The House has passed a $78 billion child tax credit and business tax bill — a rare moment of bipartisanship during a broader election-year political knife fight in which control of the chamber hangs by a thread.
The Jan. 31 vote was 357-70, with members of both parties supporting the legislation, H.R. 7024, the Tax Relief for American Families and Workers Act. The bill contains a variety of provisions that are amenable to both Republicans and Democrats. The proposal’s fate hangs in the balance of the Democratic majority Senate, where lawmakers in both parties will undoubtedly scrutinize the bill.
If the legislation is enacted, it would represent a big win for a divided Congress and a Democratic White House, with President Joe Biden likely to face a rematch against his vanquished 2020 Republican opponent, former President Donald Trump. During election years, bipartisan legislation usually grinds to a halt given partisan divisions, which are otherwise playing out in Congress over securing the U.S.-Mexico border, aid to Ukraine in its two-year war with Russia, and military assistance to Israel in its counteroffensive against Hamas after the Oct. 7 terrorist attacks claimed 1,200 lives.
Child tax credit
The House-passed bill would expand the child tax credit beyond the levels set by the 2017 Tax Cuts and Jobs Act, Trump’s signature domestic achievement during his single White House term. But the proposal does not go nearly as far as when Democrats temporarily expanded it in 2021 on a partisan basis when the party held full control of Congress and the presidency.
At the time, Congress raised the child tax credit to $3,600 for children under 6 and $3,000 for older children, with perhaps the biggest change being the removal of an income threshold for those who receive the funds. A family with no income or head of household working would also receive the full $3,600 or $3,000 payments. The boosted tax credit sunset at the end of 2021.
In this case, the bill crucially keeps income requirements in place — something that is a red line for Republicans who believe without that provision the credit would be akin to welfare without work.
The agreement would change the calculation of the credit on a per-child basis to make it more generous. It also would increase the maximum refundable amount per child to $1,800 in tax year 2023, $1,900 in 2024, and $2,000 in 2025. Also of note, the bill would index the credit to inflation so that it doesn’t decrease over time on a real basis.
Business provisions
For Republicans, the major aspects of the legislation are those related to business. As the 2017 tax cuts expire, the various deductions and provisions are sunsetting. This legislation would extend those prized deductions, a major priority for the corporate world.
In the bill is a tax deduction for research and development costs that had expired. After it expired, companies had to amortize R&D expenses, meaning they faced a higher tax burden.
Spreading out the deduction over five years, instead of being able to take it immediately, indirectly raises the cost of investing in R&D because the value of a deduction is worth more today than a deduction down the road.
The agreement also temporarily ends the phase-out of bonus depreciation. That is a feature of the 2017 tax cuts that allowed companies to write off certain capital expenditures immediately instead of having those deductions written off over the “useful life” of the asset.
The provision began phasing out last year, when it went from 100% of new investments in 2022 to 80% in 2023. It is then set to keep fading before ending in 2026.
Cost
The bill aims to be paid for through changes to the pandemic-era employee retention credit. The costs would be offset by stronger enforcement and penalties tied to fraudulent ERC claims and would bring an early end to the processing of claims.
The Joint Committee on Taxation, Congress’s in-house tax scorekeeper, estimates the ERC changes would result in just over $77 billion in savings, making the overall bill deficit-neutral.
Although some critics contend that is tricky math.
The bill is written so that its tax cuts expire in 2025, but if they were instead made permanent, it would cost $645 billion through 2033, according to an estimate from the Committee for a Responsible Federal Budget, an outside group that advocates lower deficits.
Support
The bill passed out of the Ways and Means Committee in a strong 40-3 vote, with only Democrats opposing the legislation.
Republicans have been pushing for the business provisions to be renewed as soon as possible so there is support for the legislation on that basis within the GOP conference.
Rep. Greg Murphy (R-NC), a member of the powerful tax-writing panel, said during an interview with the Washington Examiner that given the gridlock in Congress right now, a bipartisan proposal was needed to get the business provisions passed. He said the bill will “crank business back up again.”
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And while many Democrats independently support the business provisions, some more liberal members have panned it as a Wall Street giveaway that provides Main Street with a less balanced win.
Meanwhile, while Democrats wanted a much more expansive child tax credit boost, many will support the legislation because it does expand the credit from where it is now, something that will help poor families with living expenses and child care.
