Lawmakers set to return to spending showdown

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Lawmakers set to return to spending showdown

Legislators are gearing up to return to Washington to face an imminent crisis related to government funding, a situation that could have implications for the progress of tax-related legislation.

The Senate is scheduled to reconvene on September 5th, while the House is set to return on September 12th. This leaves lawmakers with only a short period to agree on government funding before the current funding expires on September 30th. It appears unlikely that a comprehensive omnibus bill will be reached by the deadline, and finishing all individual appropriations bills is also a challenging task. This scenario increases the likelihood of resorting to a continuing resolution (CR), although the Freedom Caucus is pushing for demanding concessions in exchange for their agreement. The potential for a government shutdown remains, casting uncertainty over the situation.

The outcome of the timing and substance of a spending agreement has implications for the trajectory of tax policy. Any spending deal that is achieved could serve as a legislative vehicle to carry a tax package, given the limited options available. Should a short-term CR be passed, followed by a broader spending agreement by the year’s end, the year-end deal could encompass tax priorities. However, if only smaller spending agreements are reached, and a partial or full CR is required until well into 2024, the prospects for a comprehensive tax package diminish.

In addition to navigating the intricacies of government funding, lawmakers must also find common ground on the content of the tax package itself. As of now, there appears to be no imminent agreement between the two sides regarding trading child tax credit enhancements for the restoration of research expensing under Section 174, reinstating 100% bonus depreciation, and addressing the Section 163(j) limit on interest deductions. While Republicans have shown a willingness to consider child tax credit relief, Democrats emphasize the importance of balancing this relief with provisions that benefit businesses. However, numerous obstacles remain that could impede a deal. Some Republicans insist on incorporating work requirements for new child tax credit benefits, a stance that is met with opposition from Democrats. Moreover, the focus on deficits in recent times makes it challenging to move forward with a costly tax compromise without offsetting revenue sources.

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