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Lawmakers gearing up for a renewed spending showdown

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Congress is gearing up to reconvene in Washington to tackle an urgent government funding crisis that could have implications for potential tax legislation.

Scheduled for September 5th, the Senate’s return will be followed by the House of Representatives on September 12th. With this timeline, lawmakers have a tight window to find common ground on government funding before the current authorization expires on September 30th. Despite the looming deadline, reaching a consensus on a comprehensive omnibus bill or completing individual appropriations bills seems unlikely. Instead, a more viable option might be a continuing resolution (CR), a short-term fix to keep the government funded. However, there’s a snag as the Freedom Caucus is demanding significant concessions in exchange for their support, increasing the risk of a government shutdown.

The timing and substance of the spending agreement have significant implications for tax policy. Any spending deal could serve as a legislative vehicle for a tax package. Opting for a short-term CR and then achieving a broader spending agreement before the year ends could open the door for tax priorities. Conversely, relying on smaller spending agreements and potentially extending a partial or complete CR into 2024 would diminish the chances of substantial tax reform gaining traction.

Before even reaching an agreement on the contents of a tax package, lawmakers need to bridge their differences. The two sides are far apart on potential compromises. These include enhanced child tax credits in exchange for restoring research expensing under Section 174, reintroducing 100% bonus depreciation, and providing relief for the Section 163(j) limit on interest deductions. While Republicans are open to child tax credit relief, Democrats emphasize that such relief must be proportional to business-focused provisions. Yet, significant hurdles remain. Many Republicans insist on work requirements tied to new child tax credit benefits, which Democrats oppose. Additionally, the recent focus on fiscal deficits makes passing an expensive tax compromise challenging without corresponding revenue offsets.

In summary, the upcoming Congressional sessions will address pressing concerns related to government funding and taxation. The decisions made will impact the government’s operations and shape the potential for significant tax reforms.

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