The Build Back Better Plan Is Stalling: What’s The Issue?

We all are coming out of our holiday slumber, and wondering what ever happened to the potential tax increases for the 2022 taxable year? While many were enjoying their families and eggnog, Senator Manchin held strong to his concerns expressed in the fall of 2021 and announced that he could not support the Build Back Better (“BBB”) Act at this time because it just was too costly. Senator Manchin noted increased inflation, the costs of extending the child tax credit, and the potential for the Act to risk the reliability of our electric grid all as reasons for not being able to give his support. As recently as this week, the Senate has announced that their focus in the near-term will be on debating potential rule changes regarding the filibuster, prompted by a desire to act on voting rights. Does that mean the bill is dead? Possibly, but democrats feeling pressure to have better momentum heading into midterm elections and Senator Manchin being encouraged by the United Mine Workers of America to reconsider the Act might be enough to start negotiations again. The progression of the BBB Act could be similar to the Affordable Care Act, where the bill was under revision in November and December but did not pass until the following March.

Child Tax Credit: To enhance or not to enhance?

So what’s the big deal about extending the enhanced Child Tax Credit (“CTC”) benefits that were introduced through the American Rescue Plan (“ARP”)? Many Americans may not have initially been aware of this significant change made to the CTC but started asking questions when unexpected IRS checks arrived in July. While the CTC was modified through the Tax Cuts and Jobs Act (“TCJA”) in December of 2017, it was significantly enhanced under the ARP passed in March of 2021. The CTC enhancements made under the ARP expired as of December 31, 2021. While the BBB Act looks to only extend the CTC one year through 2022, many (including Senator Manchin) fear this is more of a budgeting gimmick than reality. The opposition doesn’t rely on the budget scores provided as they expect that the enhanced CTC will more likely span 10 years, matching the proposed bill time window. And this isn’t the only portion of the Act where he has this concern. Manchin was quoted as saying the following in a West Virginia radio interview:

"The same bill I have in front of me right now that they kept putting in front of me, was the same $6 trillion bill from the beginning. The only thing that changed was the time element in which they would pay for things. And I said, 'That's [disingenuous] to tell someone who's getting a Child Tax Credit, it goes away in one year, OK? Or someone who gets any one of these other services and it goes away in two or three years when we are basically trying to [increase] taxes for 10 years to pay for them.' And that's the truth."

So what are the major differences surrounding the TCJA CTC and the ARP Enhanced Tax Credit? Let’s review.

TCJA Child Tax Credit

In general, the TCJA CTC allows an amount equal to $2,000 for each qualifying child for tax years beginning in 2018 through 2025. Between 2018 and 2025, the $2,000 credit was reduced by $50 for every $1,000 a MFJ couples AGI exceeds $400,000 or $200,000 for all other taxpayers. In other words, MFJ couples with AGI above $440,000 and all other filers with AGI above $240,000 would not receive the credit. Yes, you are reading that correctly. Married filing joint couples making $400,000 a year would calculate the credit the same way that a married filing joint couple making $125,000 a year would. However, it should be noted that the costs of living between large cities and small towns is what drives the larger AGI amounts. Massachusetts average annual child care costs in 2021 were the highest at $20,913 per child, while Mississippi was the lowest, averaging only $5,436. 

Under the TCJA CTC rules, only a portion of the CTC was refundable. In other words, even if you had three qualifying children, were under the AGI limitation and had no tax liablity, you couldn’t expect a $6,000 IRS refund check (2,000 x 3). While the credit could offset tax liability, if there was no tax liability only a portion of the CTC could be received as a cash refund. Under the TCJA, a taxpayer is allowed a refund related to the CTC up the lessor of:

1)    $1,400 or

2)    15 percent of earned income above $2,500

Assuming the taxpayer had enough earned income, even if there was no tax liability, they would receive a check from the IRS of $4,200 (1,400x3).

While you may think this this is too much detail, the fact that the refundable portion of the CTC under the TCJA was linked to earned income is an important point to Senator Manchin. During a December 20^th radio interview, Senator Manchin said the following:

"When they first brought the bill out, I said, 'Chuck Schumer, there is nothing in there about accountability — holding people accountable — there is no work requirement, there is no means testing to where you are targeting the people that really need it.'

ARP Enhanced Child Tax Credit

Under the ARP an additional amount was added to the CTC calculations. The additional amount for 2021 is $1,000 for each qualifying child age 6 and older, and $1,600 for each qualifying child under age 6. The additional $1,000, or $1,600 for each qualifying child under age 6, is phased out with lower AGI amounts of $150,000 for MFJ couples and $75,000 for single taxpayers. Based on the limitation, married filing joint taxpayers will no longer be available for the enhanced $1,000 or $1,600 CTC if their AGI is over $170,000 or $182,000 respectively, but could still could qualify for the TCJA CTC.

Also, under the enhanced ARP CTC, the total amount of the credit was refundable as there was no earned income limitation. Therefore, using the same example we used under the ARP CTC, a taxpayer with three qualifying children over the age of 6 would now calculate a CTC of $9,000 (3 x (1,000 ARP Enhanced and 2,000 TCJA) and without a refundable limitation, could receive a refund of up to $9,000 as opposed to a maximum amount of $4,200 provided under the TCJA. While this was initially done to help families through the pandemic, the democratic party seems to want to give it more permanence. 

The last major enhancement, and the reason why so many were receiving a check from the IRS starting in July, is that half of the expected 2021 enhanced ARP CTC was provided to taxpayers through IRS checks over the last 6 months of the 2021 year. This provided a lifeline to many via a steady flow of cash over multiple months, as opposed to lump sum being received when filing a tax return.  And the benefits were significant for low-income families. A Columbia University study noted the first installment of the CTC lifted 3 million children out of poverty in July. The continued credit payments saw a reduction of approximately 20% of the November monthly child poverty rate from 15.8% to 12.7%. What’s not to love?

The cost of extending the enhanced CTC under the ARP is significant, and some are questioning whether the true intention is a tax credit which generally incentivizes economic growth or if it’s closer to mimicking a public assistance program. The Congressional Budget Office (CBO) estimates that the costs associated with the ARP enhanced CTC would cost the federal government $207.8 billion in 2031. The TCJA CTC in 2031, without any expansions, was estimated by the CBO to costs $43 billion in 2031, or almost five times less than the expanded ARP CTC. For comparative purposes, the CBO estimates the 2031 costs for the Supplemental Nutrition Assistance Program to be $76.7 billion; the Children’s Health Insurance Fund to be $20.1 billion; and the refundable Premium Tax Credits to be $65.7 billion; for a total of $162.5 billion in that year. Who knew? The costs of the enhanced CTC in 2031 of $207.8 billion would be more than the combined costs of the Supplemental Nutrition Assistance Program, Children’s Health Insurance Fund, and refundable premium tax credits.

It gets worse. The Tax Foundation General Equilibrium Model released in August of 2021 noted that if the enhanced ARP CTC remained, it decreases full time equivalent jobs by 38,000 and slightly reduces economic input. If instead the TCJA CTC remains, economic output would increase about 0.1 percent and full-time equivalent jobs would increase by 152,000.  It would seem that there’s opportunity for a compromise to be negotiated to strike a balance between the two. 

Energy Tax Credits

Another point of contention between Senator Manchin and the democratic party surrounds the energy proposals made in the BBB plan. There are significant energy tax credits embedded within the BBB Act, including new and expanded tax credits for hydrogen, wind, solar, and nuclear energy. 

Significant energy credits included in the BBB Act include:

• New: Section 45BB Clean Electricity Production Tax Credit
• New: Section 48F Clean Electricity Investment Tax Credit
• Section 45 Production Tax Credit (“PTC”) Extension
• Section 48 Investment Tax Credit (“ITC”) Extension
• New Section 45X Clean Hydrogen PTC
• New: Section 45CC Clean Fuel Production Credit
• Section 45Q Carbon Capture Credit (“45Q Credit”) Extension
• Section 45W Zero-Emission Nuclear Power PTC
• Section 48C Advanced Energy Project Credit Revision and Expansion
• Section 30C Alternative Fuel Refueling Property

This discussion around energy may be more apt to bring Senator Manchin back to the table above any other issue. After all, he is the Chairman of the Senate Energy and Natural Resources. Based on the current bill, Manchin was quoted on December 19^th regarding his energy concerns:

"If enacted, the bill will also risk the reliability of our electric grid and increase our dependence on foreign supply chains. The energy transition my colleagues seek is already well underway in the United States of America. In the last two years, as Chairman of the Senate Energy and Natural Resources Committee and with bipartisan support, we have invested billions of dollars into clean energy technologies so we can continue to lead the world in reducing emissions through innovation. But to do so at a rate that is faster than technology or the markets allow will have catastrophic consequences for the American people like we have seen in both Texas and California in the last two years."

However, Senator Manchin was urged by the United Mine Workers of America to reconsider his position on the BBB Act on December 20th. The group released a statement including: (https://umwa.org/news-media/press/umwa-statement-on-build-back-better-legislation/)

“The Build Back Better (BBB) legislation includes several items that we believe are important for our members and their communities – some of which are part of the UMWA’s Principles for Energy Transition we laid out last spring.

The bill includes language that will provide tax incentives to encourage manufacturers to build facilities in the coalfields that would employ thousands of coal miners who have lost their jobs. We support that and are ready to help supply those plants with a trained, professional workforce. But now the potential for those jobs is significantly threatened.

… we are disappointed that the bill will not pass. We urge Senator Manchin to revisit his opposition to this legislation and work with his colleagues to pass something that will help keep coal miners working, and have a meaningful impact on our members, their families, and their communities.”

While many were about to breathe a sigh of relief that the BBB Act was dead, and the change in federal tax law could be avoided, I wouldn’t exhale just yet. With midterm elections approaching, along with pressure from the United Mine Workers, Senator Manchin may find his way back to the negotiation table. The ability to point to rising inflation as a concern of passing the BBB Act may be dwindling as some economists and governmental officials are noting the peak of inflation is behind us. All that being said, the BBB Act most likely will require significant changes in order to receive the support of Senator Manchin and be trimmed down. 

Believe it or not, many tax professionals would not enjoy the passage of yet another major tax legislation to occur in 2022. Many are still dealing with the four bills (FFCRA, CARES Act, CAA of 2021, and ARP) passed over the last 22 months and are still receiving regulatory guidance on those tax law changes today. If the BBA Act is passed by March of 2022, that would mean five bills with significant tax law changes were passed over a 2-year period. For comparative purposes, prior to the TCJA being passed in December of 2017, there were no major tax legislative changes since 1986. 

Even worse, the BBB Act could be passed in March of 2022 during tax professional’s peak busy season. Based on the way the Act is written currently, the state and local income tax limitation is supposed to be retroactive to the 2021 tax year. That means a month before the 2021 individual income tax filing deadline, April 15, 2022, the 2021 tax law could have significant changes. No wonder tax professionals look tired. The one New Year’s resolution that should be completed for 2022 is to find a good tax professional. With all the tax law changes, regulatory guidance being issued surrounding the new tax law, potential increase in IRS funding, and an extreme backlog by the IRS and tax courts, 2022 and beyond could be rocky.