MARY REICHARD, HOST: It’s Wednesday the 7th of February, 2024. Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Mary Reichard.
NICK EICHER, HOST: And I’m Nick Eicher. It’s time for Washington Wednesday. Today, a conversation with a tax policy expert about a bipartisan tax bill from the U.S. House.
But first, Senate Republicans say it’s back to square one after reviewing the text of a bill with immigration reform tied to emergency aid for Ukraine and Israel.
Senator Ron Johnson speaking yesterday.
RON JOHNSON: It didn't work because that bill in the end would have probably done more harm than good by normalizing a flow of illegal immigration and undermining a future president who actually wants to secure the border.
REICHARD: Many in the media are saying that the Senate has been swayed by former president Donald Trump’s pressure to kill the bill, but what’s the rest of the story?
Joining us now to talk about it is politics reporter Carolina Lumetta. So Carolina, what’s going on here?
CAROLINA LUMETTA: Well, a lot of very high emotions on Capitol Hill today, Mary. The border security deal is effectively back to the drawing board. Senate Republicans yesterday came out strongly against it promising to tank even a procedural vote to bring it up for a debate. Now, a coalition of three negotiators have spent months at Congress’s request to draft a deal here. Republicans say they never promised to accept any deal and they have issues with the actual policies involved along with the timeline that they've had to approve this. Democrats say the hold up is simply a political play and they accuse former President Donald Trump of interference after he said he disapproved of the compromise.
REICHARD: So setting aside the Trump factor, what are Republican Senators saying about why they aren’t supporting the bill?
So there are a few big issues here. Firstly is that it ties the border legislation to both Ukraine and Israel aid. Republicans do not want a blank check to Ukraine included in any border deal. Democrats don’t want border legislation tied to Israel aid. And it’s all lumped in one big package. On the policy side of things, yesterday, several senators were saying this is not focused enough on border security. It deals a lot more with immigration reform, and they say now’s not the time for that, we need to shut down the border. Here’s what Senator Mike Lee said yesterday.
MIKE LEE: And perhaps most importantly, we should have included border security metrics so that Ukraine aid and release would be linked to the achievement of certain sustained security benchmarks. Had we done that I think would be an altogether different position.
REICHARD: What else did Republicans want that they didn’t get?
LUMETTA: Well, the big thing for them is it does not actually shut down the border. It does not include any construction for continuing work on the border wall. It also does not end "catch and release" that the Biden administration has allowed. It switches the situation to more of a catch and detain situation and expands the use of what they call alternatives to detention. This could be ankle monitors or cell phones that you use to check in with your immigration lawyer or your judge. But it does not catch and deport which is what Republicans wanted. They want policy that will disincentivize people from coming to the border at all. And they say catch and detain is not going to help with that.
REICHARD: So it sounds like Republicans are saying this deal would cement bad immigration policy. What about Democrats? What are they saying?
LUMETTA: Well, that’s another important thing to note. Plenty of Democrats and immigration advocates also do not love this bill. They think it's far too harsh, and they're upset at President Biden for even being willing to negotiate on this issue. Another provision in the bill is that it would give the Department of Homeland Security the authority to shut down the border entirely, with an exception for unaccompanied minors, if crossings surpass 5,000 a day for a week. Now for context, the average crossings in December were over 9000 per day, and the low back in June was about 3,300. This also does not provide any text for giving undocumented immigrants a pathway to citizenship, which has been another big priority for Democrats. So there's plenty of ill will on both sides of the aisle here.
REICHARD: So what are the options?
LUMETTA: So either they scrap the bill and start over from scratch or they give the chamber a few extra days or weeks to read through the text and work out amendments with the House. But any bill the House likes is likely doomed in the Senate and vice versa. They could also split it up into one bill for border security. One bill for Israel, one bill for Ukraine. That's going to take a lot more time that negotiators say that those countries might not have.
REICHARD: Carolina Lumetta covers politics for World’s Washington bureau. Carolina, thanks.
LUMETTA: Thanks, Mary.
EICHER: Well, on to another generally contentious issue: taxes.
Americans don’t agree on many things these days, but a bipartisan House majority recently passed a tax bill. It would expand child tax credits and give businesses some tax breaks.
REICHARD: Joining us to talk about it is Erica York. She’s a Senior Economist and Research Director with the Tax Foundation’s Center for Federal Tax Policy.
Erica, thanks for joining us!
ERICA YORK: Thanks, Mary. Good to be here with you.
REICHARD: Well, as we mentioned, there are two elements in this bill getting a lot of attention. The first is child tax credits. What would this bill do about those?
YORK: The bill makes three specific changes to the child tax credit, generally retaining the same structure but increasing the amounts that certain families will see. So one thing that it does is provide an inflation adjustment to the maximum credit. Right now that maximum is set at $2,000. And that's a fixed amount. So moving forward for 2024 and 2025, that max would be adjusted for inflation. The child tax credit right now is a partially refundable credit. That means that to the extent that the credit exceeds what someone owes in taxes, they can receive part of it above and beyond their tax liability. But this bill would accelerate that inflation adjustment so that the refundable amount of the credit would match that inflation adjusted max. So there would no longer be a difference between the maximum credit and the cap on refundability. And then the third big change is that right now, that refundable portion of the credit phases in with the taxpayers earned income starting, when they earn more than $2,500, it phases in at a 15% rate. This change would, say for each child you have, it increases at that 15% rate. So say you have two children, it would increase 30%, you would see a 30% phase in. So essentially, it gets the full benefit to families with multiple children faster than they would see under current law.
EICHER: Well, another general element of this bill is a set of provisions that change how businesses deduct certain expenses, from their taxes, anything stand out to you in those proposed changes?
YORK: Yeah, these are three changes that were put in place by that 2017 Tax Cuts and Jobs Act, and they relate mainly to how businesses recognize the cost that they make for investment. So if a business buys a new machine, or if a business pays a scientist for research and development, it's a question of when do they get to deduct that payment on their tax return. Under an ideal tax system, they would deduct it immediately to match the expense that they actually incur in real life. But because of some accounting rules, sometimes the tax system delays those deductions. So to the extent that we accelerate those deductions, allow that 100% deduction up front, which is what this bill is doing temporarily, that provides a better incentive to invest in the U.S. economy. Unfortunately, what we're seeing today is a lot of uncertainty. So this bill changes these provisions retroactively, sometimes all the way back to 2022 for the R&D provisions, and it only puts the full deductions in place through 2025. So at the end of next year, businesses are still going to be sitting there not really sure about what the tax treatment is moving forward.
REICHARD: What does it mean for Congress that many of the bill’s provisions are set to expire in 2025?
YORK: It means that next year is going to be a huge year for tax policymaking. That aligns the expirations of what we're talking about now with some broader expirations that are already scheduled to take place at the end of next year. And that's most of the changes that the 2017 law made to individual income taxes. So if you'll recall that, that law doubled the standard deduction, reduced tax rates, widened brackets, lots and lots of changes to virtually every aspect of the individual income tax code; those expire at the end of next year, too. So likely what Congress is thinking and providing this temporary extension is, well, next year, we're already going to have to deal with a lot of big tax policy questions, we might as well put it all on the table. And next year will be the big tax showdown when it comes to these business deductions, when it comes to the structure of the individual income tax code. All of that will be up for debate again next year.
EICHER: Erica, what would you say is the bottom line for taxpayers if this bill passes, and then Congress struggles to resolve the bigger debate next year?
YORK: If this bill passes, most taxpayers would just see small changes, because as far as individual tax changes here, we're talking about relatively small changes to inflation adjustments on the child tax credit and its phase in. The big implications for taxpayers would happen next year. So say we're in a world where all of the tax cuts expire after the end of 2025, then come January 2026, basically every American wakes up and faces a higher tax bill. Now, I don't think that's a likely outcome. I don't think we're going to see wholesale expiration, but I do think we're going to see a very extended and maybe painful debate amongst lawmakers. Of course, it depends who occupies the White House, who's in majority in Congress, how that shakes out will have major implications for taxpayers and their individual financial situations because it affects how much they'll owe in taxes.
REICHARD: Erica York is senior economist and Research Director with the Tax Foundation. Erica, thanks so much for your time today.
YORK: Thank you, Mary.
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