Federal spending deal

Based on my preliminary scan, Congress appears to have included very few tax provisions in its lame duck $1.7 T spending deal that was released at 1:30 am today (12/20/2022 NYT story). A deal on child tax credits and business extenders (e.g., continued expensing of research and development costs) was dropped to get 10 Republican votes in the Senate to avoid a filibuster. See Senate Appropriations Committee overview for summary of the deal’s nontax provisions.

Of course, the SECURE Act 2.0 made it in. So, The Great American Retirement Fraud marches on (my earlier takes here and here). The deal (bill, section 107 on page 2085) splits the difference between the House and Senate on RMDs – increasing it to age 73 starting in 2023 and to 75 starting in 2033 (outside the budget window, so “no cost” to the budget deficit, cynically speaking). I’m conflicted as to which is worse but they’re unnecessary and will increase long run federal debt. The Minnesota update cost, which is automatic (no update bill required), will show up in the February forecast and be minor.

The deal also includes the fix to syndicated conservation easements (section 605, starting on page 2372) that limits the deduction to 2.5X modified basis from the Senate bill. The changes are prospective (contributions made after enactment), so the IRS will need to continue fighting old deals in court. That includes the admin law issues with making them listed transactions. Conservation easements – not just the syndicated deals – are rife with abuse, e.g., illustrated by The Former Guy’s contributions of various golf course easements (box p. 112), apparently a common practice. The Caspar Milquetoast limits on syndicated deals in the bill are at best a battlefield tourniquet on a wound that needs extensive reconstructive surgery.

Battles over IRS funding appear to be deferred until the GOP takes over the House. The Republicans, according to Roll Call, are considering that a victory:

Other “wins” GOP lawmakers touted include * ** flat-funding the IRS. Republicans have repeatedly lambasted the $80 billion, 10-year increase Democrats granted the tax collection agency in this year’s partisan budget reconciliation law.

Roll Call, Both parties claim wins in massive omnibus spending bill

My guess is that the 2023-24 Congress will enact very little in the way of tax changes. I expect battles over expiring provisions and IRS funding to be the main events. TCJA’s individual provisions do not expire until 2025, so that almost guarantees that will be put off until after the 2024 election.

Update

12/26/2022: The Joint Committee on Taxation posted its revenue estimates for the tax provisions last Thursday. They reveal the usual gaming of budget rules – virtually all the revenue to offset the tax reductions results from expanded use of the Roth model or provisions that are variants on it (new emergency savings plan). That, of course, is just an acceleration of when revenue is collected (upon contribution rather than distribution). Limiting syndicated conservation easements is one significant exception that does not just accelerate revenue.

One could argue that looser RMD rules are just a deceleration of revenue, so it’s no big deal. The changes are symmetrical. But I remain skeptical because of the flaw I see in the Roth structure. For the reasons I have made in prior posts, I think the Roth structure undercuts progressivity on a permanent income basis. It does that because, all else equal, it imposes lower tax rates on retirement savers with higher rates of return on their savings. That surely means those recipients also have more income. Given the progressive rate structure, that should also mean lower revenues.

The RMD increase from age 73 to 75 has no revenue offset because it is outside the budget window. The increase from 72 to 73 had about a $7 billion effect over the 10-year window. The increase from 73 to 75 should be just short of twice that.

Howard Gleckman at TPC (The Good, the Bad, and Ugly) sees more positives in the package than I do. Other than the conservation easement changes and expanded 401(k) auto-enrollment and coverage, I don’t see much good. Money for the savers credit would be better sunk into low end social security benefits.

As I noted before, I expect the matching contribution regime to present some serious administrative challenges for the government. I will be interested to see how they do it and how many glitches result.