and
support the agency moving forward with rulemakings to extend anti-money
laundering safeguards to the real estate sector and private investment
funds.
At the start of the year, Treasury successfully launched the CTA's
beneficial ownership reporting system, establishing a database for our
law enforcement officers and national security officials to better
understand who is behind otherwise anonymous companies in the United
States.
Can you remind us what the stakes are if the Corporate Transparency
Act is not implemented in a timely and robust fashion?
Answer. Illicit actors frequently use corporate structures such as
shell and front companies to obfuscate their identities and launder
their ill-gotten gains through the U.S. financial system. Not only do
such acts undermine U.S. national security, but they also threaten U.S.
economic prosperity: shell and front companies can shield beneficial
owners' identities and allow criminals to illegally access and transact
in the U.S. economy, while creating an uneven playing field for small
U.S. businesses engaged in legitimate activity.
Historically, the U.S. Government's inability to mandate the
collection of beneficial ownership information of corporate entities
formed in the United States has been a vulnerability in the U.S. anti-
money laundering/countering the financing of terrorism (AML/CFT)
framework. As stressed in the 2022 National Strategy for Combating
Terrorist and Other Illicit Financing (the ``2022 Illicit Financing
Strategy''), a lack of uniform beneficial ownership information
reporting requirements at the time of entity formation or ownership
change hinders the ability of: (1) law enforcement to swiftly
investigate those entities created and used to hide ownership for
illicit purposes; and (2) the regulated sector to mitigate risks. This
lack of transparency creates opportunities for criminals, terrorists,
and other illicit actors to remain anonymous while facilitating fraud,
drug trafficking, corruption, tax evasion, organized crime, or other
illicit activity through legal entities created in the United States.
More recent geopolitical events have reinforced the threat that
abuse of corporate entities, including shell or front companies, by
illicit actors and corrupt officials presents to U.S. national security
and the U.S. and international financial systems. For example, Russia's
unlawful invasion of Ukraine in February 2022 underscored the extent to
which Russian elites, state-owned enterprises, and organized crime, as
well as the Government of the Russian Federation, have attempted to use
U.S. and non-U.S. shell companies to evade sanctions imposed on Russia.
Such efforts pose a significant threat to the national security of the
United States and its partners and allies.
In 2021, some of the principal authors of the CTA in the Senate and
U.S. House of Representatives wrote to Treasury, explaining that
``[e]ffective and timely implementation of the new [beneficial
ownership information (BOI)] reporting requirement will be a dramatic
step forward, strengthening U.S. national security by making it more
difficult for malign actors to exploit opaque legal structures to
facilitate and profit from their bad acts.'' Consistent with this
perspective, FinCEN has already established the reporting framework and
the beneficial ownership IT system. Between January 1, 2024, when
FinCEN launched this system, and December 2, 2024, FinCEN received
nearly 10 million beneficial ownership reports. Further, FinCEN
launched a pilot program for access to BOI data by core Federal agency
users, with the goal of helping to protect the Nation's economic
prosperity and security. With the steps FinCEN has already taken, every
report Treasury receives will make it increasingly harder for malign
actors involved in illicit financial activities to hide in the shadows
of anonymity.
However, on Tuesday, December 3, 2024, in the case of Texas Top Cop
Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.), a
Federal district court in the Eastern District of Texas, Sherman
Division, issued an order concluding the CTA was likely
unconstitutional and granting a nationwide preliminary injunction that:
(1) enjoins the CTA, including enforcement of that statute and
regulations implementing its beneficial ownership information reporting
requirements, and, specifically, (2) stays all deadlines to comply with
the CTA's reporting requirements. The government continues to believe--
consistent with the conclusions of other courts--that the CTA is
constitutional. On December 5, 2024, and the Department of Justice
(DOJ), on behalf of the Department of the Treasury, filed a notice of
appeal on December 5, 2024, and has sought to stay the district court's
injunction pending that appeal. Still, since the day that injunction
was entered, FinCEN has received an additional nearly 2 million reports
on a voluntary basis, for a total of over 11.5 million reports. On
December 23, 2024, a panel of the U.S. Court of Appeals for the Fifth
Circuit granted the government's motion to stay the district court's
injunction pending appeal, holding the government motion was likely to
succeed on the merits of its appeal. FinCEN is now working to provide
the public with timely guidance on next steps while the appeal unfolds.
Question. I am committed to working with the Biden administration
to get the word out to national security officials and law enforcement
authorities about the promise of this new investigative tool
established by the CTA.
How is Treasury getting the word out to law enforcement and
national security officials about this new investigative tool?
Answer. FinCEN has engaged and consulted with law enforcement and
national security counterparts throughout the implementation of the
beneficial ownership regulations and has routinely discussed the
benefits of the beneficial ownership database, and the contours around
access. FinCEN published access-related guidance on its Beneficial
Ownership Information Frequently Asked Questions webpage (https://
www.fincen.gov/boi-faqs) (see FAQs section O). Of particular note:
Treasury has begun a five-phase approach to accessing the
BOI database to support our law enforcement and national
security partners. The first phase and second phases have been
initiated, and Treasury aims to initiate the remaining phases
in CY 2025.
The first phase began in the spring of 2024 as a pilot
program for several Federal agencies.
The second phase began in late summer of 2024 with the aim
of extending the opportunity to request access to the BOI
database to Treasury offices, as well as other Federal agencies
engaged in law enforcement and national security activities
that already have memoranda of understanding for access to Bank
Secrecy Act information.
The third phase will extend the opportunity to request
access to additional Federal agencies engaged in law
enforcement, national security, and intelligence activities, as
well as to State, local, and Tribal law enforcement partners.
The fourth phase will extend the opportunity to request
access to intermediary Federal agencies in connection with
foreign government requests for beneficial ownership
information.
The fifth phase will extend the opportunity to request
access to financial institutions subject to customer due
diligence requirements under applicable law and their
supervisors.
In the planning and execution of each phase, FinCEN engages with a
variety of law enforcement agencies, national security agencies, and
other potential recipients of beneficial ownership information. FinCEN
provides, among other things, training to ensure that authorized agency
users are properly equipped to access BOI and ensure the information is
safeguarded consistent with the requirements in the CTA.
Question. I am also committed to working with the Biden
administration to get the word out to the roughly 32 million businesses
subject to the reporting obligations under the CTA prior to the January
1, 2025 filing deadline.
Does the recently enacted Further Consolidated Appropriations Act,
2024 include the funding necessary to ensure that all businesses
subject to reporting obligations under the CTA are informed of their
CTA obligations before the end of Calendar Year 2024? If not, how much
more funding would Treasury and FinCEN need to accomplish this goal and
how would Treasury and FinCEN utilize the additional resources?
Answer. While FinCEN appreciates the support from Congress since
passage of the Anti-Money Laundering Act of 2020 (AMLA), the
President's budget request continues to more accurately reflect
FinCEN's mission requirements. The Further Consolidated Appropriations
Act, 2024, funded FinCEN at $190,193,000. This is the same level of
funding that FinCEN received in FY 2023--which was roughly $20 million
less than the amount requested in the FY 2023 President's budget
request. The current difference between the President's FY 2024 budget
request and FinCEN's appropriated budget is $38.7 million.
The manner in which FinCEN would utilize additional resources is
outlined in the FY 2024 and 2025 President's budget requests. Of note,
FinCEN's FY 2025 President's budget request provides an additional $16
million for beneficial ownership implementation, which includes funding
for a Beneficial Ownership Contact Center. It also provides funding for
and outreach and public awareness campaigns to educate the public on
this new reporting requirement.
Question. Does the President's FY 2025 budget request include the
funding necessary to ensure that all businesses subject to reporting
obligations under the CTA are informed of their CTA obligations before
the end of Calendar Year 2024? If not, why? And how much more funding
would Treasury and FinCEN need to accomplish this goal and how would
Treasury and FinCEN utilize the additional resources?
Answer. Yes, FinCEN's FY 2025 President's budget request includes
$16 million for Beneficial Ownership Implementation, which adds
permanent funding for a Beneficial Ownership Contact Center and
outreach and public awareness campaigns to educate the public on this
new reporting requirement.
Question. The CTA requires FinCEN to validate and verify the
information submitted to the new beneficial ownership information (BOI)
register, and the recently-enacted Further Consolidated Appropriations
Act, 2024 recommends that FinCEN ensure that the new beneficial
ownership registry ``validates the accuracy and completeness of
information submitted.'' The Further Consolidated Appropriations Act,
2024 also urges Federal agencies to ``cooperate with and provide
information requested by FinCEN for the purpose of validating the
accuracy and completeness of this information, including by developing
tools that can streamline validation.''
Is FinCEN currently verifying and validating the information
submitted to the BOI register? If not, why?
Answer. Validation is critical to ensuring that the beneficial
ownership information database is ``accurate, complete, and highly
useful,'' as stated in the Corporate Transparency Act. FinCEN has
carried out limited data matching efforts to ensure that information
reported in the beneficial ownership registry aligns with third-party
data sources. FinCEN continues to assess options using available
resources to effectuate the broad-based validation and verification of
beneficial ownership information, including the anticipated launch of
an assessment in early 2025 to sample a statistically significant
number of BOI reports against third party data sources. Regardless of
the results of such an assessment, FinCEN anticipates that the eventual
validation and verification of a database estimated to contain up to 32
million reporting companies will be resource-intensive.
Additionally, pursuant to section 6502(b)(1)(C) and (D) of AMLA,
the Secretary of the Treasury, in consultation with the Attorney
General, will conduct a study to evaluate the costs associated with
imposing any new verification requirements on FinCEN and the resources
necessary to implement any such changes.
Question. Does the recently enacted Further Consolidated
Appropriations Act, 2024 include the funding necessary to ensure that
FinCEN is able to verify and validate the information submitted to the
BOI register? If not, how much more funding would Treasury and FinCEN
need to accomplish this goal and how would Treasury and FinCEN utilize
the additional resources?
Answer. The Further Consolidated Appropriations Act, 2024, funded
FinCEN at $190,193,000. This is the same level of funding that FinCEN
received in FY 2023--which was roughly $20 million less than the amount
requested in the FY 2023 President's budget request. The current
difference between the President's FY 24 budget request and FinCEN's
appropriated budget is $38.7 million. Of note, FinCEN's FY 2025
President's budget request includes $1 million in funding for sample-
based validation of information reported to the Beneficial Ownership IT
System. The FY 2025 request more accurately reflects FinCEN's needs in
order to effectively implement the AMLA/CTA, including funding for
sample-based validation of information reported to the Beneficial
Ownership IT System.
Question. Does the President's FY 2025 budget request include the
funding necessary to ensure that FinCEN is able to verify and validate
the information submitted to the BOI register? If not, why? And how
much more funding would Treasury and FinCEN need to accomplish this
goal and how would Treasury and FinCEN utilize the additional
resources?
Answer. FinCEN's FY 2025 President's budget request includes $1
million in permanent funding for sample-based validation of information
reported to the Beneficial Ownership IT System. These resources will be
critical to evaluating and implementing a long-term, sustainable
approach to BO IT System data validation and verification.
Question. The Notice of Proposed Rulemaking on ``Anti-Money
Laundering Regulations for Residential Real Estate Transfers'' (Docket
Number FINCEN-2024-0005 and RIN 1506-AB54) indicates that to
``implement the proposed rule, FinCEN expects to incur certain
operating costs that would include approximately $8.5 million in the
first year and approximately $7 million each year thereafter.'' The
NPRM indicates that, absent these additional resources, the agency
would be forced to curtail five percent of their current activities.
Does the recently enacted Further Consolidated Appropriations Act,
2024 include the funding necessary to implement this NPRM without
offsetting any of the agencies' current activities? If not, how much
more funding would Treasury and FinCEN need to accomplish this goal and
how would Treasury and FinCEN utilize the additional resources?
Answer. No. The Further Consolidated Appropriations Act, 2024,
funded FinCEN at $190,193,000. This is the same level of funding that
FinCEN received in FY 2023--which was roughly $20 million less than the
amount requested in the FY 2023 President's budget request. The current
difference between the President's FY 2024 budget request and FinCEN's
appropriated budget is $38.7 million, which has implications for
FinCEN's ability to resource the implementation of the proposed ``Anti-
Money Laundering Regulations for Residential Real Estate Transfers''
rule.
Notably, in addition to the $38.7 million requested in FY 2024,
FinCEN's FY 2025 President's budget request includes $4 million to add
additional staff support to implement many outstanding AMLA/CTA
requirements and related initiatives, including the funding necessary
to implement the proposed ``Anti-Money Laundering Regulations for
Residential Real Estate Transfers'' rule.
Question. Does the President's budget request include the funding
necessary to implement this NPRM without offsetting any of the
agencies' current activities? If not, why? And how much more funding
would Treasury and FinCEN need to accomplish this goal and how would
Treasury and FinCEN utilize the additional resources?
Answer. FinCEN's FY 2025 President's budget request includes $4
million to add personnel critical to FinCEN's continued implementation
of the AMLA/CTA and related initiatives, including funding necessary to
account for any shift in resource demand resulting from the need to
implement the ``Anti-Money Laundering Regulations for Residential Real
Estate Transfers'' rule. While FinCEN appreciates the funding provided
to FinCEN in FY 2024 during a difficult budget negotiation, the gap
between what FinCEN was appropriated in FY 2024 and the needs stated in
the President's budget request for both FY 2024 and FY 2025 may impact
implementation of several initiatives across FinCEN's operations.
Question. FinCEN recently issued a Notice of Proposed Rulemaking on
``Anti-Money Laundering/Countering the Financing of Terrorism Program
and Suspicious Activity Report Filing Requirements for Registered
Investment Advisers and Exempt Reporting Advisers'' (Docket Number
FINCEN-2024-0006 and RIN 1506-AB58).
Does the recently enacted Further Consolidated Appropriations Act,
2024 include the funding necessary to implement this NPRM without
offsetting any of the agencies' current activities? If not, how much
more funding would Treasury and FinCEN need to accomplish this goal and
how would Treasury and FinCEN utilize the additional resources?
Answer. FinCEN's FY 2025 President's budget request includes $4
million to add personnel critical to FinCEN's continued implementation
of the AMLA/CTA and related initiatives, including funding necessary to
account for any shift in resource demand resulting from the need to
implement the ``Anti-Money Laundering/
Countering the Financing of Terrorism Program and Suspicious Activity
Report Filing Requirements for Registered Investment Advisers and
Exempt Reporting Advisers'' rule. While FinCEN appreciates the funding
provided in FY 2024 during a difficult budget negotiation, the gap
between what FinCEN was appropriated in FY 2024 and the needs stated in
the President's budget request for both FY 2024 and FY 2025 may impact
implementation of several initiatives across FinCEN's operations.
Question. Does the President's FY 2025 budget request include the
funding necessary to implement this Notice of Proposed Rulemaking
without offsetting any of the agencies' current activities? If not,
why? And how much more funding would Treasury and FinCEN need to
accomplish this goal and how would Treasury and FinCEN utilize the
additional resources?
Answer. FinCEN's FY 2025 President's budget request includes $4
million to add personnel critical to FinCEN's continued implementation
of the AMLA/CTA and related initiatives, including funding necessary to
account for any shift in resource demand resulting from the need to
implement the ``Anti-Money Laundering/
Countering the Financing of Terrorism Program and Suspicious Activity
Report Filing Requirements for Registered Investment Advisers and
Exempt Reporting Advisers'' rule. While FinCEN appreciates the funding
provided in FY 2024 during a difficult budget negotiation, the gap
between what FinCEN was appropriated in FY 2024 and the needs stated in
the President's budget request for both FY 2024 and FY 2025 may impact
implementation of several initiatives across FinCEN's operations.
______
Questions Submitted by Hon. John Barrasso
Question. President Biden is proposing $5 trillion dollars in
burdensome tax increases on job creators and small businesses. He
proposes increasing the corporate tax rate from 21 percent to 28
percent. A 28-percent rate is the second highest corporate rate in the
developed world. Combined with State tax rates on corporate income,
most businesses would be above 32 percent. For small pass-through
businesses, they would see rates as high 44.6 percent on ordinary
income as well investment income. When you include rates for State
income taxes--these rates would be more than 50 percent in most States.
I believe these rates will hamper investment, make us less competitive,
and devastate economic growth.
Why does the administration believe this type of tax regime
encourages a strong and growing economy?
Answer. The President's budget proposes additional investments to
lower costs for workers and families and strengthen our economy while
reducing the deficit. It proposes making health care more affordable
for millions of Americans by making permanent the expansion of tax
credits for health insurance premiums enacted in the American Rescue
Plan and extended in the Inflation Reduction Act. And the budget
includes broad tax cuts for the middle class by expanding the Earned
Income Tax Credit, Child Tax Credit, and Low-Income Housing Tax
Credit--proposals which would contribute to lowering child poverty and
giving working families more breathing room in their household budgets.
We can make these investments while reducing the deficit by $3
trillion over a decade through a combination of smart savings and tax
proposals. President Biden and I continue to urge Congress to act so
that the United States plays its part in the global minimum tax deal,
which is currently being implemented in jurisdictions around the world
to end the race to the bottom in corporate taxation. We have also
proposed implementing a Billionaire Minimum Tax so that the top .01
percent pay their fair share; raising the tax on corporate stock
buybacks to encourage businesses to reinvest profits in their workers
and grow their companies; and closing estate and gift tax loopholes
that allow wealthy Americans to pay less than they would otherwise owe.
Question. The Joint Committee on Taxation, the Congressional Budget
Office, and other economic experts believe that the burden of tax
increases, like the corporate rate, are passed on to workers. Does the
administration believe this to be true, and if so, to what extent?
Answer. The incidence of a tax increase depends on both the details
of the tax increase (which taxes are changed and in what ways) and the
economics of the relevant markets, among other considerations. There is
no single answer to the question of who bears the burden of a tax
increase.
Question. Will these across-the-board tax increases make it easier
or harder for businesses--large and small--to grow, invest, hire, and
increase wages?
Answer. The President's agenda has driven the first, second, and
third strongest years of new business application rates on record--and
is on pace for the fourth--with Americans filing a record 17.2 million
new business applications. Business applications are a leading
indicator for new business creation, and the historic growth in
business applications has coincided with a strong labor market.
The proposals in the President's budget are designed to continue
this progress.
Question. Your department has negotiated a global minimum tax with
foreign bureaucrats through the Organisation of Economic Co-operation
and Development. Without the consent of Congress, the administration
has been working to allow foreign countries to place punitive tax hikes
on American companies. Other nations could claw back tax incentives
from U.S. multinational companies. A foreign government could apply
taxes on a U.S. company making investments domestically--if they
believe the U.S. company is not paying enough tax in the U.S. This is
despite the fact that the U.S. company may be utilizing longstanding,
bipartisan tax provisions designed to boost domestic investment. The
Joint Committee on Taxation says that if the global minimum tax is
widely adopted, the U.S. could lose between $60 billion (with U.S.
adoption) and $120 billion (without U.S. adoption).
Why, in the opinion of the Treasury Department, is it good tax
policy to increase taxes on U.S. companies and lose revenue at the same
time?
Answer. My understanding of the Joint Committee on Taxation's
(JCT's) analysis is that the forecasting scenarios that are most likely
in the near- to medium-term result in U.S. revenue gains if the U.S.
adopts Pillar 2 or components of Pillar 2.
As you know, the JCT analysis presents five forecasting scenarios.
A critical assumption of the two estimates that you cite is that the
entire world--including those jurisdictions that have not yet proposed
Pillar 2 legislation or signed onto the Two-Pillar agreement--will
collectively implement Pillar 2 starting in 2025. Although
approximately 40 countries, including many major economies, have
already implemented or moved towards implementing Pillar 2, assuming
that every country in the world will do so over the next 6 months is
likely an implausible assumption.
On the other hand, the remaining scenarios discussed in the
report--which assumes that the 40+ jurisdictions that have already
moved to adopt Pillar 2 do so by 2025--are more likely. In two of those
scenarios, U.S. adoption of Pillar 2 results in U.S. revenue gains of
$102.6 billion (in the case of U.S. QDMTT and IIR adoption) to $236.5
billion (in the case of US QDMTT, IIR, and UTPR adoption).
Question. Why is the Treasury Department negotiating a deal that
hurts U.S. companies, workers, and investment?
Answer. The Pillar 2 agreement is critical to leveling the playing
field for U.S. businesses and workers and restoring stability to our
international tax system. Under the Pillar 2 agreement, large
multinationals from all countries will be subject to the same minimum
rate on their earnings, regardless of where they are headquartered or
operate. Enactment of Pillar 2 legislation will ensure the U.S. can tax
these large multinationals at reasonable levels--without being undercut
by other countries using their tax systems to harm investment in the
U.S. by inducing our companies to shift their profits offshore. When
U.S. businesses and workers compete on a stable and level playing
field, they can win, which is why we support the Pillar 2 agreement.
Question. What recourse would a U.S. company have if another tax
jurisdiction decided a 15-percent minimum tax was still too low and
decided to grab more revenue from the U.S. tax base? Does the
administration have concerns that a 15-
percent minimum tax could end up being much higher?
Answer. Pillar 2 is aimed at ending tax competition by subjecting
large, multinational companies to the same minimum tax rate of 15
percent. Countries that adopt Pillar 2 may raise their Pillar 2 rate in
domestic legislation above the 15-
percent floor. Because every jurisdiction has a sovereign right to
impose or not impose taxes, it is up to each jurisdiction to evaluate
the impact of adopting the Pillar 2 rules and, should they decide to
adopt Pillar 2, of raising their tax rate above the Pillar 2 minimum
rate.
Question. How would you propose protecting U.S. companies from more
double taxation when the income they earn will be subject to both the
Global Intangible Low-Taxed Income (GILTI) regime and Qualified
Domestic Minimum Top-up Taxes (QDMTTs) if they are currently limited in
using foreign tax credits? If QDMTTs are made creditable to reduce
double taxation, what revenue impact will this have on the U.S.?
Answer. We have had productive conversations with U.S. taxpayers on
this issue and have taken steps to address concerns about potential
double taxation as other jurisdictions begin to adopt Pillar 2
legislation. For example, Notice 2023-80, issued on December 11, 2023,
provides guidance regarding the treatment of QDMTTs and taxes incurred
under an Income Inclusion Rule (IIR) and may allow relief where double
taxation would occur (even when the Pillar 2 rules would not provide
that outcome). In addition, we have encouraged taxpayers to identify
double taxation risks unique to U.S. companies and continue to
negotiate Pillar 2 administrative guidance to further mitigate double
taxation risks faced by U.S. taxpayers. In general, with respect to the
situation described in the above question, once foreign tax credits
have completely offset all U.S. tax on foreign earnings, additional
foreign tax does not give rise to additional foreign tax credits. This
is not double taxation because the United States is not imposing tax on
those foreign earnings. However, concerns related to double taxation
and U.S. revenue loss could both be further addressed if the U.S.
adopts Pillar 2-related legislation.
Question. In the Treasury Green Book, the summary of the
administration's tax proposals, it says, ``these oil, gas, and coal
preferences encourage more investment in the fossil fuel sector than
would occur under a neutral system. This market distortion is
detrimental to long-term energy security.'' In the hearing, I gave you
a chance to clarify this statement. You reiterated that it was the
distortion that was detrimental. You referred to standard cost recovery
provisions for energy production as ``subsidies.''
In your opinion, are the cost recovery provisions for oil, natural
gas, and coal production subsidies? How would you classify refundable
tax credits for green energy?
Answer. See answer to question below.
Question. Do you believe that hundreds of billions of dollars in
refundable tax credits for green energy production creates a market
distortion? If it creates a distortion, do you believe that it's
detrimental to energy security?
Answer. Externalities in the consumption or production of
electricity lead to market failures, where either too little or too
much of a certain economic activity occurs relative to an optimal level
of activity. In the case of pollution, businesses make decisions based
on the direct profits from production and do not consider the indirect
costs to those harmed by pollution. Tax incentives for clean energy
help address the inefficiencies and market failures in the energy
sector.
The oil, gas, and coal tax preferences that the administration has
proposed to eliminate distort markets by encouraging more investment in
the fossil fuel sector than would occur under a neutral system. This
market distortion is detrimental to long-term energy security,
increases our reliance on oil, and increases greenhouse gas emissions.
The tax provisions in the Inflation Reduction Act (IRA), reduce the
consumption of fossil fuels and enhance the countries energy security
by diversifying the country's energy supply.
Question. Without provisions like intangible drilling costs and
percentage depletion, what would cost recovery look like for
conventional energy production?
Answer. The administration's proposal would repeal expensing of
IDCs and 60-month amortization of capitalized IDCs. IDCs would be
capitalized as depreciable or depletable property, depending on the
nature of the cost incurred, in accordance with the generally
applicable rules. The administration also proposes to repeal percentage
depletion with respect to oil and gas wells. Taxpayers would be
permitted to claim cost depletion on their adjusted basis, if any, in
oil and gas wells.
Question. President Biden failed to fully enforce U.S. sanctions on
Iran. As a result, Iran continues to access resources to fund terrorist
proxies like Hamas, Hezbollah, and the Houthis. The world has seen the
consequences. America and our allies are under attack across the Middle
East. Iranian-backed Hamas brutally attacked Israel on October 7th.
Iranian-backed Houthi terrorists are firing drones and missiles at U.S.
Navy ships and merchant vessels in the Red Sea. Iranian-backed militias
are attacking U.S. personnel and facilities in Iraq and Syria.
Why has the Biden administration failed to fully enforce sanctions
on entities involved in these illicit transactions with Iran?
Regarding sanction enforcement, do you believe the problem is a gap
in the existing sanctions themselves or a lack of will to enforce them
thoroughly?
What is your strategy to cut off all funding and resources to Iran?
Answer. Treasury has consistently made enforcing Iran sanctions
among its highest priorities, and we have a variety of tools to combat
Iran's destabilizing activities. Treasury's designation actions,
enforcement actions, and interdiction efforts with our law enforcement
partners disrupt the regime's access to funds, goods, services, and
technology. Treasury's existing broad enforcement authorities enable it
to pursue domestic and foreign actors that may support Iran's malign
activities and contribute to its revenue streams. We are steadfast in
our efforts to expose and cut-off Iran's ability to generate revenue.
Treasury also works closely with our foreign partners and allies to
take coordinated action against Iran and regularly engages regarding
the enforcement of U.S. sanctions.
Treasury's strategy includes using our counterterrorism,
nonproliferation, and human rights authorities to take actions that
disrupt Iran's financial and material support to terrorism and
destabilizing behavior in the Middle East and around the world. It also
includes working with like-minded foreign partners to take coordinated
action and in some cases, improve their AML/CFT laws and regulations to
ensure that Iran, its partners, and proxies cannot take advantage of
their banking sectors.
Over the past 4 years, we've sanctioned 730 persons and vessels
connected to Iran's terrorist activity, its human rights abuses, and
its financing of terrorist groups, including Hamas, the Houthis,
Hizballah, and Iraqi militia groups.
Under this administration, Treasury has sanctioned more than 200
entities and individuals involved in the production, sale, and transfer
of Iranian petroleum and petrochemical products abroad. Treasury has
sanctioned dozens of Iranian petroleum brokers and over 40 ghost fleet
tankers involved in shipping of Iranian oil.
Since December 2023, OFAC has issued 14 rounds of sanctions
targeting the network of IRGC-QF and Houthi financial facilitator Sa'id
al-Jamal, to include a range of shipping facilitators and vessels in
multiple jurisdictions helping the network illicitly ship Iranian
commodities to the People's Republic of China (PRC).
Treasury has also worked closely with our interagency partners and
issued numerous advisories related to Iran's deceptive shipping
practices, sanctions evasion typologies, and procurement of U.S.-origin
parts for drones/ballistic missiles in an effort to disrupt funding and
resources to Iran. Additionally, on May 7th, FinCEN issued an advisory
flagging for financial institutions methods Iran uses to finance
terrorist organizations.
______
Questions Submitted by Hon. Marsha Blackburn
Question. I find it concerning that the Internal Revenue Service
(IRS) is selectively auditing on factors unrelated to the accuracy of
tax returns, particularly when they're scrutinizing a tax base that has
historically had no significant issues with compliance. Last July, the
Government Accountability Office (GAO) examined IRS audits of large
partnerships and found that the agency is starting from a weak
position.\8\ Between 2010 and 2018, four out of every five of those
audits resulted in no change, and of those that changed, the company
overpaid taxes and was owed money back by the IRS. Additionally,
business partnerships are very common and account for about 12 percent
of employment in the U.S., according to a 2022 study by the consulting
firm EY.
---------------------------------------------------------------------------
\8\ https://www.gao.gov/products/gao-23-106020.
Given GAO's findings, why do you think it is wise to spend billions
---------------------------------------------------------------------------
of taxpayer dollars to keep targeting business partnerships?
Answer. Prior to the Inflation Reduction Act, more than a decade of
budget cuts prevented IRS from keeping pace with the increasingly
complicated set of tools that the wealthiest taxpayers use to hide
their income and evade paying their share. These challenges were
particularly acute when it comes to large and complex partnerships. The
audit rate on partnerships with more than $10 million in assets
plummeted from 3.8 percent in 2010 to 0.1 percent in 2019. The IRS is
now taking swift and aggressive action to close this gap using IRA
funds. The IRS is taking a comprehensive approach to ensure that
enforcement is both fair and modern, using the full range of ways that
technology, data analytics, and service improvements can improve
compliance.
Question. Has Treasury examined whether new enforcement actions and
other new rules from the administration will have a chilling effect on
the establishment of new business partnerships and the jobs they
create?
Answer. By ensuring that complex partnerships and large
corporations pay what they owe, the IRS is leveling the playing field
for small businesses, who do not have the resources to engage in
complicated tax planning. The IRS is hiring accountants, data
scientists, attorneys, and tax experts with the specialized expertise
to examine the complex returns of large corporate taxpayers, complex
partnerships and high-income high wealth individuals.
Moreover, Americans have filed a record 17.2 million new business
applications during the current administration. Business applications
are a leading indicator for new business creation, and the historic
growth in business applications has coincided with a strong labor
market.
Question. I am concerned about China's growing influence in the
renewable energy market. China's intent is to dominate the renewable
energy space using subsidies and unfair trade practices. Now, Beijing
is targeting polysilicon, which is the building block for both solar
panels and computer chips. Congress has taken action to incentivize
polysilicon production by establishing the 48D tax credit through the
CHIPS and Science Act of 2022, which supports investments throughout
the semiconductor manufacturing supply chain.
I was disappointed Treasury's proposed regulations for section 48D
excludes polysilicon and the Department's domestic content guidance
provides no additional benefit for using domestic polysilicon, despite
polysilicon being the essential building block for both semiconductors
and energy applications.
How will Treasury maximize the benefits of these new programs for
U.S. polysilicon manufacturing to counter China's growing influence,
including recognizing polysilicon as a component for domestic content
purposes?
Answer. Treasury and the IRS issued final rules for the section 48D
Advanced Manufacturing Investment Credit (CHIPS ITC) on October 22,
2024, in close coordination with the Department of Commerce. The 48D
statute specifies that the CHIPS ITC is only available for property
integral to the operation of facilities that manufacture semiconductors
or semiconductor manufacturing equipment. The final rules therefore do
not expand the scope of the CHIPS ITC to include additional products
and substances, such as polysilicon. The final rules do clarify that
semiconductor wafer production includes the production of wafers used
for photovoltaic solar energy generation. This clarification in concert
with other historic investments made by this administration is helping
strengthen the entire domestic solar supply chain.
The domestic content bonus is one of several Inflation Reduction
Act provisions that promote domestic clean energy manufacturing and
secure supply chains. The section 45X Advanced Manufacturing Credit and
section 48C Advanced Energy Project Credit also incentivize building
clean energy manufacturing facilities in the U.S. Treasury and our
interagency colleagues continue to evaluate potential options to
further the IRA's goal of incentivizing U.S. solar manufacturing. As
described in October remarks by Aviva Aron-Dine, Performing the Duties
of Assistant Secretary for Tax Policy, we intend to update domestic
content safe harbor guidance by the end of the administration that
will, among other things, differentiate the treatment of solar cells
that are manufactured with domestically produced versus imported
wafers.
Question. In July 2020, the Trump administration sanctioned the
Xinjiang Production and Construction Corps, a paramilitary organization
with a 50-percent or more stake in more than 2,800 companies in China.
We have received reports that the Biden administration, under your
leadership at Treasury, has not fully enforced these sanctions or
issued new sanctions against subsidiaries of this entity. These reports
are frankly unacceptable and appalling.
What specific actions are you taking to ensure that this Chinese
Communist Party entity is sanctioned to the fullest extent of the law?
What are you doing to identify individuals and entities to sanction
to put further pressure on Communist China for its ongoing human rights
violations in Xinjiang?
Answer. Thank you for allowing my team to brief yours on May 8,
2024.
The subsidiaries of the Xinjiang Production and Construction Corps
(XPCC) that are 50 percent or more owned, individually or in the
aggregate, directly or indirectly, by the XPCC are blocked by operation
of law, and OFAC can and will enforce against U.S. persons violating
sanctions.
Since OFAC listed XPCC, we have also designated PRC officials under
the Global Magnitsky sanctions program for their connection to ongoing
serious human rights abuse in Xinjiang. For example, we sanctioned two
PRC officials on December 8, 2023. We have also consulted with the
Department of State in connection with their issuance of the ``Report
to Congress on the Imposition of Sanctions Pursuant to Section 6(a) of
the Uyghur Human Rights Policy Act (UHRPA) of 2020, Pub. L. 116-145),''
consistent with the requirements of the UHRPA.
Question. During the hearing, you referenced Treasury's internal
estimates regarding the revenue impact of Pillar 1, stating, ``our own
internal estimate is, there's a lot of uncertainty, but our own
internal estimate is about $500 million.'' This estimate is at odds
with the Joint Committee on Taxation's estimate included in its report
to House Ways and Means Committee estimating that Pillar 1 could cost
the United States an estimated $1.4 billion.\9\
---------------------------------------------------------------------------
\9\ https://www.jct.gov/publications/2024/jcx-7-24/.
Will you commit to providing Treasury's internal analysis to
---------------------------------------------------------------------------
Congress before formally signing Pillar 1?
Answer. Treasury has previously shared this estimate, along with
information on assumptions and underlying data, with Senate Finance
Committee member office staffs on a bipartisan basis. We would be
pleased to provide this information to other interested congressional
offices.
Question. Has Treasury similarly forecasted the potential revenue
losses for the U.S. Government on Pillar 2, and how does that compare
to the June 2023 analysis released by the Joint Committee on
Taxation?\10\
---------------------------------------------------------------------------
\10\ https://www.finance.senate.gov/imo/media/doc/118-
0228b_june_2023.pdf.
Answer. Treasury's estimates regarding adoption of Pillar 2-related
legislation in the United States can be found in the General
Explanations of the Administration's Fiscal Year 2025 Revenue Proposals
(the FY 2025 Greenbook). The FY 2025 Greenbook estimate does not
forecast revenue losses. The Joint Committee on Taxation (JCT) analysis
you reference presents several estimates showing both revenue losses
and revenue gains and differs from the FY 2025 Greenbook in several
ways. For example, the JCT analysis evaluates U.S. adoption of the
Pillar 2 model rules. The FY 2025 Greenbook assumes that the U.S. will
implement a modified GILTI regime at a 21-percent minimum rate. The JCT
and FY 2025 Greenbook estimates also use differing assumptions with
respect to the baseline countries assumed to have adopted Pillar 2 and
with respect to profit shifting, among other distinctions between the
---------------------------------------------------------------------------
two estimates such as interactions with other policy proposals.
Question. If so, will you commit to providing Treasury's estimates
on Pillar 2 revenue impacts to Congress?
Answer. Please see the response above.
Question. A recent Treasury Inspector General for Tax
Administration report found that more than 2,800 IRS employees are not
following the mandate from Congress regarding the use of TikTok, a
Chinese Government spying app, on government devices.\11\ Senator Thune
and I sent a letter to Commissioner Werfel in January seeking answers
on Treasury's actions to comply with the No TikTok on Government
Devices Act.\12\ We have yet to receive a response.
---------------------------------------------------------------------------
\11\ https://www.tigta.gov/sites/default/files/reports/2023-12/
2024ier003fr.pdf.
\12\ https://www.thune.senate.gov/public/_cache/files/1401fe1e-
8c59-42ca-a649-055958675edf/
81744CBCCD1644008A456369260B7C16.1as01252024-thune.blackburn-letter-to-
irs.pdf.
---------------------------------------------------------------------------
What are you doing to rectify this compliance failure?
Answer. In the report you referenced, TIGTA indicated it had
``identified more than 2,800 mobile devices used by CI that could
access TikTok's website and approximately 900 CI employees that had the
ability to get access to TikTok's website via computers assigned to
CI.'' OMB M-23-13, ``No TikTok on Government Devices'' Implementation
Guidance, makes an exception for law enforcement activity that is
``performed by or in coordination with an agency that is part of the
Federal law enforcement community, in response to a law enforcement
emergency, or in the course of investigating potential violations of
Federal statutes or regulation.''
Question. Will you commit to ensuring we receive a fulsome response
from Commissioner Werfel this month?
Answer. A response was sent on May 23, 2024.
Question. You and your staff have conducted robust meetings on no
less than three occasions in the last 12 months, including two trips
Communist China.
In any of these conversations, did you or your staff press Chinese
officials on the ongoing genocide and crimes against humanity against
Uyghurs in Xinjiang?
While I disagree with your planned visit to Communist China this
year, do you commit to raising the ongoing genocide and crimes against
humanity against Uyghurs in your meetings with your Chinese
counterparts?
Despite repeated trips to Asia, you have not visited one of our key
military and economic allies, Taiwan. Can you commit to visiting Taiwan
in 2024?
Answer. Treasury will continue to raise our concerns about the
genocide in Xinjiang against Uyghurs and other ethnic minority groups
with PRC counterparts. As I have stated previously, we remain committed
to using our authorities to safeguard our financial system from those
who commit egregious human rights abuses. Recently, Treasury designated
two PRC officials for their involvement in human rights violations
against Uyghurs and Muslim minority groups in Xinjiang.
Consistent with the Taiwan Relations Act (TRA), U.S. officials
regularly visit Taiwan to advance our unofficial relationship through
the American Institute in Taiwan (AIT) and the Taipei Economic and
Cultural Representative Office (TECRO), and vice versa.
Question. I'd like you to address the IRS's cybersecurity
deficiencies and instances that the IRS abused its access to
confidential tax information, as seen in the ProPublica case and the
recent sentencing of Charles Littlejohn, an IRS contractor who pled
guilty to stealing and leaking President Trump's tax returns. Recent
reports have highlighted the IRS's vulnerability to both external and
internal threats, putting private taxpayer data at risk.
GAO found numerous instances of ``willful unauthorized access of
tax data by employees.''\13\ And this past fall, your agency's watchdog
found that the IRS failed to maintain cybersecurity standards to the
level required by Federal law.\14\ These instances of negligence--and
sometimes even criminal conduct--undermine the public's trust in the
IRS. Law-abiding stakeholders are rightfully concerned that our tax
authorities are acting in a political manner, threatening taxpayers
with serious privacy breaches and punishing them for complying with the
law.
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\13\ https://www.gao.gov/products/gao-22-105872.
\14\ https://www.tigta.gov/sites/default/files/reports/2023-09/
202320064fr.pdf.
How do you plan to work with the IRS Commissioner to protect
taxpayers' privacy and ensure that we protect taxpayers' sensitive
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information?
Answer. Safeguarding taxpayer information is among the highest
priorities of Commissioner Werfel and the Internal Revenue Service.
During the past year, the IRS has taken dramatic steps to strengthen
its internal systems, protocols and procedures by putting in place
numerous improvements to bolster protection of key systems and
information. These improvements include further restricting user access
for the most sensitive taxpayer data sets; more robust protective
security controls; more frequent data reviews; improved firewalls;
stronger around the clock data monitoring; new security tools; less use
of removable media; tighter email controls; new printer controls; and
improved retention of data access logs. I plan to continue to work with
and receive updates from Commissioner Werfel as the IRS continues to
work to implement protocols and protections using Inflation Reduction
Act (IRA) funding resources and industry and government best practices
to better protect taxpayers.
Question. I request that you review the GAO's May 2022 report ``IRS
Security of Taxpayer Information: Characteristics of Employee
Unauthorized Access and Disclosure Cases'' (GAO-22-105872, https://
www.gao.gov/products/gao-22-105872).
Will you commit to reviewing this report and provide a written
response regarding Treasury's efforts to address the IRS's past
failures to safeguard taxpayer information?
Answer. Safeguarding taxpayer information is among the highest
priorities of Commissioner Werfel and the Internal Revenue Service.
This report reviewed incidents of unauthorized access occurring between
FY 2012 and FY 2021. The IRS has created a robust monitoring and
reporting structure designed to identify unauthorized access and
unauthorized disclosures, investigate cases, and adjudicate any
findings of inappropriate conduct by employees and contractors. The IRS
is committed to supporting the Treasury Inspector General for Tax
Administration (TIGTA) as they investigate cases. The IRS adjudicates
all TIGTA findings of inappropriate conduct by employees and
contractors. Any instances of unauthorized access or intentional
unauthorized disclosure are unacceptable and are treated with the
utmost seriousness. As noted above, the IRS continues to work to
implement protocols and protections using Inflation Reduction Act (IRA)
funding resources and industry and government best practices to better
protect taxpayers.
Question. Similarly, I request that you review GAO's September 2023
report ``Security of Taxpayer Information: IRS Needs to Address
Critical Safeguard Weaknesses'' (GAO-23-105395, https://www.gao.gov/
products/gao-23-105395).
Will you commit to reviewing this report and provide a written
response addressing the GAO's recommendations to the IRS, and what
steps you have taken to implement GAO's outstanding recommendations?
Answer. Safeguarding taxpayer information is among the highest
priorities of Commissioner Werfel and the Internal Revenue Service. I
know that the IRS values the feedback and recommendations it receives
from all oversight bodies, including the Government Accountability
Office (GAO) and the Inspector General for Tax Administration (TIGTA),
and is working to close out open recommendations.
Question. The Free File Alliance has worked closely with the IRS
for over 20 years. Taxpayers can access free tax preparation software
services only through the IRS website. According to the IRS site,
``With IRS Free File, taxpayers have easy access to IRS.gov/freefile,
which offers a list of the participating free offerings on a single web
page. Under our agreement, Free File Alliance companies offer both free
preparation and free e-filing services. There is no cost for a Federal
tax return to qualifying taxpayers.'' Prior to the launch of the IRS's
Direct File program, taxpayers followed this link to reach these
services, as they have for years.
When the IRS launched Direct File, midway through the tax filing
season, the IRS repurposed Free File's web address to direct taxpayers
to Direct File. Now, if taxpayers find they are ineligible for Direct
File or choose not to have the IRS prepare their tax forms, the IRS
website continues to redirect users to Direct File and requiring users
to scroll further down the Free File website to locate Free File links.
Given taxpayers can only access Free File through the IRS website,
is Treasury concerned that this website redesign, in which taxpayers
search for Free File and are directed to Direct File, will cause a
chilling effect on the number of taxpayers who successfully find and
use Free File?
Will Treasury commit to working with the IRS to establish clearer
web URLs for these services?
Answer. Treasury is committed to working with the IRS to ensure
their website helps taxpayers find, understand, and access the full
ecosystem of IRS tax services and is constantly looking for
opportunities to improve that experience.
Question. Will Treasury commit to working with the IRS to ensure
that, once taxpayers choose not to use Direct File or find they are
ineligible, they are directed to a dedicated Free File site?
Answer. Treasury and the IRS are committed to ensuring taxpayers
have options to interact with the IRS quickly and easily. During the
pilot and post-pilot evaluation, the IRS heard from taxpayers
throughout the country that they want more no-cost filing options, and
Direct File helps meet that demand.
The IRS remains committed to the Free File program and last month
they announced their extension of the program through 2029. Direct File
and Free File are complementary options within the IRS's ecosystem of
free tax-filing services that extend access to these services to more
Americans and provide taxpayers with the choice to file their taxes
directly with the IRS or through commercial tax-filing options. Use of
Free File increased this year.
Treasury is committed to working with the IRS to ensure the IRS
website helps users find, understand, and access the full ecosystem of
tax services. The IRS will be better able to answer specific questions
about their website and their specific plans to help taxpayers easily
and effectively navigate the available free filing options.
______
Questions Submitted by Hon. Bill Cassidy
Question. Can you please share an analysis or model of what tax
rates would have to be for Americans making over $400,000 in order to
pay for Medicare, our budget deficit, and to ensure the 75-year
solvency of Social Security?
Answer. The FY 2025 budget proposes to close loopholes in Medicare
taxes, increase the Medicare tax rate to 5 percent, direct revenues
from the Net Investment Income Tax to the Medicare trust fund, and
credit savings from prescription drug reform savings to the Medicare
trust fund. Together, these proposals would extend the solvency of the
Medicare trust fund indefinitely.
The administration is committed to protecting and strengthening
Social Security and opposes any attempt to cut Social Security benefits
as well as proposals to privatize Social Security. The administration
believes that protecting Social Security should start with asking the
highest-income Americans to pay their fair share. In addition, the
administration supports efforts to improve Social Security benefits, as
well as Supplemental Security Income benefits, for seniors and people
with disabilities, especially for those who face the greatest
challenges making ends meet.
On the budget deficit, fair tax policies are only one part of the
fiscal responsibility equation. The President has enacted roughly $1
trillion in savings over the next decade through the Fiscal
Responsibility Act, and provisions of the Inflation Reduction Act. The
budget details the President's vision to protect and build on his
administration's progress by continuing to lower costs for working
families, protect and strengthen Social Security and Medicare, invest
in America and the American people, and reduce the deficit by cracking
down on fraud, cutting wasteful spending, and making the wealthy and
corporations pay their fair share. Building on the President's record
of fiscal responsibility, his budget reduces the deficit by $3 trillion
over the next 10 years--on top of paying for new investments.
Question. In the 2023 Medicare trustees report, the trustees issued
a determination that triggered a Medicare funding warning, which
requires the President to submit to Congress proposed legislation to
respond to the warning within 15 days after the submission of the
Fiscal Year 2025 budget. Does the President plan to submit legislation
to address the Medicare trigger?
Answer. The President's FY 2025 budget contains proposals that
would extend the Medicare Hospital Insurance (HI) trust fund's solvency
indefinitely without cutting benefits by ensuring high-income
individuals contribute their fair share and directing revenue from the
net Investment Income Tax into the HI trust fund as was originally
intended. In addition, the budget directs an amount equivalent to the
savings from the budget's proposed Medicare drug reforms into the HI
trust fund. The Chief Actuary for the Centers for Medicare and Medicaid
Services (CMS) determined that the HI trust fund would be sufficiently
funded indefinitely with the additional revenue included in the
President's FY 2025 budget proposal, based on revenue estimates
provided by the Office of Management and Budget.
Question. Just this week, the Congressional Budget Office released
their long-term budget outlook for the Nation. In this report, CBO
projects that Federal debt held by the public will rise from 97 percent
of GDP at the end of FY 2023 to 166 percent of GDP by the end of 2054--
more than twice the pre-pandemic level and 3.4 times the 50-year
historical average. By 2051, CBO projects that interest will be the
single largest line item in the Federal budget.
CBO's report illustrates that the long-term fiscal trajectory of
the Nation is unsustainable. At what point do you consider the Nation's
debt to GDP ratio a significant risk to the budget and economy? How do
you think we should address this?
Answer. President Biden and I are committed to pursuing a fiscally
responsible and sustainable path. I have repeatedly advocated for the
President's budget that would reduce the deficit by nearly $3 trillion
over a decade. I believe that we need to take a balanced approach that
asks the wealthy to pay their fair share while continuing to make
investments that support the middle class and grow our economy.
President Biden has signed into law significant deficit-reduction
policies--including establishing a corporate minimum tax, lowering
prescription drug costs, and cracking down on wealthy tax cheats--that
have already raised revenue and will take full effect in coming years.
Falling revenues are a significant contributor to the deficit,
underscoring the importance of President Biden's enacted and proposed
policies to reform the tax system.
Under the President's budget, the economic burden of debt would
remain in line with historical norms over the next decade. The budget
keeps real net interest payments as a share of the economy close to the
average for the last several decades, and well below the 2-percent
level of the 1990s.
Question. As the Secretary of the Treasury is the Chair of the
Boards of Trustees of the Social Security and Medicare trust funds, can
you please provide me with the methodology upon which you calculate
U.S. GDP over 75 years? If you have multiple growth scenarios, can you
please share the models and associated data?
Answer. As discussed in the 2024 Social Security trustees report
beginning on page 115, the value of real GDP is equal to the product of
three components: (1) productivity (i.e., output per hour worked); (2)
average weekly total employment; and (3) average hours worked per week,
times 52. Consequently, the growth rate in real GDP is equal to the
combined growth rates for productivity, total employment, and average
hours worked. For the period from 1969 to 2019, which covers the last
six complete economic cycles, the average annual growth in real GDP was
2.76 percent, combining average growth rates of 1.59 percent for
productivity, 1.35 percent for total employment, and -0.20 percent for
average hours worked. The real GDP growth rate was -2.2 percent for
2020, 5.8 percent for 2021, 1.9 percent for 2022, and is estimated to
be 2.4 percent for 2023 under the ``intermediate''--or baseline--
assumptions.
For the intermediate assumptions, the average annual growth in real
GDP is 2.0 percent from 2023 to 2033, combining the average growth
rates of 1.54 percent for productivity, 0.50 percent for total
employment, and -0.02 percent for average hours worked. After 2033, the
annual growth in real GDP averages 1.9 percent, which combines the
projected ultimate annual growth rate of 1.63 percent for productivity,
average annual growth rate of 0.32 percent for total employment, and
the ultimate annual growth rate of -0.05 percent for average hours
worked per week. The projected growth rate of real GDP is lower than
the average growth rate in past years, mainly because the working-age
population is expected to grow more slowly than in the past.
In addition to the intermediate assumptions, the trustees reports
include low-cost and high-cost sets of assumptions. For the low-cost
assumptions, the annual growth in real GDP averages 2.8 percent from
2023 to 2033 and 2.6 percent from 2033 to 2098. For the high-cost
assumptions, the annual growth in real GDP averages 1.4 percent from
2023 to 2033 and 1.1 percent from 2033 to 2098.
For more detailed documentation of the economic models used by
Social Security's Office of the Chief Actuary, please see their
documentation of the long-range economic model\15\ used to prepare
trustees report estimates and their more general long-range model
documentation \16\ for flow charts and additional information on the
underlying economic modeling used in the reports.
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\15\ https://www.ssa.gov/oact/TR/2024/2024_Long-
Range_Economic_Assumptions.pdf.
\16\ https://www.ssa.gov/oact/TR/2024/
2024_LR_Model_Documentation.pdf.
Additionally, Table V.B.2 \17\ provides specific historical and
projected GDP data as does the supplemental single year table
V.B.2,\18\ under low-cost, intermediate, and high-cost assumptions.
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\17\ https://www.ssa.gov/oact/TR/2024/V_B_econ.html#308187.
\18\ https://www.ssa.gov/oact/TR/2024/lr5b2.html.
Question. Periodically, on behalf of the Medicare Board of
Trustees, the Secretary of Health and Human Services convenes an
independent panel of actuaries and economists to review the projection
assumptions and methods underlying the Medicare trustees report. This
analysis was last performed in 2017. In that report, the independent
panel suggested the trustees provide information in the trustees report
on the per capita level of taxation that would be required to finance
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projected Medicare spending.
Can you please provide me with an update as to whether you are in
the process of incorporating this analysis into the Medicare trustees
report? If you have performed this analysis but are not willing to
share it, would you be able to brief my staff on your analysis?
Answer. The Medicare trustees report regularly reports the amount
of funding needed to keep the Hospital Insurance (HI) solvent over a
75-year period, as a percentage of taxable payroll, as shown in Table 9
of this document.\19\ When the 75-year actuarial balance as a percent
of payroll is negative, it indicates that estimated income is
insufficient to meet estimated trust fund obligations for all or part
of the 75-year period. This calculation only applies to the Hospital
Insurance program because the other parts of Medicare are funded in a
way that ensures they are always permanently funded, for instance with
general revenue transfers and beneficiary premiums.
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\19\ https://www.ssa.gov/oact/TRSUM/index.html.
The 2017 technical panel in recommendation 8-4 did not identify a
specific approach to measuring future tax rates for Medicare-financed
services across all programs, and the trustees have not developed such
a measure. The 2024 Medicare report \20\ does, however, show in Figure
II.D.2 on page 23 both historical and projected total Medicare costs as
a percentage of GDP and is intended to show how much of the Nation's
total economic output is projected to be needed to finance Medicare
under current law.
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\20\ https://www.cms.gov/oact/tr/2024.
Question. As the Secretary of the Treasury is the Chair of the
Boards of Trustees of the Social Security and Medicare trust funds and
owing to the fact that the OASI trust is going insolvent, have you
considered including in the Social Security trustees report an analysis
on the per capita level of taxation that would be required to keep
Social Security solvent over a 75-year period? If you have performed
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this analysis, would you be willing to brief my staff on your results?
Answer. The Social Security trustees report regularly reports the
amount of funding needed to keep the Social Security solvent over a 75-
year period, as a percentage of Social Security taxable payroll, as
shown in Table 9 of this document. When the 75-year actuarial balance
as a percent of payroll is negative, it indicates that estimated income
is insufficient to meet estimated trust fund obligations for all or
part of the 75-year period.
As reported in the 2024 trustees report, solvency for the program
over the next 75 years could be restored using a variety of approaches.
The Social Security trustees report also provides historical and
projected annual income and cost rates \21\ as a percentage of taxable
payroll, as well as summarized income and cost rates over varying
valuation periods.\22\
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\21\ https://www.ssa.gov/oact/TR/2024/
VI_G1_OASDHI_payroll.html#170627.
\22\ https://www.ssa.gov/oact/TR/2024/
VI_G1_OASDHI_payroll.html#196436.
Question. In 2018, the IRS awarded an estimated $99-million
contract to use their platform to identify and uncover tax fraud,
followed by a $70-million contract in 2021 for digital modernization.
However, it wasn't until recently that Commissioner Werfel acknowledged
that the IRS leveraged AI and predictive modeling to crack down on
``wealthy tax cheats.'' Along these same lines, The New York Times
previously reported that the IRS is using AI to investigate
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partnerships whose returns show discrepancies exceeding $1 million.
The Treasury recently announced that it has recovered over $375
million as a result of its implementation of enhanced check fraud
detection processes that utilizes artificial intelligence. On the tax
side, outstanding tax evasion among the wealthy remains as high as $150
billion, as Commissioner Werfel has publicly stated.
In 2019, the IRS released a multiyear modernization plan to enhance
taxpayer service and enforcement efforts. Despite this robust plan, the
IRS has made little progress with modernization and seems to be moving
slowly in leveraging or adopting best-in-class commercial technology,
including leading AI solutions. According to the Treasury Inspector
General for Tax Administration's March 11, 2024, IRA Transformation
Efforts assessment, successful delivery of most of the 42 initiatives
is directly contingent on the IRS timely completing its modernization
of its core information technology structure.
Over the years, the IRS has solicited and received tech proposals,
RFI responses, white papers, and proof-of-concept proposals from
various third-party stakeholders on leveraging commercial solutions,
yet the IRS seems to be stuck in an analysis paralysis scenario.
Given the available technological capabilities that exist and are
ready to scale today, can you provide specific examples of how Treasury
and the IRS have successfully utilized commercial off-the-shelf (COTS)
solutions to effectively prioritize audits and combat tax fraud, money
laundering, and other financial schemes?
Answer. While I am not at liberty to discuss details of the
technology behind the IRS's anti-fraud and criminal investigation
activities, I can state that the various information systems used to
perform these missions are built on COTS platforms. For example, the
IRS employs a widely used COTS product to identify anomalies within
returns as they are filed as well as to retroactively examine historic
returns for anomalies based on the emergence of novel/new fraud
schemes.
Question. Can you explain the challenges the IRS is facing to
moving forward with commercial off-the-shelf (COTS) solutions, and what
steps are being taken to overcome these obstacles?
Answer. The IRS has been a heavy consumer of COTS products since it
began adopting information technology, whether the platforms that are
used to manage its infrastructure or the tools they use to detect and
respond to cybersecurity threats. As the IRS continues to migrate its
information systems to the cloud, it will be able to take advantage of
an even larger ecosystem of COTS products to fulfill its mission.
Question. It has been 18 months since IRS received modernization
funding through the Inflation Reduction Act. Which new commercial off-
the-shelf solutions have been implemented or expanded to enhance
taxpayer services and return processing?
Answer. IRA funding has allowed the IRS to increase its Enterprise
Case Management (ECM) investment in Pega, an industry-leading case
management solution that helps streamline operational efficiency,
reduce costs, and help accelerate faster case resolution across the
agency--improving taxpayer services and interactions.
IRA funding was also used to migrate the IRS's operations
management functions to ServiceNow, another industry-leading platform
that helps optimize how IRS operates its information infrastructure,
which ultimately results in more resilient and reliable information
systems that support return processing.
These are just two examples of how IRS has shifted its focus to
COTS.
Question. Earlier this year, my office reached out to IRS
Legislative Affairs asking to what extent the IRS has contracted with
third-party information systems and other tech firms to modernize tax
return processing and customer service over the past decade and moving
forward.
To what extent are third-party contractors being used to establish
cloud and AI-based systems to fulfill IRS's promise to modernize tax
collection and taxpayer services?
Answer. The IRS uses a wide array of large systems integrators and
small businesses to modernize tax return processing. A substantial
amount of our information technology spending goes toward contractors,
with much of it focused on operating/expanding cloud and AI-based
systems.
Question. By April 30th, can you please provide my office with the
following information: the name of each contractor and subcontractor
that IRS is using in its work on IT modernization and software
development; the scope and cost of work being performed in each task
order or contract; the contracting approach that is being taken,
including whether the services are being purchased using procurement
authorities intended for commercial services such as information
technology (FAR part 12), are leveraging the T-Cloud contract, are
assisted acquisitions, and/or are using the Federal Supply Schedules
program to increase efficiency in government contracting; and the
allocation of modernization expenses, as well as how work is being
split between contractors and internal IRS employees.
Answer. The IRS is best suited to address these questions, as they
pertain to detailed IT acquisition and funding data.
______
Questions Submitted by Hon. Steve Daines
Question. During the hearing, you said that Pillar 2 ``results in a
big increase in tax revenue for the U.S.,'' directly contradicting an
analysis from the Joint Committee on Taxation, which found that Pillar
2 would move tax revenues out of the country.
Please provide the data you were referencing.
Answer. My understanding of the Joint Committee on Taxation's
(JCT's) analysis is that the forecasting scenarios that are most likely
in the near to medium term result in U.S. revenue gains if the U.S.
adopts Pillar 2 or components of Pillar 2.
As you know, the JCT analysis presents five forecasting scenarios.
A critical assumption of the forecasting scenarios that result in
revenue loss is that the entire world--including those jurisdictions
that have not yet proposed Pillar 2 legislation or signed onto the Two-
Pillar agreement--will collectively implement Pillar 2 starting in
2025. Although approximately 40 countries, including many major
economies, have already implemented or moved towards implementing
Pillar 2, assuming that every country in the world will do so over the
next 6 months is likely an implausible assumption.
On the other hand, the remaining scenarios discussed in the
report--which assumes that the 40+ jurisdictions that have already
moved to adopt Pillar 2 do so by 2025--are more likely. In two of those
scenarios, U.S. adoption of Pillar 2 results in U.S. revenue gains of
$102.6 billion (in the case of U.S. QDMTT and IIR adoption) to $236.5
billion (in the case of U.S. QDMTT, IIR, and UTPR adoption).
In addition, the JCT analysis suggests that Federal revenue could
increase thanks to the adoption of Pillar 2 by major negotiating
parties even if the United States fails to adopt Pillar 2: the average
of the upper and lower bound revenue estimates for Pillar 2 adoption by
the 40+ countries that have enacted or proposed Pillar 2 legislation
relative to a no-adoption counterfactual is a small but positive
revenue gain.
Question. The nonpartisan Tax Foundation has found that workers and
consumers bear the brunt of the corporate tax burden. It follows that
an increase in the corporate rate increases that burden.
Does President Biden intend to keep his pledge to Americans earning
under $400,000 and maintain the current corporate rate, or will he
violate his pledge and advocate for a higher rate as outlined in his
budget?
Answer. The budget fulfills the President's iron-clad commitment
that people making under $400,000 will not have to pay a single dollar
more in new taxes, while ensuring the wealthy and big corporations pay
their fair share.
Question. In the rollout of the Fiscal Year 2025 budget request,
the Biden administration touted a slew of tax hikes on businesses that
would, in the administration's terms, make them ``pay their fair
share.'' However, the Inflation Reduction Act enacted a slew of tax
credits to subsidize industries, estimated to be more than $1.8
trillion if made permanent.
Can you explain the reasoning for increasing the corporate rate on
these businesses, only to subsidize industries of your choosing with
credits that in effect lowers their rates?
Answer. The administration's revenue proposals would ensure that
the wealthy and large corporations pay their fair share and, in doing
so, fully pay for the investments proposed in the President's budget
while generating roughly $3 trillion in additional deficit reduction
over the next decade. The Inflation Reduction Act is the single most
significant legislation to combat climate change in American history
and one of the largest investments into the American economy in a
generation. It will help create good-paying jobs, strengthen our energy
security, and tackle climate change.
Question. The Fiscal Year 2025 budget request proposes $4.9
trillion of new tax increases.
Do you believe these proposed tax hikes will have a positive impact
on growth in the next 5 years?
Answer. Under President Biden, the United States has experienced
historic economic progress. Thanks to President Biden's policies, the
U.S. saw the fastest, most equitable economic recovery in its history.
The President's long-term strategies led to the lowest average
unemployment rate of any administration in 50 years, increased real
wages for Americans to above pre-pandemic levels, reduced inflation by
more than two-thirds from its peak, and led to robust GDP that which
has blown past expectations.
President Biden's budget proposal builds on America's historic
economic recovery by making fiscally responsible investments to grow
the economy over the medium and long term and lowering costs for
working families in key areas, including health care and housing.
Importantly in delivering this growth, the investments in the
President's budget are fully paid for, and the budget would reduce
deficits by approximately $3 trillion through a combination of smart
savings and tax proposals that ensure wealthy individuals and large
corporations pay their fair share.
Question. Final regulations for the corporate alternative minimum
tax adopted in 2022 have yet to be approved, but the rate of this tax
is increased in the administration's budget.
How does the administration believe this to be an effective revenue
raiser when Treasury cannot figure out how to operate the original
provision?
Answer. The CAMT works to reduce the significant disparity between
the income reported by large corporations on their Federal income tax
returns and the profits reported to shareholders in financial
statements by requiring them to pay a minimum amount of tax based on
their reported financial statement income. The proposal in the FY 2025
Greenbook strengthens the CAMT by increasing the CAMT rate roughly in
line with the proposed increase in the regular corporate tax rate and
aligns the CAMT rate with the proposed effective GILTI rate. The
proposal is a targeted approach to ensure that the most aggressive
corporate tax avoiders bear meaningful Federal income tax liabilities.
Question. The administration, through their budget and in your
testimony, have explicitly stated their intention to shut down the
American fossil fuel sector while handing out subsidies in other
sectors.
Can you explain the administration's rationale to shut down
American producers while handing out money to foreign adversaries, such
as China and Iran?
Answer. With the Inflation Reduction Act, the Biden-Harris
administration has taken historic action to spur domestic manufacturing
of critical minerals and battery components to establish a reliable,
sustainable supply chain and alleviate our dependence on China.
The law is already working as intended to drive private investment
in clean energy generation and manufacturing, and it is creating jobs
and economic opportunity in the process.
IRA investments are delivering more clean investment to left-behind
places--communities at the forefront of fossil fuel energy production,
and those that have benefited least from the economic growth of the
past few decades. Moreover, these investments are lowering everyday
energy and transportation costs for consumers.
Question. The New Markets Tax Credit expands investment in Montana,
creates good-paying jobs, and drives growth in our local economies.
Unfortunately, the tax credit is set to expire on December 31, 2025 if
Congress fails to extend it. With billions of already allocated dollars
still remaining, what is Treasury's plan to ensure these credits are
awarded before the program's expiration?
Answer. On November 19, 2024, the Community Development Financial
Institutions Fund (CDFI Fund) announced that it was making available a
total of $10 billion in New Markets Tax Credit (NMTC) allocation
authority. This round of the NMTC program combines allocations
authorized for Calendar Years 2024 and 2025. The final year of
allocation authorized under the Taxpayer Certainty and Disaster Tax
Relief Act of 2020 is CY 2025. Applications for this round of the NMTC
program are due to the CDFI fund by January 29, 2025. The CDFI Fund
anticipates announcing NMTC program allocation awards in the fall of CY
2025.
______
Questions Submitted by Hon. Chuck Grassley
Question. In the recently published ``The Budget and Economic
Outlook: 2024 to 2034,'' the Congressional Budget Office increases
projections for the cumulative deficit from 2024-2033 by $428 billion
solely due to reestimations of amounts claimed for clean vehicle and
energy-related tax credits.
In their report, CBO states that ``[t]he budgetary effects of
energy-related tax provisions remain highly uncertain'' suggesting the
cost of the IRA energy provisions will be even more expensive than now
projected.
Do you agree or disagree with CBO that the costs of the IRA energy
credits have increased? Has Treasury performed its own analysis of what
the cost of these IRA energy tax provisions will be over the next 10
years? Please provide any such analysis.
Answer. Treasury's FY 2026 tax expenditure estimates, which include
estimates for the green credits created or modified by the IRA, are
available on the Treasury website.
Question. The President's budget increases the corporate
alternative minimum tax on ``book income'' from 15 percent to 21
percent. Since this tax is based on a different base than ``taxable
income,'' it has proven difficult for the IRS to administer and
collect. For the 2023 tax year, the IRS provided waivers for
corporations failing to pay any estimated AMT tax liability. The IRS
said this relief was ``in the interest of sound tax administration''
due to difficulties in determining whether the tax applied and in
calculating the amount of additional tax owed.
Given the challenges Treasury and IRS are having implementing this
extremely complex tax, how confident is Treasury that increasing the
rate would raise $137 billion? Do you expect regulations fully
implementing this tax that have yet to be published will materially
affect the revenue estimate of this proposal?
Answer. As you state, Treasury estimates that the CAMT proposal in
the FY 2025 budget would raise $137 billion over 10 years. There is
uncertainty in this estimate as there is with any revenue estimate.
Information from corporate tax filings will be incorporated into the
estimate as it becomes available. Regulations interpreting and
implementing the corporate alternative minimum tax would be consistent
with the text and purpose of the statute and are not expected to
materially affect the revenue estimate.
Question. Last year, the White House issued a press release
celebrating the 1-year anniversary of the so-called Inflation Reduction
Act and touting the 15-percent corporate alternative minimum tax as
``making the wealthy and big corporations pay their fair share.'' Of
course, the President's budget now calls for raising this tax to 21
percent.
Do you expect the definition of a corporation's ``fair share'' to
continue to evolve over time to meet the spending demands of this
administration?
Answer. The President's FY 2025 budget proposes increasing the
corporate tax rate to 28 percent and increasing the rate on
multinationals' foreign earnings to 21 percent. Increasing the
corporate alternative minimum tax rate in line with these other two
rate increases ensures the CAMT serves as an effective floor on
corporate taxes.
Question. While the administration pays lip service to generational
businesses such as family farms, the actual fine print of the
President's budget proposal shows this administration is hostile to
family-owned businesses.
In addition to allowing the increase in the estate and gift tax
exemptions enacted in 2017 to expire, the President proposes to
eliminate the benefit of step-up basis rules on transfers of most
assets at death or by gift. This proposal would essentially create a
second ``death tax'' by taxing paper gains in property immediately upon
transfer at death. While Treasury description claims a special rule
will protect family operations by allowing them to defer payment of the
tax over 15 years, this tax would still be highly disruptive and could
affect the businesses ability to secure business loans. This is
particularly true in light of the fact that the IRS would be
``authorized to require security at any time when the IRS perceives a
reasonable need for security to continue this deferral.''
Under this rule, isn't it likely that the IRS would routinely seek
``security'' from family farmers that tend to be land rich and cash
poor?
Answer. The proposal to treat transfers of appreciated property by
gift or on death as realization events includes several provisions to
protect family-owned and -operated businesses. Taxpayers could elect
not to recognize unrealized appreciation of certain family-owned and -
operated businesses until the interest in the business is sold or the
business ceases to be family-owned and -operated. Furthermore, the
proposal would allow a 15-year fixed-rate payment plan for the tax on
appreciated assets transferred at death, other than liquid assets such
as publicly traded financial assets and other than businesses for which
the deferral election is made. As you note, the IRS could require
security when the IRS perceives a reasonable need for security to
continue this deferral. The IRS would use this authority when
appropriate in the circumstances.
Question. According to the Fiscal Year 2023 Strategic Operating
Plan for the Internal Revenue Service, the IRS intends to ``develop and
implement a plan and to improve the IRS Whistleblower Program.''
However, little detail has been provided on what will be included in
this plan.
When can Congress expect to see a formal plan? How much, if any, of
the mandatory funding the IRS received in the so-called Inflation
Reduction Act has been dedicated to making these planned improvements
to the IRS Whistleblower program?
Answer. I defer to the IRS Commissioner of the content and timing
of this plan. Meanwhile, you can find additional information on the IRS
Whistleblower Office on their website, including the annual report to
Congress.
Question. The President's budget again proposes to make significant
reforms to international tax rules in order to implement the OECD's
Pillar 2 initiative for a global minimum tax. Since these reforms were
initially proposed, Treasury's revenue estimate for them has dropped by
hundreds of billions of dollars. I understand this is the result of
other nation's adopting Pillar 2 siphoning off revenue from the U.S.
tax base. Treasury's budget estimate was produced in November.
Isn't it true that if Treasury performed a revenue analysis of
these provisions today, its revenue estimates would be significantly
lower? Will you commit to providing Congress regular updates as to the
revenue implications of the U.S. implementing Pillar 2 in light of
further adoption by other nations?
Answer. Assumptions regarding the number of jurisdictions that will
adopt Pillar 2 can, as your question suggests, impact revenue estimates
regarding U.S. implementation of Pillar 2. However, these estimates can
also vary considerably by a number of other factors, including data and
model updates, profit shifting behavior by multinational enterprises
and the design features of the Pillar 2 implementing legislation.
Treasury provides revenue estimates for all proposals in the
President's budget twice each year, first as part of the release of the
budget and then again in the midsession review.
Question. In the aftermath of the pandemic, you dismissed concerns
about the national debt claiming the interest burden on our national
debt was ``very manageable.'' Since that time interest rates have
spiked. As a result, annual interest on the national debt has nearly
doubled, jumping from $350 billion in 2021 to $659 billion last year.
This year, interest on the debt is projected to cost $870 billion,
exceeding even what we spend on national defense.
Do you still view the interest burden on the national debt to be
``very manageable?''
Answer. The most important measure of debt sustainability is the
level of debt service cost as a percentage of GDP adjusted for
inflation. This ``real net interest'' measure depends on Federal
revenue, spending, and interest rates.
Under the President's Budget, this measure would remain in line
with historical norms over the next decade. Specifically, the budget
keeps real net interest payments as a share of the economy close to the
average for the last several decades and well below the 2-percent level
of the 1990s. But to achieve this manageable level of debt service,
legislation such as that proposed in the President's budget must be
enacted.
______
Questions Submitted by Hon. James Lankford
Question. In the President's State of the Union address, he
mentioned the threat of Iran once and only briefly. The same regime
that has lethally targeted American service members nearly 200 times
over the last few months, through their proxies.
Do you believe Iran is a threat to U.S. national security?
Answer. Yes. The Iranian regime's malign activities such as its
support to terrorism, and proliferation of drones and missiles,
continue to be a threat to our national security.
Question. In the 2024 Annual Threat Assessment, it states ``Iran
probably will consider installing more advanced centrifuges, further
increasing its enriched uranium stockpile, or enriching uranium up to
90 percent in response to additional sanctions, attacks, or censure
against its nuclear program.'' It's my understanding Iran continues to
pursue nuclear capabilities, and it is also my understanding Iran is
evading current sanctions placed against them due to their nuclear
program development.
Does the administration have a good estimate on Iran's illicit oil
sales?
Answer. As of November 2024, Iran exported about 1.6 million
barrels per day on average of crude oil and condensate, according to
open sources.
To restrict these sources of revenue, Treasury has designated
numerous Iranian and third-country operatives, front companies, and
ships involved in Iran's oil smuggling networks.
Question. In the months following the 2023 Annual Threat
Assessment, the Biden administration extended a sanctions waiver for
Iran allowing access of $10 billion in electricity revenue. In turn,
Iranian proxies have wreaked havoc on our allies and U.S. forces in the
Middle East, as well as commercial shipping in the Red Sea.
Is it still your assessment that administering sanctions relief
will create a trustworthy negotiating partner in Iran?
What is Treasury doing to collect and increase information sharing
for enforcement purposes?
What nations are contributing to aiding Iran in evading these
sanctions?
Answer. The Iraq Electricity Waiver issued by the State Department
is not a form of sanctions relief. It permits Iraq to receive vital
electricity resources from Iran and to pay into restricted Iranian
accounts in Iraq. Funds in these restricted accounts may only be used
by Iran to purchase humanitarian goods and for other non-sanctionable
purposes, in keeping with statutory exceptions and longstanding U.S.
policy across administrations.
Treasury has robust relationships with partners in law enforcement
and throughout the intelligence community, and often coordinates
actions with like-minded nations with the desire to detect, deter, and
disrupt Iran's malign activities. FinCEN also works closely with our
allies, exchanging information and analysis with financial intelligence
units and law enforcement worldwide. Treasury regularly shares
information on Iran sanctions evasion networks with our foreign
partners and in instances where we observe abuse of their banking
sectors, work closely with these countries to make improvements to
their existing AML/CFT laws and regulations.
We have seen partnerships to evade sanctions between the Iranian
regime and governments in Russia, Syria, and Venezuela, all of whom are
subject to significant sanctions. China, particularly its privately-
owned teapot refineries, remain major importers of Iranian oil and
petrochemicals. We have taken several actions against persons in China,
Russia, Syria, and Venezuela for their involvement in Iran-related
trades and procurement activities. We have also observed and targeted
individuals and companies based in Hong Kong, UAE, India, Turkey,
Singapore, Malaysia, Iraq, Oman, and Pakistan have engaged in assisting
Iranian sanctions evasion.
Question. At the beginning of March, two crew members were killed
and at least six others were injured by a ballistic missile launched by
the Houthis, marking the first fatalities since the Houthis began
attacking commercial shipping in the Red Sea and Gulf of Aden in
November. The Houthis have said the attacks are in response to the
Hamas attack on Israel, but we know the Houthis have been stockpiling
weapons long before the Hamas attack.
What is the administration doing to enforce sanctions on the
Houthis and ensure they are not able to continue to stockpile weapons
used against U.S. assets?
Answer. Since December 2023, OFAC has implemented 14 rounds of
sanctions targeting the network of Iran-based Houthi financier Sa'id
al-Jamal, whose network generates revenue for the Houthis through the
sale of Iranian commodities to foreign purchasers. We have designated
close associates of al-Jamal involved in brokering these shipments,
shipping firms and vessels involved in transporting Iranian
commodities, and financial facilitators and exchange houses in multiple
jurisdictions involved in repatriating the proceeds of these sales back
to the Houthis. We continue to emphasize disrupting the revenue streams
that contribute to the Houthis' military capabilities.
______
Questions Submitted by Hon. Tim Scott
Question. President Biden has repeatedly promised that he would not
raise taxes on individuals earning less than $400,000 and you yourself
instructed the IRS by letter to not increase audit rates for
``households making under $400,000 annually.'' However, since the
President took office inflation has eroded the value of the President's
tax pledge. According to BLS data, a household today would have to earn
nearly $75,000 more to have the same purchasing power as a household
earning $400,000 when the President was sworn into office.
Will you commit here today that the President's pledge to
taxpayers will account for this inflation?
How many fewer households are covered by the President's $400,000
pledge due to inflation compared to when President Biden took office?
Answer. The President's pledge guarantees that people making under
$400,000 will not have to pay a single dollar more in new taxes, while
ensuring the wealthy and big corporations pay their fair share. This
was true in 2021 and continues to be true today.
Question. Can you explain how providing Iran with easier access to
restricted funds, at a time when the regime is using its money to
facilitate the targeting and killing of U.S. service members and our
allies, including Hamas's brutal and unprovoked attack on October 7th
resulting in 1,200 innocents dead and American citizens taken hostage,
is in the national security interest of the United States?
Do you believe it is in the national security interest of the
United States to stop China from purchasing sanctioned Iranian oil, and
thus funding Iran's terrorist activities?
Answer. Access to restricted funds strictly for humanitarian trade
is aligned with U.S. law and longstanding U.S. Government policy across
administrations. These authorizations do not permit the release of
funds to the Iranian Government, nor do they permit these funds'
unrestricted use. These funds are only available for humanitarian trade
transactions that benefit the Iranian people and for other non-
sanctionable purposes. Treasury works closely with our foreign partners
to oversee these funds and ensure they are not abused. As our actions
demonstrate we consistently take measures to disrupt the flow of
Iranian oil to China in order to decrease the Iranian regime's oil
revenue that it uses to funds it wide range of malign activities. While
the State Department has the lead in Iran oil and petroleum sanctions
enforcement, Treasury continues to leverage multiple Iran,
counterterrorism, and counterproliferation authorities to target Iran's
export of oil and other energy sector commodities.
Over the past 4 years, we've sanctioned 730 persons and vessels
connected to Iran's terrorist activity, its human rights abuses, and
its financing of terrorist groups, including Hamas, the Houthis,
Hizballah, and Iraqi militia groups.
Under this administration, Treasury has sanctioned more than 200
entities and individuals involved in the production, sale, and transfer
of Iranian petroleum and petrochemical products abroad. Treasury has
sanctioned dozens of Iranian petroleum brokers and over 40 ghost fleet
tankers involved in shipping of Iranian oil.
Since December 2023, OFAC has issued 14 rounds of sanctions
targeting the network of IRGC-QF and Houthi financial facilitator Sa'id
al-Jamal, to include a range of shipping facilitators and vessels in
multiple jurisdictions helping the network illicitly ship Iranian
commodities to the People's Republic of China (PRC).
Question. Do you believe that the Islamic Republic of Iran should
benefit financially from U.S. actions while the proxies that it arms
and bankrolls kill American service members and target our ally,
Israel?
I have several concerns regarding the administration's waiver that
allowed approximately $10 billion in Iranian funds to be transferred
from Iraqi banks to Omani banks. The administration previously told
this committee that at least two transactions have occurred, and I have
several questions.
What is the exact amount that has been transferred from Iraq to
Oman under the waiver?
In what currencies have the funds been transferred?
Can you please confirm the number of transactions and the nature of
the transactions that have taken place?
Please describe to this committee which entities were involved and
what the funds were used to purchase.
What specific oversight mechanisms are in place to prevent
diversion or abuse?
Answer. Under Secretary Nelson testified to the House Financial
Services Committee on February 14, 2024 that about =500 million have
been transferred from restricted accounts in Iraq to restricted
accounts in Oman under the Iraq electricity waiver. As discussed
previously, two transactions have occurred involving the restricted
accounts in Oman. These transactions were for the purchase of
agricultural commodities. We can further describe these transactions in
a classified setting.
The humanitarian channel in Oman provides a mechanism for the
limited use of restricted Iranian funds to pay third-country exporters
for the sale of humanitarian goods to Iran, consistent with U.S.
statutory exemptions and longstanding support for humanitarian trade
mandated by Congress and implemented across administrations of both
parties. Similar to humanitarian channels established under previous
administrations, the channel is designed to support the Iranian
people's access to agricultural commodities (including food), medicine,
and medical devices while requiring participating foreign financial
institutions to implement stringent due diligence measures to
specifically address the risk of funds transfers to Iran, as well as
the risks of other misuse or evasion of U.S. sanctions.
The terms of the channel require participating financial
institutions to implement certain due diligence measures, on top of the
bank's existing due diligence measures, in connection with any
authorized use of the channel. These include:
Establishing qualifications for non-Iranian companies to
participate in the export of humanitarian items to Iran and
creating a ``white list'' of approved entities, to be shared
with Treasury and subject to its approval;
Vetting relevant documentation and information to ensure
that items for export to Iran qualify as humanitarian items;
and
Conducting sanctions screening and additional due diligence
of Iranian persons involved in the export of humanitarian items
to ensure that no listed Iran-related persons would be
involved.
If, in the course of the financial institutions' due diligence,
exporters or Iranian customers were found to have attempted, or were
suspected of, misuse of the channel, Treasury would expect the
financial institutions to restrict such suspicious transactions and
provide relevant information to Treasury, as such transactions would
not be covered by Treasury's assurance letter. OFAC or the State
Department would require additional information from the participating
financial institutions, as appropriate, and would proactively raise
issues independently identified by the U.S. Government through all
sources available.
The Treasury Department is in regular communication with the
financial institutions participating in the channel.
The channel does not lift any U.S. sanctions on Iran, and the U.S.
Government continues to impose sanctions in connection with Iran's
malign activity, including in response to Iran's weapons proliferation
and its support for international terrorism. Should the channel
ultimately be used in the future, and if Treasury Department or any
other U.S. Government bodies become aware of illicit activity in the
channel, the Treasury Department would work with the financial
institutions and the Omani Government to take appropriate action.
Question. Is Iran in compliance with the Nuclear Nonproliferation
Treaty? If yes, how is Iran in compliance when it has not answered the
IAEA's questions on undeclared nuclear material and activities?
Will this administration commit, will you commit, to no sanctions
relief for Iran until they comply with the IAEA's requests to resolve
the outstanding issues on undeclared nuclear material and activities?
Answer. Treasury does not lead the monitoring of Iran's compliance
with the Nuclear Nonproliferation Treaty. However, Treasury is
committed to using its authorities to enforce any violations of U.S.
laws and regulations.
Question. The Work Opportunity Tax Credit (WOTC) program is vital
for the hiring and retention of certain categories of job applicants
that otherwise could be disadvantaged in the pursuit of employment.
However, to ensure the WOTC program fulfills this important purpose,
Treasury must act to reinforce the congressional intent of the WOTC
program to incentivize hiring of WOTC eligible job applicants by
unequivocally clarifying that the WOTC screening must logically occur
before the employer makes any offer of employment.
It is my understanding that a lack of Treasury guidance concerning
WOTC and/or instructions to the IRS to provide such guidance has opened
the program to inappropriate use, potentially resulting in windfall
payments to firms that are merely claiming tax credits for employees
who happen to meet WOTC criteria, despite not determining their
qualifications prior to extending a job offer. The WOTC program
requires an employer to obtain the pre-screening information set forth
in Form 8850 ``on or before'' the job offer date, which helps ensure
that an applicant's WOTC eligibility is available to positively
influence an employee's hiring decision. Despite this requirement, I
understand that some service providers have set up screening practices
that result in screening job applicants for WOTC eligibility after they
have already been offered employment. Those providers incorrectly take
the view that they are not violating the WOTC instructions because
``offer of employment'' is undefined for WOTC purposes, and thus that
``conditional'' or ``contingent'' offers do not trigger the screening
requirement prior to becoming a ``final'' or unqualified offer. I am
fully aware that this inquiry has been made in other settings to the
IRS and the IRS has responded that they have reiterated the requirement
to WOTC screen before an offer of employment, but for reasons
completely unclear to me, and seemingly unwarranted, has been unwilling
to define an offer of employment to include any offer (including
conditional or contingent). This unwillingness has only worsened the
problem and seemingly empowered those abusing the system into falsely
concluding their actions are permissible and not resulting in abuse of
the program.
Employers who follow such practices are making hiring decisions
without the ability to know whether an applicant is eligible, and yet
still seek a tax credit under WOTC. We must protect the integrity and
intended function of the WOTC program.
I recognize that the WOTC program is jointly administered by the
Department of Labor (via the Employment and Training Administration)
and Treasury (via the IRS). Even so, DOL does not have specific
statutory authority to define ``offer of employment.'' However, the
Department of the Treasury Orders and Directives number 107-03 state,
``The General Counsel of the Department of the Treasury has the
authority to approve all regulations pertaining to the internal revenue
laws, including the authority to ratify and approve, where necessary,
any such regulations previously issued.'' It appears that the
Department of the Treasury has the statutory power to issue clear
guidance on this issue. It is essential that Treasury act and end this
abuse or justify the basis for continued unwillingness to implement
this easy fix and protect the program.
This guidance on screening is crucial to protect the integrity of
the WOTC program and ensure that it is used to incentivize the hiring
of qualified individuals facing barriers to employment.
In partnership with the Treasury Department, what is your timeline
to provide clear and definitive guidance to employers on what
constitutes an ``offer of employment'' triggering the screening
requirement for the purpose of WOTC?
Answer. Treasury and the IRS share your objectives of protecting
the integrity of the WOTC and properly administering and enforcing its
provisions. Your question focuses specifically on the pre-screening
requirement. IRS has provided guidance on this pre-screening
requirement.
In an IRS news release,\23\ dated September 19, 2022, and an
updated WOTC page on irs.gov,\24\ the IRS emphasizes the requirement
that employers must pre-screen job applicants before making an offer of
employment. The updated WOTC page highlights pre-screening as an
essential component of the WOTC; employers are reminded that they must
complete Form 8850, Pre-Screening Notice and Certification Request for
the Work Opportunity Credit, to comply with the pre-screening
requirement. The page specifically states that the job applicant must
provide information to the employer about being a targeted group member
on or before the date the employer offers the applicant the job.
---------------------------------------------------------------------------
\23\ https://www.irs.gov/newsroom/irs-updates-information-on-tax-
credit-helping-businesses-to-hire-certain-categories-of-workers.
\24\ https://www.irs.gov/businesses/small-businesses-self-employed/
work-opportunity-tax-credit.
The Instructions to Form 8850 direct employers to obtain
information about WOTC eligibility from job applicants on or before
they make a job offer. Form 8850 requires that both the job applicant
and employer sign Form 8850, under penalties of perjury, and attest
that the applicant provided the information on or before the day the
---------------------------------------------------------------------------
job offer is made.
In addition, the Internal Revenue Manual (IRM), which provides
guidance to IRS personnel in administering and enforcing the Internal
Revenue Code, provides that to claim the WOTC, employers must pre-
screen job applicants on or before the day the employer makes an offer
of employment. The IRM and Form 8850 provide that, on or before the day
the employer makes a job offer, a job applicant must provide
information to the employer about whether the job applicant may be a
member of a targeted group for purposes of WOTC and the employer must
complete Form 8850.
Question. The OECD set a deadline to conclude Pillar 1 negotiations
by the end of March. What is the status?
Answer. See response to question below.
Question. Based on feedback to Treasury's consultation, the
language prohibiting DSTs in the OECD's draft Pillar 1 framework is not
strong enough and has too many exceptions.
What are you doing to ensure the definition is strengthened to stop
discriminatory taxes against U.S. companies?
Answer. While we had hoped to finalize the text of a Pillar 1
multilateral convention (MLC) earlier this year, we have been able to
narrow the outstanding issues significantly and countries have chosen
to remain at the table. We are focused on bridging the remaining gaps
as soon as possible.
We appreciate the taxpayer comments we received on the Pillar 1 MLC
during the public consultation that you mention. We have used the
comments, as well as feedback from our consultations with bipartisan
Senate Finance Committee tax staff, to negotiate further clarifications
to help address the concerns raised by taxpayers. Any final agreement
must aim to achieve Pillar 1's underlying goals of tax stability and
certainty.
Question. A lot of us have been caught off guard by the
announcements coming out of USTR on digital trade, including the
withdrawal of digital rules from the WTO and Indo-Pacific Economic
Framework, the removal of digital trade barriers from USTR's upcoming
National Trade Estimate report, and Ambassador Tai's recent statements
that U.S. technology companies ``are not really American companies''
for tax purposes.
Are you concerned that USTR is sending the message to other
countries that it's okay to discriminate against U.S. companies and to
seize tax revenue that would otherwise be going to the U.S. tax base?
Answer. I defer to USTR on the details of Ambassador Tai's
position. I understand that she has addressed this issue numerous times
including during her testimony with both this committee and the House
Ways and Means Committee. That being said, we engage in extensive
interagency coordination regarding the administration's position on
Pillar 1 and on our opposition to discriminatory digital services
taxes, and those positions remain unchanged.
Question. A study by the consulting firm EY for the Small Business
Entrepreneurship Council was released earlier this week. It highlighted
the broad and positive impact of business partnerships in the ``core
living expenses sector,'' as defined by President Biden's Council of
Economic Advisors. It showed that business partnerships in this sector
account for 10.6 million jobs, $779 billion in wages and a positive
contribution of $1.3 trillion to U.S. GDP. Yet, the administration
continues to imply that business partnerships exist only to avoid
paying taxes or are not paying ``their fair share.''
What evidence do you have that business partnerships, a
longstanding structure that has fueled countless businesses and
employers big and small for well over a hundred years, are a source tax
reporting malfeasance and should be targeted? Furthermore, do you
believe stepped up enforcement will be more of a deterrence of tax
fraud or a more of a disincentive for viable individuals and businesses
to avoid beneficial partnerships altogether?
Answer. Recently announced IRS efforts are focused on the largest
partnerships, including launching audits on 76 partnerships with
average assets over $10 billion. These structures can be complex and
opaque. One study estimated that 20 percent of partnership income goes
to taxpayers who cannot be classified by type and 15 percent of
partnership income is earned in circularly owned partnerships, meaning
that it cannot be uniquely linked to an originating partnership. The
complexity of these structures combined with more than a decade of
underfunding caused audit rates for large partnerships to plummet: from
3.8 percent in 2010 to 0.1 percent in 2019. Funding provided by the IRA
is allowing the IRS to rebuild its capacity in this area and ensure
that taxpayers, including complex partnerships, pay what they owe.
______
Questions Submitted by Hon. John Thune
Question. The Tax Cuts and Jobs Act reduced rates across every
income bracket, nearly doubled the standard deduction, and simplified
the tax code so American families would get to keep more of their hard-
earned money.
It also lowered rates for small and medium-sized businesses and
lowered our Nation's corporate tax rate, which was the highest combined
corporate rate in the developed world.
It also made our international tax system more competitive with our
foreign counterparts. And keep in mind that in addition to tax reform
growing our economy, increasing wages, and reducing our unemployment
rate, it also grew tax receipts.
As Congress looks to either extend or make permanent the rates
enacted under TCJA, can you please explain why extending the expiring
rates was not explicitly accounted for in the President's budget
request?
Answer. The President's Budget sets forth principles to guide the
administration's work with Congress to address the 2025 expirations.
Specifically, the President:
Opposes increasing taxes on people earning less than
$400,000 and supports cutting taxes for working people and
families with children to give them more breathing room;
Opposes tax cuts for the wealthy--either extending tax cuts
for the top 2 percent of Americans earning over $400,000 or
bringing back deductions and other tax breaks for these
households; and
Supports paying for extending tax cuts for people earning
less than $400,000 with additional reforms to ensure that
wealthy people and big corporations pay their fair share.
Question. The Tax Cuts and Jobs Act doubled the estate tax
exemption level, and I am hopeful that my colleagues understand the
importance of either retaining the TCJA exemption level or repealing
the estate tax in its entirety next year.
Last year, I led 40 of my Senate Republican colleagues in
reintroducing the Death Tax Repeal Act, which would put an end to this
punitive tax that not only burdens and punishes family-owned and -
operated businesses when a death in the family occurs, but also through
costly estate planning, both of which have adverse effects on ongoing
operations and the longevity of the business itself.
Does the administration truly believe that letting the death tax
snap back to pre-TCJA levels and repealing many of the benefits of the
step-up in basis would not have detrimental impacts on farm and ranch
operations and other family businesses across the Nation?
Answer. Under current law, because a person who inherits an
appreciated asset receives a basis in that asset equal to the asset's
fair market value at the time of the decedent's death, appreciation
that had accrued during the decedent's life is never subjected to
income tax. In contrast, less-wealthy individuals who must spend down
their assets during retirement pay income tax on their realized capital
gains. This dynamic increases the inequity of the tax treatment of
capital gains. In addition, the preferential treatment for assets held
until death produces an incentive for taxpayers to inefficiently lock
in portfolios of assets and hold them primarily for the purpose of
avoiding capital gains tax on the appreciation, rather than reinvesting
the capital in more economically productive investments.
The proposal to treat transfers of appreciated property by gift or
on death as realization events includes several provisions to protect
family-owned and -operated businesses. Taxpayers could elect not to
recognize unrealized appreciation of certain family-owned and -operated
businesses until the interest in the business is sold or the business
ceases to be family-owned and -operated. Furthermore, the proposal
would allow a 15-year fixed-rate payment plan for the tax on
appreciated assets transferred at death, other than liquid assets such
as publicly traded financial assets and other than businesses for which
the deferral election is made.
Question. Americans continue to grapple with the negative
consequences of the $1.9-trillion American Rescue Plan and the
unnecessary spending that helped fuel a 3-year inflation crisis. And as
we all know, inflation is caused by too many dollars chasing too few
goods. However, the President's budget request seems to ignore that
fact by proposing more than $7 trillion in spending in FY25 and nearly
$3 trillion in new spending over the next 10 years.
Can you please outline how the levels of spending embedded in this
proposal are in any way appropriate given that they would undoubtedly
continue fueling inflation and prolonging the pain that American
families continue to feel?
Answer. Inflation rose in 2021 and 2022 due to both supply-side and
demand-side factors. Supply, especially, was hampered by pandemic-
related disruptions to supply chains that reduced the amount of
available goods. As supply chains untangled, inflation started to
recede. Indeed, inflation has eased significantly since mid-2022.
Headline inflation is down almost two-thirds from its peak, and core
inflation has also trended down.
Much of the spending in President Biden's agenda is associated with
long-term investments in infrastructure and manufacturing. These
investments will lead to an expansion of supply in our economy, which
will serve to bring inflation down. Furthermore, the new spending in
the budget is accompanied by revenue increases that will serve to
offset any increases in aggregate demand. This is a fiscally
responsible approach to the Federal budget and to ensuring that
inflation is brought sustainably down.
______
Questions Submitted by Hon. Todd Young
Question. In my brief review of the budget, I have been unable to
find an entry in the budget tables regarding the continuation of tax
relief for any taxpayer earning under $400,000. I see allusions to tax
increases offsetting the revenue loss from extending the roughly $2
trillion of tax relief for taxpayers earning under $400,000, but that
revenue is then used to offset the trillions in new spending in this
budget. You can't have $1 dollar of revenue raised offsetting $1 of new
spending and $1 dollar of revenue loss and claim both are offset. It
appears as though there is a $2-trillion hole in the budget.
Can you please highlight where, if at all, the Biden
administration's FY 2025 budget proposal addresses the impact the
expiration of tax relief under the Tax Cuts and Jobs Act (TCJA) will
have, particularly on individuals earning less than $400,000?
Answer. The President's budget sets forth principles to guide the
administration's work with Congress to address the 2025 expirations.
Specifically, the President:
Opposes increasing taxes on people earning less than
$400,000 and supports cutting taxes for working people and
families with children to give them more breathing room;
Opposes tax cuts for the wealthy--either extending tax cuts
for the top 2 percent of Americans earning over $400,000 or
bringing back deductions and other tax breaks for these
households; and
Supports paying for extending tax cuts for people earning
less than $400,000 with additional reforms to ensure that
wealthy people and big corporations pay their fair share.
Question. A Washington Post fact-checker article \25\ noted this
same issue and called it the Fiscal Year 2025 budget plan's ``magic
asterisk.'' How do you respond to that article's observation that ``the
budget is silent on how Biden would keep his promise not to raise taxes
on people making less than $400,000 in a revenue-neutral way''?
---------------------------------------------------------------------------
\25\ Kessler, Glenn, ``President Biden's $400,000 tax pledge has a
`magic asterisk.' '' The Washington Post, March 18, 2024, available at:
https://www.washingtonpost.com/politics/2024/03/18/biden-tax-pledge-
fact-checked/.
Answer. The President has put forward or supported trillions in
deficit reduction and revenue measures that could be used to pay for
extending tax cuts below $400,000. That includes openness to working
with Congress on policies not included in the budget. For example, he
has expressed openness to looking at additional ideas to limit tax
breaks for millionaires and supported Build Back Better surcharges on
wealthy people that are not included in the budget, and he knows there
is more to do beyond his budget proposals to crack down on business tax
---------------------------------------------------------------------------
shelters.
Question. Congressional scorekeepers estimate that roughly $2
trillion of the $2.8-trillion in tax relief from TCJA goes to taxpayers
earning under $400,000--more than 70 percent. That figure is consistent
with Joint Committee on Taxation distribution tables showing that the
Tax Cuts and Jobs Act moved tax burden upward and not downward.
Would you agree, looking simply at the distribution of tax burden
upward and 70 percent of the tax relief provided to those the
administration claims it wants to hold harmless from a tax increase,
that TCJA policies are an improvement over pre-TCJA law, ``yes'' or
``no''? Please explain your answer.
Answer. No. The Tax Cuts and Jobs Act was a costly, regressive tax
cut that not only didn't pay for itself but included delayed raisers,
phase-outs, and sunsets that concealed the true cost. It
disproportionately benefited the wealthy and large corporations. The
centerpiece was a corporate rate cut that enriched corporate
shareholders at the expense of common-sense investments benefiting
middle-class families.
Question. I noticed the Fiscal Year 2025 Green Book neglected to
discuss or address implementation of Pillar 1 of the OECD global tax
deal. As you know, Pillar 1 could not go into effect until two-thirds
of the Senate ratifies it. Furthermore, to ensure double tax relief
under Pillar 1 Amount A, it would likely also be necessary for Congress
to amend domestic law to ensure the intended relief.
What was the administration's reasoning for failing to discuss the
impacts of Pillar 1 implementation in this year's Green Book?
Answer. Pillar 1 negotiations are ongoing, including on issues that
Treasury views as critical to the tax certainty and stability goals
that are core to Pillar 1. Because negotiations on those key items were
not yet concluded (and, to some extent, still remain open), we did not
include a proposal to adopt Pillar 1 in the FY 2025 Greenbook. Those
key items include the clarification of the definition of digital
services taxes and relevant similar measures and a mandatory and robust
Amount B, both of which we understand are important to Congress.
Question. I understand that the administration is deciding by the
end of March 2024 whether to sign the Pillar 1 agreement, in
preparation for a formal signing ceremony in June 2024. I also
understand that Treasury officials were recently in Paris for a final
round of Pillar 1 negotiations.
Can you provide an update on the status of those negotiations,
including an estimated timeline?
Answer. While we had hoped to finalize the text of a Pillar 1
multilateral convention earlier this year, we have been able to narrow
the outstanding issues significantly and are focused on bridging
remaining gaps as soon as possible. Any final agreement must aim to
achieve Pillar 1's underlying goals of tax stability and certainty.
Question. A battery separator is a critical component of a battery,
as recognized by guidance released by the Treasury Department. However,
I have heard from relevant stakeholders that there is a perceived
ambiguity in what constitutes manufacturing a separator. It is my
understanding that some battery separators are coated and some are not.
This brings us to a broader discussion on whether coating a separator
in North America should be considered a manufactured component, which
would qualify for U.S. tax credits. This perspective contrasts with a
separate view that separators are complex components, rather than ``raw
materials'' that require coating to be considered separators.
How is the Treasury Department actively engaging with stakeholders
to clear up regulatory ambiguities like the one described above?
Answer. The Treasury Department and the IRS actively engage with
stakeholders on tax guidance, including through meetings and through
the notice-and-comment rulemaking process. We carefully consider public
feedback on proposed regulations before issuing final rules.
For purposes of section 30D, the final regulations define a battery
component to include a coated separator. In general, the base film and
coating of a separator are battery materials, not battery components,
because they are processed rather than manufactured or assembled. For
purposes of section 45X, the final regulations define electrochemically
active materials to include separators.
Question. Do you believe that ambiguities like the one described
above can be addressed in the Treasury Department's formal published
guidance or will they have to be addressed through a case-by-case
enforcement process?
Answer. As described above, the section 30D final regulations
address the treatment of separators as battery materials. In addition,
the section 30D final regulations adopt a robust up-front review
process, conducted by the IRS in consultation with the Department of
Energy, to ensure compliance with the FEOC restrictions.
Question. Many of the community foundations in my State have
expressed concern with the impact the proposed regulations on donor-
advised funds (DAFs), issued in draft form in November, could have on
community foundations in Indiana and around the country.
One issue Indiana's community foundations have raised is how the
regulations could force many charitable funds that are not currently
DAFs to be reclassified as DAFs, and the cascading impact this can have
on charities in my State.
Has the Treasury Department explored the potential impact these
specific regulations may have on community foundations? Can you please
share what these impacts to community foundations would be?
Answer. The proposed regulations would implement amendments made by
the Pension Protection Act of 2006 that, among other things, impose an
excise tax on taxable distributions made by sponsoring organizations
from a DAF. The statute applies equally to community foundation
sponsoring organizations and to other public charity sponsoring
organizations. In addition, because the statute's definition of donor
advised fund is broad, it may include a variety of fund types.
The proposed regulations defined a donor advised fund and included
several exceptions to the definition of DAF, including exceptions for
certain funds advised by committees that include donors or donor
advisors, for certain scholarship funds, and for certain disaster
relief funds, among other things. The proposed regulations requested
comments on additional circumstances in which a fund should either not
meet the definition of a DAF or, even though it does meet the
definition of a DAF, should qualify for an exception to the definition
of DAF.
We received over 140 written comments, including from community
foundations, in response to the proposed regulations. We also held 2
days of public hearings on May 6th and 7, 2024, at which 44 commenters,
including community foundations, spoke. Community foundations discussed
the definition of DAF, among other issues, and suggested several
alternative definitions. We will consider all of those comments in
finalizing the regulations.
Question. The Fiscal Year 2025 Green Book's description of the
administration's proposal to repeal percentage depletion for hard
mineral fossil fuels specifically refers to ``coal mines and other
hard-mineral fossil-fuel properties.''
Could you please clarify which hard minerals, beyond coal, are
considered fossil fuels and would thus be affected by this proposal?
Answer. In addition to coal, the administration's proposal would
also include but is not limited to oil shale and lignite, with are
listed separately from coal under the section 613 of the IRS Code for
percentage depletion.
Question. As I mentioned during the hearing, one of your deputies
had recently mentioned a ``plan B'' legislative option to protect our
country's R&D tax credit from the Pillar 2 framework.
To reiterate my request during the hearing, please provide a
detailed description of the legislation the administration believes is
necessary to address this important issue.
You noted during the hearing that you are still hoping to address
the R&D tax credit through Pillar 2 negotiations. Why has it taken so
long to negotiate on this point? What do you believe is the likelihood
of success through negotiations versus requiring Congress to implement
your ``plan B'' option?
Answer. We have indicated to our Inclusive Framework negotiating
partners that addressing issues related to the treatment of the U.S.
R&D tax credit is a priority for Congress and the Treasury Department.
We are currently focused on resolving this issue multilaterally, which
requires developing a path forward that can be adopted by consensus
among all Inclusive Framework countries. We have briefed Senate Finance
Committee offices on a bipartisan basis on our negotiations thus far,
and would be happy to follow up with you and your staff as that work
continues.
______
Communications
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America's Credit Unions
99 M Street, SE, Suite 300
Washington, DC 20003
202-508-6745
https://www.americascreditunions.org/
March 21, 2024
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
Committee on Finance Committee on Finance
United States Senate United States Senate
Washington, DC 20510 Washington, DC 20510
Re: ``Hearing on the President's Fiscal Year 2025 Budget''
Dear Chairman Wyden and Ranking Member Crapo:
On behalf of America's Credit Unions, I am writing regarding the
Committee's hearing entitled, ``Hearing on the President's Fiscal Year
2025 Budget.'' America's Credit Unions is the voice of consumers' best
option for financial services: credit unions. We advocate for policies
that allow the industry to effectively meet the needs of their nearly
140 million members nationwide.
As the Committee discusses important financial services and tax
policies today, we urge you to focus on several key areas of the
President's Fiscal Year 2025 (FY25) budget that protect credit unions'
ability to serve communities in need.
Benefits of the Credit Union Tax Status
America's Credit Unions writes in strong support of the preservation of
the credit union tax exemption, which represents one of the best
investments that the government makes in its citizens. We urge Congress
to retain and reaffirm this tax status so that credit unions can
continue to advance communities, improve the financial future for all
people, and keep local economies strong.
The importance of having not-for-profit credit unions as vibrant and
viable alternatives in the financial services marketplace is as
significant today as it has ever been. Credit unions provide accessible
and affordable basic financial services to people of all means and
encourage the equitable distribution of capital across all individuals,
families, communities, and small businesses. Credit unions infuse
financial market competition with multiple and differentiated
competitive business models. They help keep financial services
accessible--and affordable--for all consumers, whether they are members
of a credit union or not. This non-profit status is an integral part of
credit unions' structure that allows them to focus on their mission of
``people helping people.''
Credit unions provide significant financial benefits to both their
members as well as nonmembers. According to America's Credit Unions'
analysis of NCUA and DataTrac data, credit unions provide $21.5 billion
in total financial benefits annually to consumers and communities
across the country through higher returns on savings and returns, lower
loan rates, and fewer fees.
In the aftermath of the financial crisis and the COVID-19 pandemic,
more Americans are choosing credit unions as their best financial
partner. Some may have joined because their bank failed, and others may
have joined because they grew frustrated with the policies and fees of
the for-profit sector. What is important is that when they needed an
alternative, a healthy credit union system with the capacity to grow
was ready to serve them, and as credit union members, they benefit from
conducting their financial services with an institution that they own.
The credit union tax status is crucial to encourage and support the
continued existence of this alternative, cooperative component of the
financial system.
Congress should preserve the credit union tax status because:
the tax treatment for credit unions continues to serve the
purpose for which it was conveyed;
credit unions are different because of their structure as not-
for-profit member-owned financial cooperatives;
the tax status represents good public policy because it causes
the creation of substantial benefits to the public, far in excess of
its cost; and,
taxing credit unions would represent a tax increase on 140
million Americans--taxpayers who pay a total of $1.5 trillion in taxes
annually. In addition, credit unions pay nearly $20 billion in local,
state, and federal taxes annually.
Simply put, the credit union tax exemption helps grow the greater
economy and create jobs, which is what a corporate tax exemption should
be doing. Both credit union members and non-members benefit from credit
unions' role in the marketplace, as they serve as a check on the rates
and practices banks would otherwise implement to maximize profit.
Community Development Financial Institutions Fund
The President's budget proposes $325 million in new budget authority
for FY25 for the Community Development Financial Institutions (CDFI)
Fund. America's Credit Unions, in consultation with our partners in the
credit union movement, recommends that the Fund receive an
appropriation of $500 million in Fiscal Year 2025. We also support the
budget's proposed $500 million for the CDFI Bond Guarantee Program
(BGP), which provides CDFIs with greater access to low-cost, long-term,
fixed-rate capital. Specifically, the BGP fully guarantees long-term
bonds with maturities of up to 30 years. Since its creation in 2010,
this program has guaranteed $2.5 billion in bonds to 27 CDFI-certified
institutions.
The CDFI Fund was established in 1994 by the Riegle Community
Development and Regulatory Improvement Act and is administered by the
Treasury Department. With 1,456 CDFI-certified institutions nationwide,
515 of which are credit unions, the Fund makes capital grants, equity
investments, and awards for technical assistance to community
development financial institutions. Examples of CDFIs include community
development banks, community development credit unions, community
development loan and venture capital funds, and microenterprise loan
funds. CDFIs are required to provide a 1:1 match for most of the
awarded funds, which are offered on a competitive basis. CDFIs finance
community development initiatives such as small businesses, community
facilities, and low-income housing.
CDFIs such as Community Development Credit Unions (CDCUs) are charged
with supplying low-income, distressed communities with traditional
financial services such as savings accounts, personal loans, and the
tools needed to become self-
sufficient stakeholders in their own future. The Fund uses small
amounts of federal dollars to leverage significant amounts of private
and non-federal dollars. This has added a tremendous boost to the CDFI
industry, which relies heavily upon private sector funds from
corporations, individuals, religious institutions, and private
foundations.
Community Development Revolving Loan Fund
The President's budget proposes $4 million in budget authority in FY25
for the Community Development Revolving Loan Fund (CDRLF). We
respectfully request that funding for this account be increased to $6
million. This fund provides revolving loan and technical assistance
grant programs to low-income credit unions. Last year, it had $2.75
million in loans on its balance sheet. In addition, $3.5 million in
technical assistance grants were awarded to 147 low-income credit
unions.
Created in 1979 and transferred to the National Credit Union
Administration (NCUA) in 1986, the CDRLF assists credit unions serving
low-income communities to: 1) provide financial services to their
communities; 2) stimulate economic activities in their communities,
resulting in increased income and employment; and 3) operate more
efficiently. No Congressionally appropriated funds are used to fund the
CDRLF's administrative or overhead costs. These costs are paid by
credit unions insured by the NCUA. Therefore, every dollar appropriated
by Congress to the CDRLF is passed on directly to underserved
communities and the credit unions that serve them.
Some of these CDRLF technical assistance grants have been used to help
credit unions expand their digital services, such as mobile or home
banking or electronic bill payment. Other grants have been used to help
small credit unions fight fraud and embed EMV chips in their credit and
debit cards. In addition, some grants have been used to open new
branches in underserved areas or move from home-based locations to non-
residential spaces. Also, some grants allow credit unions to offer
services like free income tax preparation and financial literacy
classes.
Finally, these grants enable small credit unions to offer a new product
or service, such a new ATM or an asset liability management model. In
an age of rapid consolidation in the credit union and small bank
sector, it is vital to allow these small credit unions to compete and
not have to close shop or merge with a larger financial institution
that may not know the needs of the members of these small credit
unions.
Financial Crimes Enforcement Network
The President has proposed a $325 million budget in FY25 for the
Financial Crimes Enforcement Network (FinCEN) within the U.S.
Department of the Treasury. America's Credit Unions supports this
request.
FinCEN is our nation's ``Financial Intelligence Unit.'' FinCEN plays a
critical role in combating money laundering and other illicit uses of
the financial system that fuel international terrorism, cybercrime,
corruption, human rights abuses, and the illegal trafficking of
persons, drugs, weapons, wildlife, and more. Crucially, FinCEN is also
a key player in detecting any attempts to evade sanctions or US-imposed
import restrictions related to the Russian Federation.
In conclusion, we believe these three funding requests are good
investments and are fiscally prudent. Credit unions are often the exact
types of community lenders that are perfectly suited to help someone
make that mortgage payment or receive that small loan to pay their one
or two employees. Credit unions, not predatory lenders, should be where
these Americans turn for financial assistance. On behalf of America's
Credit Unions and 140 million members nationwide, I urge you to fully
fund these three important programs. Thank you for your consideration.
On behalf of America's Credit Unions and the 140 million credit union
members, thank you for holding this important hearing and considering
our views on the subject.
Sincerely,
Jim Nussle, CUDE
President & CEO
cc: Members of the Committee on Finance
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to address Secretary Yellen's testimony.
General Approach
For obvious reasons, this year will be more hectic than the last. The
budget and appropriations process need to be simple. To do this, pass a
consensus caretaker budget with two draft partisan supplemental bills,
one of which to be enacted during the Lame Duck Session or at the
beginning of the next Congress for the
President-elect to sign upon taking office, depending on who wins.
If such a budget is enacted, use it as the basis for spending caps for
a new Budget Control Act. Make the targets realistic and self-enforcing
for purposes of Appropriations Committee allocations. Please see an
attachment with suggested changes to appropriations committee
jurisdictions that will make certain activities, like space
exploration, easier to fund adequately.
Contingencies
In the event the majority in the House shifts due to early retirements
or insurrection indictments, the Senate majority and the House minority
should have legislation ready to enact a Public Option, including
reconciliation instructions for the FY24 budget year. Please see the
second attachment for details.
Any change in control will only last through the special election
cycle, this should be the second priority. The first must be amending
the Electoral Count Act and the jurisdiction of the Ethics Committees
to provide for the enforcement of the Fourteenth and Twentieth
Amendments, including provisions for removing and related disability
for members and the President-elect.
THE PRESIDENT'S BUDGET
The President's budget priorities have not changed to a great extent.
We will address these proposals in the order presented by OMB.
Lowers Costs for the American People
The title was more a preamble than a set of proposals. Regardless,
please see these comments from last year, which have been repeated
several times in the interim, on what drives inflation and how to stop
it.
Households making under the 90th percentile have been losing ground for
almost half a century, while incomes above that amount have increased
on a regular basis.
The source of inequality, aside from abandoning the 91% top marginal
tax rate, is granting raises at an equal percentage rather than by an
equal amount. When the 91% rate was repealed, incomes were fairly
equal, so it was not an issue.
The federal government plays an outsized role in how salaries are
determined through percentage-based cost of living adjustments to
government workers, beneficiaries, government contractors. The
government can change this with the stroke of a pen. The private sector
will follow suit with a higher minimum wage, adequate child tax credits
(as described below) and paying individuals in training from ESL to
community college the minimum wage to purse their studies.
From here on in, adjust for cost of living on a per dollar an hour
rather than on a percentage basis (or dollars per month or week for
federal beneficiaries). Calculate the dollar amount based on inflation
at the median income level. No one gets more dollars an hour raise, no
one gets less dollars per hour in increases. Increase the minimum wage
as above and consider decreasing high end salaries paid to government
employees and contractors. Even without decreases, simply equalizing
raises will soon reduce inequality. Why is this necessary?
Prices chase the median dollar. The median dollar of income is actually
at the 90th percentile, rather than the 77th percentile (which is about
where the median is). This strategy will reduce inflation in both the
long and short terms as prices adjust to decreases in higher salaried
income. Let me repeat this--prices chase income dollars, not income
earners.
Increasing stock market values in the speculative sector are 100%
inflationary, according to how inflation is defined in economics:
higher prices for the same goods. When such speculation is extreme, bad
things can happen. Adopting an ASSET VALUE-ADDED TAX (see the
attachment) will control such nonsense.
In the case of labor pull inflation, lower tax rates on executives were
effective in 1982. These cuts, and their setting in stone in the 1986
tax reform, were an overcorrection. The 2013 tax bill by President
Obama showed that increasing taxes on the wealthy is the most effective
way to correct any economic slowdown. Then Vice President Biden should
have let taxes increase in 2010, as doing so lengthened the slowdown
caused by the Great Recession.
The idea that tax increases should be limited to income over $400,000
is not supported by economics. The system should have everyone pay
more, especially for broad based programs like healthcare.
Cuts Taxes for Families with Children and American Workers
Increase Child Tax Credit
We agree with increasing the CTC to at least American Rescue Plan Act
levels and adding refundability. Further, we applaud the House for
passing compromise legislation addressing this issue.
This is still not enough, but is a start. We would make it at least
$800 per month and phase it out from the median income to the 90th
percentile.
The opposition from a retiring Senator in the last Congress, as well as
among a current Senate Committee Ranking Member comes from those who
consider direct subsidies from the IRS to have the ``stink of
welfare.'' The proposal to distribute refundable payments on a monthly
basis has not changed. If the minimum wage were increased, no one would
use receipt of the child credit to avoid work. To better distribute the
credit (at full value rather than as an advance) distribute it with
wages or other benefits, such as Unemployment Insurance and Survivors
Insurance.
UI and disability insurance should match increased minimum wage levels
on a full-time basis (but assuming a 26 hour work week), while payments
to dependent children for survivors and the disabled should be
abolished and replaced with an enhanced CTC at the $1,000 per month
level
For middle-income taxpayers whose increased credits are less than their
annual tax obligation, a simple change in withholding tables is
adequate. Procedures are already in place to deliver refundable credits
to larger families.
Employers can work with their bankers to increase funds for payroll
throughout the year while requiring less money for their quarterly tax
payments (or estimated taxes) to the IRS. The main issue is working out
those situations where employers owe less than they pay out. This is
especially true for labor-intensive industries and even more so for low
wage employers. A higher minimum wage would make negative quarterly tax
bills less likely. Again, no one should have to subsist mainly on their
child tax payments.
This approach is superior to the prebate mechanism proposed for the
Fair Tax and for the same reason. The government should not be the
national paymaster for every family.
Strengthen the Earned Income Tax Credit for low-paid workers who
aren't raising a child in their home
There should be no such thing as low-paid work. Raising the minimum
wage (and mandating that franchise agreements provide for higher
returns to franchisees when--not if--this increase occurs) and making
this increase automatic will assure that all workers can make ends
meet.
Lowers Child Care Costs for Hardworking Families, Universal Pre-K and
Head Start
Child care arrangements should be the responsibility of the employer.
Tax incentives should thus be an offset to an employer-paid tax,
preferably one on total value added (both labor and capital), with
either neighborhood care or care at or near the workplace financed by
the employer rather than through creating new federal program, such as
$8.5 billion for the Child Care and Development Block Grant (CCDBG).
See our attached Tax Reform proposal details on the elements of this
tax.
Increases Affordable Housing Supply to Reduce Housing Costs
We disagree with the President's proposed subsidies. The best cure for
housing affordability is higher income. The President's budget is on
the right track regarding the Child Tax Credit. I would treble down on
his amounts and distribute these funds through Old-Age, Survivors,
Disability and Unemployment Insurance payouts or with wages.
Urban renewal, which relocates poor and largely non-white people, leads
to redevelopment that chases the 90th percentile. The tax incentives in
the President's budget are exactly the wrong approach. Instead, reform
the entire tax system so that most families do not have to file income
taxes. By most, I mean 99%.
Reduces the Cost of College
The President's Budget includes funding the first two years of
education at community college. The same level of funding should be
provided to students in technical training after grade ten and should
be available to students at both public and accredited private schools,
including religious schools. In Espinoza v. Montana, prohibitions on
funding private schools (Blaine Amendments) were found to be
unconstitutional. New (and existing) funding should reflect that fact.
A main problem with current training regimes is that potential students
have opportunity costs that are not covered by training. TANF is simply
too narrowly tailored and directs too many people to low wage work,
especially in the dirtiest jobs in the medical field. The woke among us
do not have to look hard for the intrinsic sexism and racism in this
scheme.
Payments for tuition, stipends and family support would be funded by
employer-paid subtraction value-added taxes. Ideally, both state and
federal subtraction VAT will be enacted. A federal VAT would be levied
to assure that a minimum amount of funding is available should states
underfund their programs, which some will.
Lifts the Burden of Student Debt
The President is feeling guilty for using student debt revenue as an
offset to baseline for passage of the Affordable Care Act. New and
prior borrowers should not bear this burden. The best way to do this is
to forgive all capitalized interest and eliminate this provision. Any
forbearance or deferral should stop further interest from accumulating.
Lowers Health Care Costs, making permanent the expanded premium tax
credits that the Inflation Reduction Act extended, providing Medicaid-
like coverage to individuals in States that have not adopted Medicaid
expansion, paired with financial incentives to ensure States maintain
their existing expansions.
The President is forgetting his promise to create a Public Option. It
is time to at least study how this would work. Our analysis is provided
in our comments on the HHS Budget.
Protects and Strengthens Medicare, extending the solvency of the
Medicare Hospital Insurance (HI) trust fund indefinitely by modestly
increasing the Medicare tax rate on incomes above $400,000, closing
loopholes in existing Medicare taxes, and directing revenue from the
Net Investment Income Tax into the HI trust fund as was originally
intended.
We disagree. All health care should be funded through broad based tax
reform, as specified in our attached proposals. HI and the public
option (which replaces Medicaid for the poor and those with pre-
existing conditions) should be funded by a credit invoice VAT, premium
reforms funded by the employer-paid subtraction VAT. Again, see the HHS
budget proposal.
Protects the Social Security Benefits: strengthens Social Security in a
way that ensures no benefit cuts; extends solvency by asking the
highest-income Americans to pay their fair share; and improves
financial security for seniors and people with disabilities. Please see
our comments to the testimony of Director O'Malley.
Requires Billionaires to Pay at Least 25 Percent of Income in Taxes
Our tax reform plan specifies a high-income surtax for income wage,
dividend and interest income above $400,000 per year (while
incorporating taxes for this income at lower levels, ranging from 6.5%
to 26% into a subtraction VAT surtax), which could be remitted through
a tax prepayment bond program and the enactment of a 26% ASSET VALUE-
ADDED TAX to replace capital gains, inheritance and gift taxes.
Raises Tax Rates for Large Corporations
Eliminate Corporate Profits taxes and taxation of business income on
Form 1040 with a Subtraction VAT (with offsets for employee and retiree
health care) and a credit invoice tax on both labor and profit. The
combined rates of these taxes will burden both profits and labor costs,
raising much more money.
This tax will be levied for all income earned in the country of
production (for subtraction VAT) and of sale (Credit Invoice VAT). A
new agreement on rate uniformity for our proposed Asset VAT will
prevent rate shopping for stock trading.
Provides National, Comprehensive Paid Family and Medical Leave and
Calls for Paid Sick Days. Both programs should be offsets to the
proposed subtraction VAT, with SVAT rates set accordingly. Sick leave
should be ten days.
Empowers, Protects, and Invests in Workers. Workers power America's
economic prosperity. Absolutely. This should be funded by the national
credit invoice VAT.
Confronts the Climate Crisis While Spurring Clean Energy Innovation,
Increasing Resilience, and Protecting Natural
Resources
Enforcement of pollution, as well as research into new energy sources
(such as small nuclear reactors), development of tethered electric
vehicles in urban areas and stepped up enforcement of all point-source
pollution--both past and present, should be funded by a Carbon-Added
tax, as well as fines.
Rural areas should receive Rural Electrification Administration style
subsidies for investing in renewable energy, however for areas outside
of urban and suburban areas, use of gasoline and biodiesel are
practical where tethered electric vehicles are not.
Supports a Strong Nutrition Safety Net
The best safety net for families is paying adequate minimum wages,
child tax credits and possibly converting disability programs into Long
Term Unemployment Insurance for those for whom additional education is
not practical.
Protects Americans at Home and Abroad
Active denial systems, such as the microwave radiation system developed
by Raytheon, are superior to any border wall, but installing such a
system should only happen if existing immigrants are granted amnesty,
with eligibility the program most applicable (permanent residency,
student visa, H-1B) without residency restrictions.
Tackles Crime, Reduces Gun Violence, and Makes America's Communities
Safer
The DFAR (Defense Federal Acquisition Regulations) and FAR should
specify that any firm that sells ammunition to the public cannot
provide services to defense or police agencies, nor can any of their
licensees.
Salva Ukraini and hold any members who refuse to do so out of support
for Insurrectionist Trump be held accountable by the Ethics Committee
if they also participated in organizing the actions of January 6, 2021.
Feed Gaza, regardless of funding or permission from Israel.
Treasury Funding
See the second attachment regarding sunsetting funding for the IRS.
Thank you for this opportunity to share these ideas with the committee.
As always, we are available to meet with members and staff or to
provide direct testimony on any topic you wish.
Attachment--Tax Reform, Center for Fiscal Equity, March 24, 2023
Synergy: The President's Budget for 2024 proposes a 25% minimum tax on
high incomes. Because most high-income households make their money on
capital gains, rather than salaries, an asset value-added tax replacing
capital gains taxes (both long- and short-term) would be set to that
rate. The top rate for a subtraction VAT surtax on high incomes (wages,
dividends and interest paid) would be set to 25%, as would the top rate
for income surtaxes paid by very high-income earners. Surtaxes
collected by businesses would begin for any individual payee receiving
$75,000 from any source at a 6.25% rate and top out at 25% at all such
income over $375,000. At $450,000, individuals would pay an additional
6.25% on the next $75,000 with brackets increasing until a top rate of
25% on income over $750,000. This structure assures that no one games
the system by changing how income is earned to lower their tax burden.
Individual payroll taxes. A floor of $20,000 would be instituted for
paying these taxes, with a ceiling of $75,000. This lower ceiling
reduces the amount of benefits received in retirement for higher-income
individuals. The logic of the $20,000 floor reflects full time work at
a $10 per hour minimum wage offered by the Republican caucus in
response to proposals for a $15 wage. The majority needs to take the
deal. Doing so in relation to a floor on contributions makes adopting
the minimum wage germane in the Senate for purposes of Reconciliation.
The rate would be set at 6.25%.
Employer payroll taxes. Unless taxes are diverted to a personal
retirement account holding voting and preferred stock in the employer,
the employer levy would be replaced by a goods and receipts tax of
6.25%. Every worker who meets a minimum hour threshold would be
credited for having paid into the system, regardless of wage level. All
employees would be credited on an equal dollar basis, rather than as a
match to their individual payroll tax. The tax rate would be adjusted
to assure adequacy of benefits for all program beneficiaries.
High-income Surtaxes. As above, taxes would be collected on all
individual income taxes from salaries, income and dividends, which
exclude business taxes filed separately, starting at $400,00 per year.
This tax will fund net interest on the debt (which will no longer be
rolled over into new borrowing), redemption of the Social Security
Trust Fund, strategic, sea and non-continental U.S. military
deployments, veterans' health benefits as the result of battlefield
injuries, including mental health and addiction and eventual debt
reduction.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes
and the estate tax. It will apply to asset sales, exercised options,
inherited and gifted assets and the profits from short sales. Tax
payments for option exercises, IPOs, inherited, gifted and donated
assets will be marked to market, with prior tax payments for that asset
eliminated so that the seller gets no benefit from them. In this
perspective, it is the owner's increase in value that is taxed. As with
any sale of liquid or real assets, sales to a qualified broad-based
Employee Stock Ownership Plan will be tax free. These taxes will fund
the same spending items as high income and subtraction VAT surtaxes.
There will be no requirement to hold assets for a year to use this
rate. This also implies that this tax will be levied on all eligible
transactions.
The 3.8% ACA-SM tax will be repealed as a separate tax, with health
care funding coming through a subtraction value-added tax levied on all
employment and other gross profit. The 25% rate is meant to be a
permanent compromise, as above. Any changes to this rate would be used
to adjust subtraction VAT surtax and high-
income surtax rates accordingly. This rate would be negotiated on a
world-wide basis to prevent venue seeking for stock trading.
Subtraction Value-Added Tax (S-VAT). Corporate income taxes and
collection of business and farm income taxes will be replaced by this
tax, which is an employer paid Net Business Receipts Tax. S-VAT is a
vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long-term care.
Employer-paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence-level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state-administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
As above, S-VAT surtaxes are collected on all income distributed over
$75,000, with a beginning rate of 6.25%. replace income tax levies
collected on the first surtaxes in the same range. Some will use
corporations to avoid these taxes, but that corporation would then pay
all invoice and subtraction VAT payments (which would distribute tax
benefits). Distributions from such corporations will be considered
salary, not dividends.
Credit Invoice Value-Added Tax (CI-VAT). Border-adjustable taxes will
appear on purchase invoices. The rate varies according to what is being
financed. If Medicare for All does not contain offsets for employers
who fund their own medical personnel or for personal retirement
accounts, both of which would otherwise be funded by an S-VAT, then
they would be funded by the I-VAT to take advantage of border
adjustability.
CI-VAT forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government. As
part of enactment, gross wages will be reduced to take into account the
shift to S-VAT and CI-VAT, however net income will be increased by the
same percentage as the CI-VAT. Inherited assets will be taxed under A-
VAT when sold. Any inherited cash, or funds borrowed against the value
of shares, will face the I-VAT when sold or the A-VAT if invested.
CI-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional CI-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.25% to 13%).
Carbon Added Tax (C-AT). A Carbon tax with receipt visibility, which
allows comparison shopping based on carbon content, even if it means a
more expensive item with lower carbon is purchased. C-AT would also
replace fuel taxes. It will fund transportation costs, including mass
transit, and research into alternative fuels. This tax would not be
border adjustable unless it is in other nations, however in this case
the imposition of this tax at the border will be noted, with the U.S.
tax applied to the overseas base.
Attachment--Tax Administration, Treasury Budget, February 12, 2020
Shifting to a single system for all business taxation, particularly
enacting invoice value-added taxes to collect revenue and employer-
based subtraction value-added taxes to distribute benefits to workers
will end the need for filing for most, if not all, households. Any
remaining high-salary surtax would be free of any deductions and
credits and could as easily be collected by enacting higher tiers to a
subtraction VAT.
Subtraction VAT collection will closely duplicate the collection of
payroll and income taxes--as well as employment taxes--but without
households having to file an annual reconciliation except to verify the
number of dependents receiving benefits.
Tax reform will simplify tax administration on all levels. Firms will
submit electronic receipts for CI-VAT and C-VAT credit, leaving a
compliance trail. S-VAT payments to providers, wages and child credits
to verify that what is paid and what is claimed match and that children
are not double credited from separate employers.
A-VAT transactions are recorded by brokers, employers for option
exercise and closing agents for real property. With ADP, reporting
burdens are equal to those in any VAT system for I-VAT and A-VAT and
current payroll and income tax reporting by employers.
Employees with children will annually verify information provided by
employers and IRS, responding by a postcard if reports do not match,
triggering collection actions. The cliche will thus be made real.
High-salary employees who use corporations to reduce salary surtax and
pay I-VAT & S-VAT for personal staff. Distributions from such
corporations to owners are considered salary, not dividends.
Transaction-based A-VAT payments end the complexity and tax avoidance
experienced with income tax collection. Tax units with income under
$84,000 or only one employer need not file high-salary surtax returns.
Separate gift and inheritance tax returns will no longer be required.
State governments will collect federal and state CI-VAT, C-VAT, S-VAT
payments, audit collection systems, real property A-VAT and conduct
enforcement actions. IRS collects individual payroll and salary surtax
payments, performs electronic data matching and receive payments and
ADP data from states. SEC collects A-VAT receipts.
CI-VAT gives all citizens the responsibility to fund the government. C-
VAT invoices encourage lower carbon consumption, mass transit, research
and infrastructure development. A-VAT taxation will slow market
volatility and encourage employee ownership, while preserving family
businesses and farms. Very little IRS Administration will be required
once reform is fully implemented. All IRS employees could fit in a
bathtub with room for Grover Norquist.
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