The Year Ahead in Finance

Negotiators dig in over tax credits in spending bill

Associated Press/Susan Walsh

Tax credits for individuals and businesses are up for grabs as negotiations on a year-end spending deal come down to the wire. 

The possible credits range from an expansion of the child tax credit (CTC), which was beefed up during the pandemic and ate away at child poverty rates in the U.S., to incentives for companies to invest more in research.

Negotiators on both sides of the aisle say they’re working on tax provisions and that getting a spending deal done is a high priority before a new Congress arrives in 2023 and voting dynamics on Capitol Hill become harder to predict.

Though support for the various tax provisions doesn’t break down perfectly along party lines, Democrats for the most part are arguing for credits geared toward low-income workers and families, while Republicans want extensions of the Trump administration’s 2017 Tax Cuts and Jobs Act that allow businesses to keep more of their money.

Some of those business provisions have received support from Democrats in the past, namely a write-off for research expenses traditionally used by companies in the pharmaceutical, defense and manufacturing sectors.

But analysts say that Democrats are now holding back support for the research write-off in the hopes of getting more on the CTC as well as the earned income tax credit, worth thousands of dollars to low and middle-income families.

“What’s happened is Democrats have said, ‘Hey, we like the business changes that you guys want to make, but we’re not going to go along with them unless you agree to do something about the child tax credit and the earned income credit,” Howard Gleckman, an analyst with the Urban-Brookings Tax Policy Center, said in an interview with The Hill.

Democratic Sen. Michael Bennet (Colo.) said in a statement Monday to The Hill that “We shouldn’t extend corporate tax breaks without an extension of the Child Tax Credit. I believe we can get to a responsible, common sense agreement to expand the Child Tax Credit this year, and my priority is for any expansion to cover as many of the 19 million children who are left out of the current credit as possible in a meaningful way.”

“I have always believed that in the end this would be bipartisan and that my Republican colleagues would provide input,” Bennet added. “We are considering any vehicle to get this done this year, including in an omnibus package.”

Some Republicans have expressed frustration with this negotiating tactic from Democrats.

“Democrats support the R&D tax credit – they voted for it overwhelmingly as part of ARPA [The American Rescue Plan Act of 2021]. It’s a bipartisan thing. Now they’re trying to pretend it’s just a GOP thing, which is confusing,” a Republican aide on the Ways and Means Committee told The Hill.

The battle over business and low-income tax credits may be holding up a major retirement bill that has wide-ranging bipartisan support and also includes some significant changes to U.S. tax laws. These include an increase in the age at which rich retirees would start being taxed on their savings that would cost the government $9.6 billion over ten years.

Sen. Ben Cardin (D-Md.) told reporters last week that the retirement bill could be “worked out with one final meeting.”

“And there would be broad consensus to pass it,” he said. “The question is whether it’s held off for other issues, and we can’t move it because other issues don’t allow us to move it.”

“There’s certainly a lot of interest in the Democratic caucus” on tax issues, particularly the CTC, Cardin added. “But I think that’s tied into other types of tax changes that may be coupled with it. The pension bill does not offer leverage on any of these issues. It’s just a bill that’s supported broadly by both parties, so there’s no leverage in holding that bill up.”

Congress has less than two weeks to pass legislation to keep the government funded, or risk a shutdown under a looming Dec. 16 fiscal deadline.

There is pressure on both sides to pass a larger omnibus funding bill for fiscal 2023 this month, but lawmakers are still debating over whether Congress should instead pass a short-term continuing resolution (CR) to keep the government funded at fiscal 2022 levels through early next year.

The idea, pushed by Republicans in both chambers, would allow lawmakers to put off new government funding until the House ushers in a new GOP-led majority, prompting strong opposition from Democrats.

But the proposal has also met resistance from other Republicans who say Congress should pass an omnibus before January, citing concerns about funding for defense and national security. 

The intraparty rift has Republican leaders toeing a delicate line, as lawmakers struggle to finalize an overall agreement on spending amid partisan clashes that spell trouble for potential tax credits.

Top Republicans pushing for an omnibus have made demands for spending reductions outside of defense while specifically pointing to the domestic spending passed in Democratic-backed reconciliation bills without GOP support these past two years.

While negotiators have a list of sticking points to hash out for a bipartisan deal, Sen. Richard Shelby (Ala.), vice-chair of the Senate Appropriations Committee, named social spending as a key issue in talks.

Shelby told reporters that social spending is “part of” the trouble keeping negotiators from getting to yes, warning lawmakers “might not get anything” if Democrats push for parity in levels of growth for defense and nondefense spending discussions.

“They’ve already gotten billions of dollars out of reconciliation for a lot of social programs,” said Shelby, who retires next month and is among a group of Republicans who have been pushing for Congress to pass an omnibus before the year’s end.

Senate Majority Leader Charles Schumer (D-N.Y.) said Monday he met with Republican leader Mitch McConnell (Ky.) and that “the Senate’s work on funding the government … continues.”

“Leader McConnell and I have confirmed the importance of getting this done,” he said.

Tags 2022 Year Ahead Finance Ben Cardin Child Tax Credit Michael Bennet Spending Bill Tax credits

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