Latest news with #TaxNotesTalk
Forbes
5 days ago
- Business
- Forbes
One Big Beautiful Bill: Breaking Down The House Tax Package
UNITED STATES - DECEMBER 15: HOUSE CHAMBER—The Speaker's well on the House floor. (Photo by Scott ... More J. Ferrell/) In this episode of Tax Notes Talk, Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco discuss the final version of the House's reconciliation bill and what's next as the legislation heads to the Senate. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: reconcilable differences. On May 22 the House passed the One Big Beautiful Bill Act, a giant reconciliation bill that has been hotly debated over the past few months. Factional disagreements over the state and local tax deduction cap and energy credits, as well as the need to balance tax cuts with revenue raisers, made the road to a finished bill a rocky one. So how did those issues get resolved, and what's next for the bill as it goes to the Senate? You can find a link to our deep dive into the clean energy tax credit changes in the show notes. But joining me now to walk us through the bill as a whole are Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco. Cady, Katie, welcome back to the podcast. Cady Stanton: Thanks for having us. Katie Lobosco: Good to be here. David D. Stewart: So there was a bit of drama leading up to this bill. Could you walk us through what happened in the lead-up to the vote? Katie Lobosco: Sure. There was still a lot of moving parts a week out from this vote. House Speaker Mike Johnson would later look back and call it "a perilous time with a number of pivotal moments." So one of the first signs of some trouble came when it was time for the House Budget Committee, which combines different parts of the bill together. They failed to advance the legislation. Now, this was the Friday before the vote. So, initially, four members on that committee — members who are part of the staunchly conservative House Freedom Caucus — they voted against advancing this bill. So they took the weekend to negotiate a little bit more, and that committee came back on Sunday at 10 p.m. to revote, and they were able to advance the bill at that point. Now, Monday came, and Johnson tells reporters, "We're still building consensus; there's still some sticking points that have yet to be decided." These were things like the SALT cap and cuts to the Medicaid program. But Tuesday comes, and there's a little bit of a shift on the Hill. President Trump comes to speak to the Republican caucus, and several members come out of that meeting saying they think the president moved the needle and we're getting closer to where we need to be. House leaders start singing a different tune, and the leaders say the time for talk is over. That comes partly true. On Wednesday — early Wednesday, 1 a.m. — the Rules Committee convenes. Now, they're the last committee to have to vote on the bill before it heads to the floor, but we still don't have a final bill text yet. They're still hammering out some of these details, and some of the holdouts — again from the House Freedom Caucus — they're still concerned about the deficit impact of the bill. They go and meet with the White House, and they return, and House Speaker Mike Johnson says, "We're going to move forward." WASHINGTON, DC - MARCH 20: Speaker of the House Mike Johnson (R-LA) speaks during a news conference ... More following a closed-door caucus meeting at the U.S. Capitol Visitors Center on March 20, 2024 in Washington, DC. Congressional leaders announced Tuesday they had reached a deal on a FY2024 spending package that includes budgets for about three-quarters of all federal discretionary spending, including Defense, Homeland Security, Labor-Health and Human Services, and other bills. Without a deal, the federal government would be facing a partial shutdown at midnight on Friday. (Photo by) We're about 5 p.m. now; we still don't have a bill text. The Rules Committee is still meeting, and we finally get this final bill, what we call the manager's amendment, that makes changes to the bill around 9 p.m. Rules advances it out of committee by midnight, and eventually the final vote happens just before 7 a.m. David D. Stewart: So tell me about this manager's amendment. What sort of changes were being made by the Rules Committee? Cady Stanton: Yeah, it's really important to point out that manager's amendment because, as Katie was mentioning, there were quite a few changes in the 11th hour to this bill. So some context on timeline here, since it all came together quite quickly. The original full bill text was released May 12, ahead of the House Ways and Means Committee markup, then amended slightly through the Budget Committee May 19, and finally that manager's amendment with the biggest swath of changes was released late May 21, less than 12 hours before the final vote. Those changes included a further increase on the SALT cap — even higher than the $30,000 cap set in the original version of the bill. It also included accelerated phaseouts for clean energy credits from the Inflation Reduction Act, with carveouts for nuclear energy projects and changes to transferability rules. There were also adjustments to FDII, GILTI, and BEAT calculations. That manager's amendment also undid a repeal originally in the bill on the excise tax for indoor tanning services, which is very specific. And there were also changes to itemized deduction limitations for those with income in the highest tax bracket. The point of these, as Katie discussed, was largely to convince holdouts. There were also some changes to Medicaid work requirements to please the House Freedom Caucus, and SALT members in the end were pretty happy with the SALT cap in the bill, and they called it a victory for SALT on social media. David D. Stewart: So how did the votes shake out ultimately? Katie Lobosco: In the end, the bill passed the house 215 to 214. So there were two Republicans that voted no — Thomas Massey of Kentucky and Warren Davidson of Ohio — and they have concerns about how much this bill will add to the deficit. I'll note that House Freedom Caucus Chair Andy Harris, he voted present. He wanted to move the bill along in the process, but he said, "There is still a lot of work to be done in deficit reduction and ending waste, fraud, and abuse in the Medicaid program." And then there were two Republicans that actually missed the vote that raised some eyebrows, because they were David Schweikert of Arizona and Andrew Garbarino of New York, and they were both very involved in getting this legislation together. Schweikert had just missed the vote; he showed up at the last second and didn't get his vote in. And Garbarino apparently fell asleep, according to Mike Johnson. Again, this vote was just before 7 a.m. in the morning. They had been going all night, and he didn't get to the floor in time to vote. David D. Stewart: So let's turn to the actual content of the bill. What sort of tax cuts are we seeing in the legislation heading to the Senate? Katie Lobosco: So the bill would extend most of the individual and estate provisions of the Tax Cuts and Jobs Act, which are set to expire at the end of this year. So it makes permanent lower tax rates for individuals and makes the expiring standard deduction permanent and temporarily boosted by $1,000 for individuals and $2,000 for joint filers through 2028. It permanently extends the child tax credit at $2,000, with a $500 boost through 2028, and it increases the estate and gift tax exclusion from $14 to $15 million for individuals and from $28 to $30 million for couples in 2026 and indexes that amount to inflation thereafter. There's also some reforms to business taxes: The bill would permanently increase the passthrough deduction from 20 to 23 percent, and it also would slightly adjust and make permanent three international business provisions. One is the amount of foreign-derived intangible income, known as FDII, that a domestic corporation can deduct. There's the GILTI, which is the amount of a corporation's global intangible low-taxed income deduction, and BEAT, the base erosion and antiabuse tax. David D. Stewart: So you mentioned that there was an increase in the SALT cap. What happened with the SALT cap and these energy credits? Cady Stanton: Absolutely. SALT was definitely the producer of the most drama over the past few weeks, particularly in the tax realm. For context, the SALT cap is currently set at $10,000, and that was set by the TCJA, but that provision is set to expire at the end of 2025. So after a lot of late-night meetings and pretty loud pushes from Republican members of the SALT Caucus, the bill in the end included an increase on the SALT cap to $40,000. It also included a phaseout for that cap, starting at people who make income over $500,000, and there's also a slight increase both in that cap and that phaseout every year until 2033. And after 2033 it remains what it was for 2033, so it doesn't go back down. Now, this high number was considered a pretty big win for the SALT Caucus, but it's important to note that there really aren't that many SALT allies in the Senate, particularly among Republicans. So it would be pretty surprising if this stays as-is after the Senate is done with the bill. Now, turning to the IRA credits. When we talk about IRA, we're obviously referencing the Inflation Reduction Act, a bill that was passed by Democrats in 2022 and included a variety of clean energy tax credits. At the time the bill was passed, there was a certain cost estimate for these credits, but that estimate has gone up significantly, according to estimates from the Joint Committee on Taxation. As a result, the credits have been the target of Republican ire ever since, especially after they achieved the trifecta of the White House, Senate, and House control in November. Now, the reconciliation bill includes a mix of accelerated phaseouts and repeals of those credits, including the electric vehicle credits. The wording in the bill would restrict Chinese involvement in projects under this "foreign entities of concern" clause, and the reconciliation bill also specifically targets wind and solar power projects with restrictions. There are specific carveouts for nuclear projects that were included as a way to appease some moderates concerned about these cuts. And the last-minute changes to the bill specifically targeted restrictions on the clean electricity investment and production tax credits. BEIJING - OCTOBER 02: Chinas national flag is flown during a rock-and-roll festival to mark Chinese ... More National Day on October 2, 2005 in Beijing, China. Various activities are being held in China to mark the National Day. (Photo by) David D. Stewart: Now, what became of President Trump's campaign promises? Things like no tax on tips, no tax on social security? Katie Lobosco: So a lot of his priorities did get in the bill, but they got in as temporary measures, so they are only implemented for a certain amount of time. Why would lawmakers do this? That would reduce the overall cost over the 10-year budget window, which is how it's usually estimated. So, for Trump's priorities, the bill does make tip and overtime income deductible through 2028. Now, the bill doesn't touch Social Security specifically — that might run afoul of certain rules in the Senate — but it does increase the standard deduction for seniors by $4,000 through 2028. It also makes auto interest deductible for owners of cars made in the U.S. through 2028. The bill also creates what it calls Trump Accounts. These would be tax-advantaged savings accounts, and the government would contribute $1,000 for children born between 2025 and 2028, and it would also temporarily restore a trio of business tax cuts. This includes immediate expensing for domestic research and development through 2029, 100 percent bonus depreciation also through 2029, and 100 percent expensing for qualifying structures for which construction begins before the end of 2028 and the placed-in-service date occurs before the end of 2032. David D. Stewart: Now, you mentioned that some lawmakers were having trouble with the price of this bill. So what did it come out to in the end? What sort of costs are we expecting from this bill? Katie Lobosco: So the key takeaway here is that the bill overall will increase projected deficits by nearly $3 trillion over a 10-year period. Now, some Republicans are claiming it won't add to deficits because the changes will spur so much economic growth, but that's just not likely to be the case, according to a number of independent analysts. Since there were last-minute changes in the bill, we don't have a full official score from the Congressional Budget Office at this time, but the Penn-Wharton budget model has done its own estimates, and they find that the bill as written would increase deficits by $2.8 trillion over 10 years. The tax provisions alone would cost $4.3 trillion over 10 years. Most of that is due to the extensions of the TCJA's individual and estate tax provisions. The bill also boosts spending on defense and border security. The House did find more than $1.5 trillion in savings, mostly from changes to Medicaid, food assistance programs, and changes to federal student loans, but that only partially offsets the cost. David D. Stewart: So what are we expecting to happen next when this bill gets to the Senate? Cady Stanton: That's a really great question in terms of looking ahead. So passage through the House was a huge win for Republicans, and particularly for House Speaker Mike Johnson, who a lot of people honestly underestimated. He proved he can whip votes for passage within a very thin margin for his conference. But there's more tough work ahead for Republicans in the Senate, where members haven't been shy to share their laundry list of desired tweaks. Top of the list for many members, as they told Katie and I, is more permanency on provisions that the House bill makes temporary, including the three big promises from President Trump on the campaign trail: no tax on tips, no tax on overtime, and a bonus deduction for seniors, all of which currently end in 2029, as Katie mentioned. And that would be at the end of President Trump's presidency, as well. There's also a push to make permanent that trio of business tax cuts from the TCJA that Katie mentioned, and those had already started to expire or phase out, and this bill would restore them, and senators would really want to make that restoration permanent. As I said before, I also wouldn't be surprised to see changes to the SALT cap, as well as a fresh look at the IRA credit changes in the bill. A few senators have already mentioned that they're pretty worried about the impacts on their districts from repealing and phasing out these credits, where projects have been really bolstered by these tax credits. Finally, jumping back to what Katie was saying about the cost, the deficit impact of the bill will likely take a pretty large role in conversations over the next few weeks, as it did in the House with the deficit hawks. The Senate is going to use this current-policy baseline we've talked about before, which gives them some more flexibility to their scoring on the legislation, but some deficit hawks — specifically Senators Rand Paul and Ron Johnson — have already said that they want to see deficit reduction be top of mind in talks of changes in the coming weeks. So expect that to be a big part of the conversation. David D. Stewart: What are we expecting as far as the timeline? When should we expect movement to happen in the Senate? Cady Stanton: It's really tough to read exactly when the next step might be taken in the Senate, but there are a couple of important dates to pay attention to to see how things progress. The Senate won't get its chance to leave its mark on the bill until it returns from recess June 2, but once they return, senators will get to work on their changes to the bill ahead of this July 4 deadline. That's been suggested by Treasury Secretary Scott Bessent and reiterated by Republican leaders in recent weeks. There's also the chance that after changing the bill in the Senate, the House wants to change it again, which would send it back to the Senate a second time and obviously would extend the timeline, as well. WASHINGTON, DC - MARCH 13: Treasury Secretary Scott Bessent speaks to reporters outside the West ... More Wing after doing a television interview on the North Lawn of the White House on March 13, 2025 in Washington, DC. Bessent stopped to speak to reporters briefly and took a question on tariffs and voiced his concerns about a potential government shutdown. (Photo by) Like the Memorial Day deadline that the House set for itself, this July 4 deadline is largely self-imposed, but members do have a hard deadline for this version of the bill because it includes a debt limit extension. The "X date" for the debt limit could come in early August, so Treasury Secretary Bessent has encouraged Congress to get that addressed by mid-July, and it has to be done by the end of July since the House and the Senate take the entire month of August off. Now, it's important to note that they could always pull the debt limit out of the bill and work on it separately, but that would definitely disrupt the balance of the legislation and create some problems that would require Republicans to go back to the drawing board on the bill and on reconciliation in general. Another big factor on the timing of when this moves to the Senate is how Republicans in that chamber choose to make the changes they want. I wrote a pretty in-the-weeds story recently on the procedural options that senators have for these changes, but what it really comes down to is how much of an opportunity members will push for to be heard on the changes they want. Senate Majority Leader John Thune has said pretty openly that he wants to return to regular order in the Senate, which would draw out a process for amendments on the bill that would really stretch out work and create issues with the thin majorities that Senate Republicans have on their committees. But that process might also just be necessary, given how many people want changes, not just to the tax title of the bill, but also to areas like these SNAP and Medicaid program changes. Now, senators and their staff are likely working on filling out which of those choices they want to move forward with during recess, so it's worth keeping an eye out for which method they decide upon. David D. Stewart: Well, definitely sounds like they're going to be keeping you two busy for the next few months. Thank you for being here. Cady Stanton: Thanks, Dave. Katie Lobosco: Thank you.
Forbes
20-05-2025
- Business
- Forbes
Trump's Tariff And Tax Policy 2.0
BOZEMAN, MONTANA - AUGUST 09: Republican presidential nominee, former U.S. President Donald Trump ... More walks toward the stage to speak at a rally at the Brick Breeden Fieldhouse at Montana State University on August 9, 2024 in Bozeman, Montana. (Photo by) In this episode of Tax Notes Talk, four policy experts discuss the Trump administration's actions on tariffs, their economic impacts, and their effects on tax policy during a live recording from the American Bar Association Section of Taxation May meeting. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: live from D.C., it's Tax Notes Talk. We have something a bit different for you this week. On Friday, May 9, I went down to the ABA Tax Section meeting and recorded a live podcast. I was joined by four guests — Ernie Tedeschi, Erica York, Ryan Finley, and Kyle Pomerleau — who you'll hear more about in just a minute. We discussed the Trump administration's tariff policies, their impact, and what to keep an eye on. I hope you enjoy the interview as much as I did recording it. And now, let's go to that interview. Hello, everyone, I'm David Stewart. I am editor in chief of Tax Notes Today International, as well as the host of the podcast Tax Notes Talk. And welcome to a live recording of the Tax Notes Talk podcast. As the Trump administration continues to expand its economic plan, tariffs have proven to be a cornerstone. Back in February, President Trump announced a slate of tariffs he intended to apply to China, Mexico, and Canada. Since that announcement, we've seen additional tariffs levied on all countries trading with the U.S. However, the implementation of those tariffs has been turbulent, and the economic response has been volatility. So what effects are the tariffs having here in the U.S. and abroad, and how should the tax community and beyond prepare? To explore those questions, I have these four panelists with me. On my right is Ernie Tedeschi. He's the former White House economic adviser and the current director of economics at The Budget Lab at Yale. Erica York, vice president of federal tax policy at the Tax Foundation. Ryan Finley, Tax Notes contributing editor and our resident transfer pricing expert. And Kyle Pomerleau, senior fellow at the American Enterprise Institute. So to start things off, I think we should get a baseline of where things stand. And in general, in podcasts, you're not supposed to date the show. You're not supposed to say when you recorded it. But with this subject matter, I'm going to say we're recording this on May 9 at 11:33 AM. And with that, Erica, why don't you start us off? Where do things stand now? Erica York: The U.S. is currently imposing tariffs that affect about 70 percent of goods imports. That includes two separate IEEPA [International Emergency Economic Powers Act] rounds of tariffs. The first round is the border security, fentanyl-related tariffs applying to all imports from China at a rate of 20 percent and applying to non-USMCA [United States-Mexico-Canada Agreement] trade with Canada and Mexico at 25 percent, except for 10 percent on energy and potash. The second round of IEEPA tariffs are the so-called reciprocal tariffs. Those are, of course, on pause for 90 days as far as the higher rates on about 60 different trading partners go. But the 10 percent global tariff is in effect with some exemptions. Those exemptions include the section 232 tariffs, so any good that faces a section 232 tariff doesn't face the 10 percent global tariff. There are also exceptions for energy-related goods and electronics. The way that I think about that tariff in particular is that it seems like the 10 percent global tariff is the one that's here to stay and the negotiations are over potential increases in those tariffs that would come online in July, as well as maybe some room for negotiation on the 232s. The 232s apply to steel and aluminum and a very expansive list of derivative goods that contain steel and aluminum. So you can think of like a tennis racket; the aluminum in the tennis racket would face the 232 tariff. So there's some confusion over just how expansive this list is because there is no database of how much aluminum is in a tennis racket. And then you have 232s on autos and auto parts. There are exclusions for U.S. content of USMCA goods within those tariffs. And then we have pending 232 investigations on a variety of other sectoral goods like pharmaceuticals, semiconductors, copper, lumber, trucks, and maybe more to come. So a big slate of tariffs, a lot of confusion over how they stack. At first, the Trump administration said they would, and then as recently as a couple weeks ago, they issued a new executive order clarifying that there's actually a hierarchy of how those apply. The auto tariffs apply first, then the IEEPA tariffs on Canada and Mexico, and then the steel and aluminum tariffs. So there's not a triple whammy for goods that would have been hit by all three of those. As we saw just this morning, there are lots of changes pending. The president posted that maybe the rate on China, instead of 125 percent under the IEEPA trade deficit or reciprocal tariffs, would be 80 percent, but there's no clarity yet on whether that is taking effect. So uncertainty is the name of the game. There's no real clear idea on what's durable, what's not, what's up for negotiation, what's not. And there's not really a clear purpose at play either. Is it for revenue? Is it for negotiation? Is it for protection? We just don't know yet. David D. Stewart: That brings me to that question is, what can we assume the purpose of these are, given the information that we've heard from the government so far? Kyle? Kyle Pomerleau: Yeah, so I think there's been a lot of confusion over what the purpose of these policies are. In fact, I think that there are a lot of narratives out there that are just flat wrong in trying to describe what is going on with the administration and trade policy. I think the short and easy answer is that for a very long time, decades in fact, Donald Trump has been a big trade skeptic, and that he is pursuing these tariffs because he thinks trade is bad and is a loss for the U.S. economy, and that tariffs, by reducing trade, will be beneficial. Now, lots of reasons that is wrong, but I think that is the starting point in understanding why these are happen. I think the more sophisticated narratives we've seen coming from people like his CEA Chair Steve Miran or even the Treasury secretary, that these tariffs are about some sort of currency deal or about raising revenue for tax cuts. I think those are some more after-the-fact justifications for the tariffs. I think you really just need to go back to what Trump says about tariffs in trade to understand what's going on here. Because the starting point is just this general distrust of trade and no real strategy; that's why we get a lot of these tariffs that seem contradictory and don't make sense in the context of some of these more sophisticated justifications. If you thought the tariffs were going to be a source of revenue to pay for or partially offset the Tax Cuts and Jobs Act, you wouldn't see other advisers in the Trump administration talking about how these are negotiating tools meant to reduce trade barriers overall. You're not raising much revenue if the tariffs are just going to go away. Book Tax Cuts and Jobs Act TCJA next to folder. And if you take Steve Miran's words seriously, that this is about devaluing the dollar in order to eventually reduce the trade deficit, the trade policy doesn't make sense or the general fiscal policy of the Trump administration doesn't make sense either. Tariffs by themselves cause a dollar appreciation, not a depreciation, and a lot of the fiscal policy that the Trump administration is pursuing would also cause an appreciation of the U.S. dollar, not a devaluation of the U.S. David D. Stewart: Is there any advantage to reducing trade deficits? What result could you expect from it? Kyle Pomerleau: So I think that this gets the causation backwards. It's not the trade deficit between the United States and the rest of the world that matters, per se. It's underneath that, what is causing that — that's the thing that might matter. And it's not necessarily the case that it's bad. In fact, for many reasons, the trade deficit of the United States is a good thing. The trade deficit, what it's coming from, is just a mismatch between the amount of spending in the United States and the amount of income. The United States as a whole earns some trillion dollars of income. It can either spend it on current consumption goods or investment goods. And if the United States has more investment opportunities than it has saving, we need to borrow from the rest of the world to finance that investment. And that borrowing from the rest of the world shows up mechanically in the national accounts as a trade deficit. Now, is that borrowing necessarily good or bad? Well, it's going to depend. So if we see the trade deficit go up, but that's because investment opportunities are better in the United States than they are in the rest of the world, well, that's a good thing. We should look at the trade deficit as a positive thing. But if the federal government decides to borrow a trillion more dollars to finance current consumption, well, that's going to require either paying back in the future or an increase in taxes. And the mechanical effect of borrowing from the rest of the world to finance that present consumption is an increase in the trade deficit, and maybe we wouldn't think that is as good as the other reason for the increased trade deficit. Lawmakers in general should not be primarily focused on the trade deficit. They should actually just be focused on the real underlying economy and economic performance in general and the performance of the federal budget. David D. Stewart: So one of the justifications was this idea that we'd bring in a lot of revenue. Ernie, what sort of revenue can we expect from tariffs? Is it enough to justify this external revenue agency idea? Ernie Tedeschi: So when we've looked at the tariffs that have been applied in 2025 — so far, we project that if they stayed in force in perpetuity, so over 10 years, and assuming that the "pause" stayed in effect beyond the 90 days, we'd expect them to raise $2.4 trillion over 10 years. So that assumes that imports would decline because very few people in the end would end up wanting to pay 145 percent tariffs on Chinese imports. They would find substitutes. It also assumes that because of income declines in the United States, net, the IRS is going to be raising less money in payroll and income taxes as a result of these tariffs. So at the end of the day, conventionally scored, you raise $2.4 trillion and then you probably even raise less than that because there are dynamic effects, because the economy is weaker in the United States. Using Congressional Budget Office rules of thumb, we project that you would actually raise even $600 billion less than that over 10 years. On the question of whether it's worth it, I mean, putting the question slightly differently, this is all being debated in the context of extending the Tax Cuts and Jobs Act. So to put that in perspective, if we were to extend the Tax Cuts and Jobs Act for 10 years — and we won't do that for lots of mechanical legislative reasons — but if we were to do that, that would cost about $5 trillion over 10 years. So these tariffs cover about half the cost of the TCJA. OK, so maybe you can get four or five years of TCJA extension with the revenue that you get from the tariff increases, but then you have to start thinking about some mismatches here. First of all, there's a mismatch in efficiency. Tariffs are just a supremely inefficient way of raising revenue. You are deteriorating your base in a way that you do not with other ways of raising revenue. As you increase tariffs, you are by definition decreasing the amount of imports in the United States. It's just funny that in some ways the two goals of the administration here — decreasing the amount of imports in the United States, reducing the trade deficit and raising revenue — are at direct odds with one another because the more successful tariffs are at one, the less successful by definition they are at the other. The second thing is that there's a mismatch in distribution here, especially in the short run. So the Tax Cuts and Jobs Act, I don't want to misrepresent it, the individual provisions do touch everyone and they reduce taxes for everyone, but they are skewed more toward the top than they are at the bottom. Whereas in the short run, tariffs are the reverse. Tariffs bite more for lower-income families than they do for upper-income families. That evens out more over the long run as tariffs start bleeding into capital income, so it's more even distribution. But especially in 2026 in the short run, there's a mismatch there. So it's not a trade-off that I think a lot of Americans would want to make. Look, what I told someone the other day is that this is almost like a Twilight Zone monkey's paw because I said early on in this debate, I'm like, "Boy, I wish that revenues were on the table in the TCJA debate," and this is the worst possible way that my wish could come true. I stand by that. I'm glad that at least the "Overton window" has been expanded and we are talking about raising revenues as a way of deficit reduction. That's great. I wish that we were doing so in a more efficient way. I think that there are lots of ways of doing that in a business-friendly way, in a way that I think even the Republican side of the aisle would find at least tolerable. But there are much more efficient ways of doing that than tariffs. David D. Stewart: How do we expect this all to play out with the upcoming tax bill? Are we expecting to see these expected tariff revenues create a more ambitious bill, or are we expecting to see other changes in that area? Erica York: So they won't be officially included. A lot of the thinking was, well, they're not going to be officially scored because Congress isn't legislating them, but maybe they'll be a rhetorical pay-for and lawmakers will say, "We're going to increase the deficit with this piece of legislation by $3 trillion, but the administration is going to raise $3 trillion through tariffs. So on a net basis, we're fine." We haven't really been seeing much talk of that from Congress. And my suspicion is that maybe they want to distance themselves so if there is a lot of blowback and this does lead to a recession or big problems in the economy, that the blame doesn't fall squarely on Congress for that. WASHINGTON, DC - JANUARY 03: U.S. Representatives of the 119th Congress are sworn in during the ... More first day of session in the House Chamber of the U.S. Capitol Building on January 03, 2025 in Washington, DC. Rep. Mike Johnson (R-LA) retained his Speakership in the face of opposition within his own party as the 119th Congress holds its first session to vote for a new Speaker of the House. (Photo by) And instead, we've been seeing Congress talk a lot about using dynamics or increased economic growth as their rhetorical pay-for for the deficit increase. Tariffs still create a problem for that though. Because if you are dragging down growth and offsetting any of the economic benefit of the potential tax package, then there are no dynamic revenues to gain. And that's what our modeling at Tax Foundation shows. We estimate the tariffs imposed so far and the retaliation announced and imposed so far would reduce long-run GDP by about 1 percent. We estimate that full TCJA permanence, including the business provisions like bonus depreciation and R&D expensing, which really drive the economic result there, would boost long-run GDP by 1.1 percent. So you've about wiped out the benefit with the tariffs so far. There are potentially more tariffs coming online. So I think it complicates the debate in Congress. There's a chance where correlation is obviously not causation, but if Congress passes a tax bill and then right after that we go into a recession, that complicates the debate around the tax bill. The finger could get pointed at Congress and "look what you did on taxes" even though it would be caused by the tariffs. So I think there's lots of issues, but I haven't seen the tariff revenues playing as much into the way Congress is talking about the tax bill as a lot of people thought we might at the beginning of the year. Kyle Pomerleau: And just to add to that, and I also don't think tariffs are making them more aggressive on the income tax side, I think what they want to do is set with a few things at the margin, say the Trump proposals, tips, overtime — adding those. But I think that they have always felt that they wanted to offset the costs of those. But the core of it — extending the individual provisions, extending many of the business provisions — I think that's pretty much set and they're moving from that. If they're not using tariffs to justify borrowing $4.8 trillion over a decade, it's going to be something else. So it's going to be economic growth, or it's going to be other sources of revenue that they think they're going to get, or it's going to be bashing the scorekeepers, whatever strategy they need to take here in order to convince the members who are ultimately voting on the package that actually this is not going to increase the deficit. So if it's not one thing, it's another. David D. Stewart: Well, all of this is happening with the background of efforts on an international level to reach a consensus on taxation of multinationals. Things have been moving along at a pretty brisk pace. What effect is this new U.S. approach going to have on that international consensus? Ryan Finley: I'm so glad you asked. So I'm going to go off on a bit of a tangent. I generally write about and talk about transfer pricing. Even within international tax, it's very much its own kind of self-contained universe. It will have its own unique interplay with a really high tariff environment. Transfer pricing, you're pricing transactions between commonly controlled entities, because the price they charge each other doesn't mean anything because they're dealing with themselves. So they could set that price wherever they want for tax reasons, and you could shift income by doing so. You need rules that give that an appropriate price and thereby get income where it ought to be. Clear enough. But it turns out that, and I saw there's a KPMG report, put the percentage of global cross-border trade of which related-party transactions accounts for is like 60 to 80 percent. I've seen lower estimates to that too, but there's enormous overlap in the transactions that are going to be subject to tariffs and transactions that are going to fall within the transfer pricing regime. And it's also interesting because there are deeper conceptual parallels between customs valuation and transfer pricing that — they used to draw more interest I'd say and maybe more organized advocacy efforts maybe before BEPS. Kinda died down after that. But to some extent, if you're importing a physical good and you have a U.S. distributor buying from — just say its parent company as a foreign manufacturer — you have a transaction that is going to be subject to transfer pricing rules. And unless you're in one of these exemptions, at least a 10 percent tariff. These transactions are going to fall squarely within both realms. It's interesting how I think the two, both of them, want you to get the price right in a sense, but what they think the right price is is a little bit different once you dig beneath the surface. Normally maybe that would be a manageable level of discrepancy, but the high tariffs raising the stakes to such a great extent, this long-standing, but usually tolerable, friction between customs valuation and transfer pricing might become a lot more significant. So it's interesting. This subject was never interesting to me at all until months ago when the tariffs went up because for exactly these reasons. In the broader tax planning perspective, most of the time it made more sense to focus on the transfer pricing and where you're going to be subject to corporate income tax than to overly worry about your dutyable value when you import something to the U.S. for customs purposes. Obviously depending on the company, on the specifics of the arrangement, the tax structure they have, the margins they earn, you could very easily have a situation where the tariff exposure could considerably exceed the income tax exposure through transfer pricing. So it's interesting. This has the potential to overturn long-standing patterns. But just a bit on how these two — it's sort of one of those dangerous things where like baseball and cricket, you think they're kind of the same. So you think you kind of understand cricket and then you don't at all. It is sort of like that where there's this basic conceptual link. But once you actually get into how the methods work, you start to see why there's no reason to expect consistent alignment between the customs value of an imported good and the arm's length price for that good (in transfer pricing parlance). There's very little reason to expect discrepancies between those two prices or values to be the exception and not the rule. So some background on that. I don't want to get too much into the technical guts of the customs valuation rules, but basically, if anyone's familiar with the 482 regs and the methods and the best method rule, basically the analysis you have to use to choose a method and apply method for customs purposes, it looks like the 1968 version of the section 482 regs. It's basically what a lot of taxpayers wish the 482 regs said. Very much the emphasis is on applying this method, the transactional value method, which is pretty close to what you'd call the comparable and controlled price method in a transfer pricing context. In that situation, you would not expect to have any major, I don't think, deviations between the results. But in this context, you have to apply that method to determine the dutyable value or price, whatever, for the imported article. And apparently, the preference is so strong that it accounts for 90 to 95 percent of import transactions that fall within this ambit of imports that are between related parties that are both subject to tariffs and the 482 regs and the transfer pricing rules. And so you see that methodological correspondence. The whole idea in both cases is — they word it differently, but it's to try to find a price for a transaction that didn't really happen. It's a legal fiction that there ever was a transaction because you're moving it from one part of a broader commonly owned business entity to the other. So in terms of that method, and then as you get into the methods that I suppose account for the other 5 to 10 percent of custom valuation price determinations, they pretty much correspond to some other transfer pricing methods too. The one looks a bit like the resale price method. One looks a bit like the cost-plus method. Where depending on whether you use operating profit, it would be more of a version of the CPM. The 482 regs have this — I think they call it a fallback method. It's basically like an unspecified method if nothing else works. I think that the takeaways are that there's a much stronger force to corral you into the transaction value, the CUT method equivalent, pricing the transaction in accordance with what would've been charged for the same transaction had that common ownership relationship not been there. David D. Stewart: Given these different spheres, do tax people have to become tariff people? Is there need for an interdisciplinary understanding in order to figure out how best to structure transactions? Ryan Finley: Absolutely. Like I was saying before, I remember getting moved off a transfer pricing project because there was an issue where this company was importing goods and they just could not get the customs valuation to reconcile with the price they determined applying the CPM. And that's routine, and there are a bunch of methodological reasons for that. But yeah, I think you're never going to make yourself an expert in another thing, but you probably do have to know the things to definitely not do, the key traps. You have to be aware that just because this transaction value method is what you're going to end up using for customs purposes, that really doesn't mean much in terms of what you're going to have to use for transfer pricing purposes, which makes the whole alignment and harmonization effort, which like I said has been going on for a while and I think it'll intensify, it makes that a lot harder. I think there are limits to how far you can get with that. But it's just interesting how these are two parallel systems of methods that look the same, are supposed to do the same, but if you dig beneath them, there are plenty of reasons to often get inconsistent results when you apply one and you apply the other. And that will be a pain because taxpayers, one of the things they get dinged on in a transfer pricing context is a major discrepancy between customs valuations and the prices determined for transfer pricing purposes. In fact, there's a code section specifically says that the price for tax purposes cannot exceed — basically, the deductible cost cannot exceed the customs value for that same item. So there's a uncomfortable interplay between the two, and I think the problems that that generates will only intensify in this environment. David D. Stewart: Pulling back to a larger issue out here, one of the main policies that the U.S. has been pushing internationally for the last several years has been trying to tamp down on digital services taxes around the world. Now that we've seen all the tariff policy, is there anything left? Is there any ammunition left to deal with that other issue? Erica York: I think they can always do more tariffs. We saw on the first Trump administration section 301 investigations into DSTs with the potential of tariffs going into place in retaliation to those. I think that's certainly a possibility down the line if that's not something that gets negotiated in this 90-day period. In the U.S.-U.K. outline of a deal that might be coming that was announced this week, there wasn't anything really written about digital trade, digital services taxes. But in the talk around it, they say that's something we'll continue exploring as we work to actually reach this agreement. Very detailed United Kingdom map - easy to edit. So I think that's definitely being discussed in relation to the IEEPA tariffs, which are into anything deemed unfair, which obviously would in the Trump administration's purview cover DSTs. So I think they're included in the negotiations there with the potential for tariff increases if agreements aren't reached. I think you could also see 301 investigations pop up again or be renewed into DSTs. Ryan Finley: If I could just add something on that, being someone focused on the international tax nontariff area, the U.S. has spent so much time flexing its muscles, making every moral argument, many of which are sound, to deter countries from adopting DSTs and to get the ones that have them to repeal them. And it's just funny. Now you're going to have the people who just did this tariff, this curious tariff policy, are going to lecture you about the harm of the DST. I suspect that will be an interesting dynamic going forward. Erica York: Well, that's one of the really unfortunate things about the way the Trump administration has gone on for tariffs because there are things that are discriminatory against the U.S. But then we have these so-called reciprocal tariffs that are based not on any actual explicit discrimination, but trade balances. I'm talking about retaliating against value-added taxes, all these things that are not actually discriminatory. So it distracts from the real issues that exist and the real progress that could have been made on them. Ernie Tedeschi: And just to add to something Erica said, this is not a DST-specific comment, but the reason why we might expect more work coming from the Trump administration in terms of a DST or its services tariffs in general. Up until last week, most of the tariffs that have been announced were pretty straightforward goods taxes that had a very clear nexus with imports coming in at different ports. And then the second that he raised the idea of a movies tax — that is a Pandora's box or that's a threshold into something very different categorically from what he talked about before now. Who knows if specifically that film tax would actually work out? His Treasury Department and his Commerce Department followed up, and it was very clear that the idea had caught them by surprise. I'm not suggesting that you bet on that specific policy, but the president raised the idea; his staff are going to work on it. And that's going to open up a whole line of thinking around services tariffs in general and DSTs probably specifically. David D. Stewart: Is there any way that a policy that can work? Ernie Tedeschi: So we were talking about it internally. I mean, it's not even clear what the import is in the case of movies. There are policies you could implement that I wouldn't call a tariff that would be like a tax on profits, et cetera. But in the case of a movie, what is being imported? A single reel that you are then duplicating for distribution when it comes to the — it's not clear what the actual — it is a service, right? It's not really a good. The way you conceptualize it is totally different. The one service that actually is easier to think of as a tariff are airline fares. That is a service. When there's a foreign-owned airline and you buy an airplane ticket from British Airways, that is a service import in the United States. But that's a pretty straightforward thing to tariff as a line item on what you pay. I'm actually shocked that that's not the first service that they tariffed in the United States. Once you go from that though, it gets just much more complicated to think about. Kyle Pomerleau: Well, yeah, you look at the Venn diagram, it starts looking a lot more like just general income taxation and capital taxation. You go from goods to services; now you're talking about importation of services. That's the right to use intellectual property. And you've just gone full circle back to figuring out things like pillar 2 or pillar 1 again. Import taxes on movies may look in some way like some sort of withholding tax on royalties, for example. But then you're back to talking about things we've been debating for years and years. It's also not clear that this is something that Trump can do with the existing authority that he has. We're not even at the point of "Is this actually a real thing?" Probably not. David D. Stewart: I'm just imagining the difficulty of determining the country of origin of a James Bond movie. OK, because we're talking about authority here, there have been a couple of legal challenges to the president's authority in the tariff realm. So what are we seeing there, and is there any chance that this unilateral authority that has been asserted will get dialed back? Erica York: To me, just looking at IEEPA, the statute, it doesn't mention the word "tariff" in it at all, and it's about a discrete national emergency. It's not about an issue that has been ongoing. And if you look at the most recent reciprocal IEEPA order, it's talking about the trade deficit. We've had a trade deficit since I think 1976. So it's not like this is an urgent thing that just popped up. This has existed for decades. And so I think certainly there is room to challenge that does have some legs to it. Now, whether the court is willing to rule on that against the president and step into what is a national emergency, what isn't, I don't have a clear idea on that. But it certainly does seem well outside the bounds of that authority to impose a global tariff for revenue purposes so-called in relation to the trade deficit. Kyle Pomerleau: Speaking more about the politics than the actual legal argument, saying I think in the short term, the only institution that can really stop this are the courts. I think it takes a little bit more time before Congress will be willing to step in. Because I think right now Congress views going after the tariff authority as a distraction from their central goal, which is passing the reconciliation bill. But if things go poorly in the real economy, so we go beyond just the market and the bond market being upset about this and goes into the real economy and people start losing their jobs and real incomes start declining, that's when constituents start bugging their congressmen saying, "Well, OK, maybe this isn't great," and that's when they might start entertaining this. But that has a time lag. Right now I don't think that there's much chance that we see these small little debates over pulling back some authority actually going anywhere. Ernie Tedeschi: Right. And I would add, remember that pulling back IEEPA authority requires a law from Congress, which President Trump can then veto. So really you need two-thirds in both houses to be able to overcome that threshold. And you even have divisions in the Democratic Party right now over how they feel about tariffs. And I completely agree with Kyle. You need to see real bite in the economy right now. There's a lot of anxiety and vibes about it. We are only just beginning now to see actual, in real prices and real data direct, effects from tariffs. And so I agree that in terms of actual voter impact, political impact, we'd have to wait a little bit longer if that happens. Erica York: And I think even that is an if, and I know that the tariffs this time around are much larger than the tariffs in Trump's first term, but if you look at the specific constituencies hurt like the [agriculture] sector, if you look at congressional districts that experienced net economic losses, there's research even saying they supported it because they believed in the president, they were willing to sacrifice their own livelihood for this idea, buying into the tariffs and the trade wars is going to help. So I think even if we do start to see the economic pain hit, there may not even be a big enough push for the political incentives to align for Republican members of Congress to stand up against the president. David D. Stewart: As we sit here today, we're in this 90-day pause on the largest of the tariffs. What can we expect? Do you expect to see maybe another pause as the time starts to expire or for these tariffs to actually come into effect at the end of 90 days? Ernie Tedeschi: I mean, look, I'm not an expert in the mentality of this administration and the strategy, such that it is. If I had to bet, and to be clear, I wouldn't bet, I'd save my money to buy toys for Christmas, but I agree that I think that fundamentally what's driving this is that the president likes tariffs, dislikes trade. I also think that more than taking the president seriously, I think that what the president has said literally in the past is a good view into his underlying guiding principle. The president said in the campaign in 2024, he proposed a 10 percent universal tariff and a 60 percent tariff on China and brought up the idea of slightly different commodity tariffs. The other panelists may have different views about where we're going, but if I had to bet, I'll bet that that's probably the equilibrium of where we're going is roughly a 10 percent universal tariff, 60 to 80 percent on China, depending on where the 20 percent tariff ends up, and slightly different variations of 25 percent commodity tariffs, depending on how deal negotiations go with different countries. USA and China trade war. US of America and chinese flags crashed containers on sky at sunset ... More background. 3d illustration Erica York: Yeah, I think we got a good preview that that is the case with the U.S.-U.K. deal this week. One of the few trading partners we have a trade surplus with is still stuck with the 10 percent global tariff. So I think that's the floor. And you saw the commerce secretary even say yesterday, "10 percent is the lowest we'll go. It's up from there." So I think, yeah, 10 to 20 percent global tariffs plus all the others is where we're going to be. And I also think we saw with the deal this week that any changes are going to be very small. There were some changes to U.K. imports of beef, but not big changes. They didn't get into the actual rules and health guidelines and that sort of thing, just like a small quota change. So it doesn't seem like anything really meaningful is going to be on the table. Kyle Pomerleau: And then just looking broadly too, even if you think that most of this gets rolled back, in some sense, if you're looking at the market or the bond market, a lot of the damage has been done. So if you looked at the reaction to these tariffs from the bond market or the U.S. dollar, for example, just initially, that's odd. So when you enact a tariff, the dollar is supposed to appreciate and you'd expect interest rates maybe wouldn't change very much, but it would depend on what the Federal Reserve does. But we saw just across the board, everything going red, going negative. Interest rates went up, dollar went down, market went down. And I think a big part of that is that the market is now finally taking Trump seriously when it comes to the things he's saying about trade and international relations. And that as long as Trump is in the White House and has the authority that he does, there'll always be this little discount now that the market is expecting that he could do something, even if the current iteration of tariffs get rolled back in their entirety. It would, I think, take courts and Congress to step in to say, "No, you can't do this," to I think bring confidence closer to where it was a couple months ago. Ryan Finley: To that I would add in terms of irreversible losses, U.S. negotiating credibility in the international tax forum. It's hard I think to probably whenever you're in a negotiation say, "You should abide by certain established standards," and show in another not-too-unrelated field that you yourself are unwilling to. I don't know how to restore confidence in the U.S. negotiating partners in that context. Probably just time. David D. Stewart: So to finish things out, since we're here among advisers, what can tax advisers tell their clients today about how to deal with this new reality they find themselves in? Ryan Finley: If you scanned the client alerts that are coming out now, they don't have a whole lot of direct tangible recommendations. I think it's really hard. There are too many moving parts to say, "Here's what you got to do." Obviously you can say things like, review your inner company contracts carefully. Make sure that any differences between custom value and transfer price either don't exist or they can be justified by specific things. Make sure you're not contradicting yourself in any information you give to the IRS and the custom and border patrol. That's all kind of obvious stuff. I don't think it's — I mean, situations where you have a fully fledged manufacturer, a low-risk U.S. distributor, it's going to be hard to restructure yourself back into something that's going to on net help you more than it will hurt you now if we have a really high tariff regime. So I don't think it's possible to responsibly give any concrete evidence until a little bit of the smoke clears. I mean, we don't even know which tariffs are going to be here when we leave, get out of this panel. So I don't know. Ernie Tedeschi: Yeah, I think anybody that tells you exactly what you should do is giving you bad advice in this environment. I think the best thing you can do is just widen the uncertainty bands about what's possible in this environment, not take as given any policy announcement that you hear. Even if it's something from the White House, that doesn't necessarily mean it's going to be true the next day. And I don't mean that facetiously. I mean, we've seen announcements made one day that are then completely undone the next day. That should inform your risk analysis and things that you should kick the tires on in terms of your contracts and your clients, but don't assume that that's the new normal or that that's your baseline going forward. Your decisions should be based on the best, most economical way of going forward based on a lot of different scenarios, a wide range of scenarios. Unfortunately, that's just the nature of uncertainty and risk right now. And hopefully, I think over the next six months, we will get some amount of more clarity on where the equilibrium will be. There will be, I think, more deals akin to the U.K. deal that we had. There will be hopefully less movement in day-to-day tariff rates. And so in that sense, you can plan for more certainty in six months, even though we don't know where that's going to end up. But nevertheless, plan for certainty, but uncertainty about where the uncertainty is going. David D. Stewart: All right, well, I think we should end it there. Thank you, Ernie, Erica, Ryan, Kyle, thank you very much for being here.
Forbes
29-04-2025
- Business
- Forbes
Budget Votes And Tax Cut Hopes: Congress's Path To Reconciliation
WASHINGTON, DC - OCTOBER 24: The U.S. Capitol Dome is seen as House Republicans continue to search ... More for a Speaker of the House in the Longworth House Office Building on Capitol Hill on October 24, 2023 in Washington, DC. Members of the GOP conference met for a closed-door vote to select their nominee for Speaker of the House to succeed former Speaker Kevin McCarthy (R-CA), who was ousted on October 4 in a move led by a small group of conservative members of his own party. The Republicans nominated Rep. Tom Emmer (R-MN) today but he has already dropped out of the running after it became clear he could not secure enough votes to be elected Speaker. (Photo by) In this episode of Tax Notes Talk, Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco outline Congress's progress on drafting the tax-focused reconciliation bill and the obstacles still remaining. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: The bill is due. With many of the Tax Cuts and Jobs Act provisions scheduled to sunset at the end of 2025, all eyes have been on Congress's progress toward a tax bill. But before they could focus on the contents of that bill, legislators had to get something else squared away: the budget framework. So how did the votes shake out on the framework, and what hurdles still remain on the path to a finished tax bill? Joining me now to walk through all of this are Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco. Katie, Cady, welcome to the podcast. Cady Stanton: Thanks for having us. Katie Lobosco: Yeah, glad to be here. David D. Stewart: So let's start with you, Katie. What is the latest that we've heard on this issue? Katie Lobosco: So before Congress left on a two-week recess, the House passed the Senate-amended budget on April 10. Now, this unlocks the reconciliation process and paves the way for one bill that addresses much of President Trump's agenda, including the extension of the expiring provisions of the TCJA. Now, this budget resolution has taken up a lot of the legislative calendar so far this year. The House and the Senate both passed their own versions of the budget back in February, but both chambers must pass an identical budget resolution to be allowed to use reconciliation. And this is a process that lets the Senate pass a bill with a simple majority, and in this case, the GOP can pass it without Democratic votes. So the Senate amended the House's budget on April 5, sent it back to the House, and this is where we saw some drama. So in the days leading up to the House vote, many deficit hawks in the House and many Freedom Caucus members told us they were going to vote 'no' on this. There was no changing their mind. The issue was that the Senate-amended version doesn't go nearly as far in demanding spending cuts that the House wanted. So an hour or so before the vote was scheduled, we see a lot of these supposed 'no' votes marching into Senate Majority Leader John Thune's office. They're seeking assurances that there will be more spending cuts that are aligned with the House version. And overnight, most of those 'no' votes had flipped, citing assurances that they got from Republican leadership and the White House about spending cuts. In the end, there were just two 'no' votes: Tom Massie of Kentucky and Victoria Spartz of Indiana, both who were concerned about deficit issues. Now, it's worth noting there was no change in the text of the bill guaranteeing more spending cuts. Basically at a press conference the morning of the vote, Thune said that there were a lot of senators that really believed that there should be more spending cuts, but he didn't make a formal assurance about this. David D. Stewart: What can we expect in a reconciliation bill around the tax issues? Cady Stanton: So this reconciliation bill is expected to be pretty large, and it's going to cover a variety of policy areas, but tax is a top priority in this bill because it has a really important upcoming deadline, as you mentioned. The main aim of the tax portions of the reconciliation bill will be to extend the expiring provisions from the TCJA. That includes individual income tax rates, expanded child tax credit, the SALT cap, estate tax changes, things like that. They're all scheduled to sunset at the end of 2025. Not everything in the TCJA was temporary — obviously the corporate tax rate, international tax reform were permanent — but as a result of the deadline at the end of 2025, those expiring provisions are likely going to be the primary focus of this year's reconciliation bill. Beyond that, there are a lot of additional provisions that could definitely be included and are being discussed as being on the table right now. Some talk has included a hike in the SALT cap; no tax on tips, which was one of President Trump's promises on the campaign trail and one that he's talked about since he has taken up the White House; the expanded child tax credit has been mentioned; tax relief for seniors; changes to the low-income housing tax credit — all of those are part of the conversation here. But while they're all on the table as possibilities, it's going to be dependent on how much lawmakers want to impact the deficit and include possible other pay-fors in what's going to be part of the larger bill in the end. ZEBULON, GEORGIA - OCTOBER 23: Republican presidential nominee, former U.S. President Donald Trump ... More looks on during a roundtable with faith leaders at Christ Chapel on October 23, 2024 in Zebulon, Georgia. Trump is campaigning across Georgia today as he and Democratic presidential nominee, U.S. Vice President Kamala Harris attempt to win over swing state voters. (Photo by) David D. Stewart: What sort of things did we see in this budget resolution that we can expect to see in the final bills? Katie Lobosco: Well, so the budget is very important to unlocking this process, but at the end of the day, it's just a blueprint. It's not law; it doesn't have policy specifications. What it does, basically, is provide instructions to the House and Senate committees setting spending and revenue targets. But here's where things get a little complicated: This budget resolution provides different instructions to the House than it does for the Senate. For example, the Senate instructions mandate a floor of $4 billion in spending cuts across the federal government, while the House section requires $1.5 trillion in cuts. And when it comes to taxes, there's another big difference. The Senate Finance Committee is given $1.5 trillion for new tax proposals, but also scores the extension of the existing tax cuts as costing nothing. The House Ways and Means Committee, on the other hand, gets $4.5 trillion for both new tax proposals and the extensions. There is a caveat there: If the House doesn't achieve $2 trillion in spending cuts, that $4.5 trillion for tax cuts could go down as low as $500 billion. Basically, this gives us a range for the tax cuts, is the way I like to think about it. Bipartisan Policy Center's Andrew Watts told me that he puts this range between $4 trillion and $5.3 trillion. David D. Stewart: So I know there's been some drama around how this is all going to get scored. So what is happening with budget scoring? Cady Stanton: So you may have heard the phrase, especially in the news and by lawmakers lately, of a current-policy baseline, and it's definitely in the weeds on the technical parts of scoring, but it's important for thinking about how many tax cuts might be passed in this package. So one of the major points of tension in this year's reconciliation bill, particularly as it pertains to tax, is around that scoring cost we've been talking about. So the main goal of this bill, as I said, is to extend the TCJA provisions that are set to expire at the end of the year. But that move is estimated to cost $4.6 trillion over 10 years, according to the Congressional Budget Office. So obviously very expensive. Now, Republican senators led by Senate Finance Committee Chair Mike Crapo have pushed for using something called a current-policy baseline to score those extensions. Like I said, it's pretty in the weeds, but the basis of it is that a current-policy baseline scores extending policy already in place as costing zero, as opposed to a current-law baseline, which scores based on what's actually written into the law. WASHINGTON, DC - SEPTEMBER 26: Sen. Mike Crapo (R-ID) arrives to the U.S. Capitol Building on ... More September 26, 2023 in Washington, DC. The U.S. Senate is working to write up separate legislation to fund the government ahead of the September 30th shutdown deadline, as legislation being drawn up by House Republicans is being stalled. (Photo by) Now, Democrats have called this method "magic math," and they aren't the only ones who are pretty skeptical of it. Quite a few Republicans in the House, such as Ways and Means Committee members David Schweikert and Lloyd Smucker, have also criticized the measure and said they're not so sure it's the right way to go about it. But for lawmakers who are attempting to balance deficit reduction, often at the demands of members of their caucus who are really worried about the deficit with this expensive tax bill, it's seen by some as the only way to make the TCJA extensions permanent, especially when other provisions that we talked about, like no tax on tips or the SALT cap, will really only increase the tally and the overall cost of this bill. David D. Stewart: So what is next for this reconciliation bill? Cady Stanton: So the House and Senate return to the Hill the week of April 28, and that's when the different committees will start writing up the actual bill text. The budget resolution gives committees until May 9, but it's not really a binding deadline. House Speaker Mike Johnson wants to move fast, and he wants to have a bill to the president's desk by Memorial Day. Now, plenty of people will tell you that this is possibly a bit optimistic. For context, we can look back to 2017, when Congress also used the reconciliation process to pass the TCJA. All told, it took about two months after the budget resolution was passed to get the TCJA signed into law. Now, one thing that could throw a wrench into this timeline is if Republican leaders want to use the reconciliation process to also raise the debt ceiling. Right now, the government is expected to run out of money in August or September, if Congress doesn't act before then, but as this year's tax revenue comes in, that date could change. And if it comes earlier, it may pressure lawmakers to move even faster on this bill. Of course, they could also just deal with the debt ceiling in a separate piece of legislation. David D. Stewart: What hurdles are we expecting to getting final passage of this reconciliation bill? Cady Stanton: So there's obviously a lot of obstacles that could come up between now and when they finally pass the bill, but I can focus on three pretty big ones right here. The first one is having to do with energy. So one possible pay-for would be either a partial or a complete rollback of the clean energy credits from the Inflation Reduction Act. Some members of the Republican caucus, like Congressman Chip Roy has said he wants a full rescission of those credits. WASHINGTON, DC - NOVEMBER 29: Rep. Chip Roy (R-TX) speaks during a news conference with members of ... More the House Freedom Caucus at the U.S. Capitol November 29, 2023 in Washington, DC. The members of the House Freedom Caucus and a few Republican Senators discussed federal spending and the need for stronger border security. (Photo by) But a number of Republicans in states that benefited from IRA investments are cautioning against using a sledgehammer against the IRA rather than a scalpel. A group of senators and a group of House members have respectively written to the leaders of their caucus cautioning against that full repeal because of the impact in their districts should that happen. There's also a question of how much revenue a full or partial rescission would bring in reality, given that the bill became law more than two years ago, and estimates vary on how much money that might bring in. A second area to focus in on has to do with Medicaid. So as Katie mentioned, the budget resolution includes pretty specific instructions for spending cuts, and among them is $880 billion in cuts to be made by the House Energy and Commerce Committee. Given the budget that that committee has, a big chunk of it is Medicare and Medicaid, and Republicans really don't want to touch Medicare — it near guarantees there's going to have to be some cuts to Medicaid. Moderates are pretty upset about this requirement, and even withheld their vote briefly over it. We watched the floor during the budget resolution debate, and there were some centrist members who went up to Mike Johnson and tried to really get some reassurances from him on a limit to those Medicaid cuts, or even no Medicaid cuts at all. So that's definitely something to watch because it impacts a lot of especially low- to middle-income constituents of these moderate members. Now the third area is the SALT cap, and this is something I've found comes up with just about any tax bill that we discuss. This year, I think as Katie mentioned, the House has very thin margins for all of these votes, and what that basically means is any small group can attempt to leverage their numbers to get what they want on this bill. That includes members of the state and local tax, or SALT, caucus. Now, Ways and Means Committee Chair Jason Smith and others have acknowledged that because of those numbers, raising the SALT cap is now a near guarantee. It would be otherwise pretty much impossible to pass the bill without their votes. The tricky part here is how high that new cap could be. A $25,000 cap has been floated recently, but members of the SALT Caucus have shot that down pretty quickly, and a separate proposal would put a cap on the corporate SALT deductions — some people refer to it as C-SALT — as a pay-for for SALT or for other provisions, but that idea has also received a pretty chilly reception. So basically what to watch for is there will likely be a change in the SALT cap, but what that new number might look like is pretty up in the air right now. David D. Stewart: Now, one of the issues that's been dominating politics lately has been the issue of tariffs. What are we hearing from Congress on them? Katie Lobosco: Yes. We've all heard a lot about tariffs lately, and there are some Republicans that have pushed back on the president's tariffs. Chuck Grassley and six other Republican senators, along with Don Bacon of Nebraska in the House, have introduced bipartisan bills that would rein in the president's authority when it comes to tariffs. This bill would require the White House to notify Congress and justify the tariffs, and unless Congress passes a joint resolution approving them, they would expire after 60 days. And Senator Rand Paul, a Kentucky Republican, is another one who's voiced some opposition. He joined a group of Democrats introducing a bill that would repeal Trump's 10 percent across-the-board tariffs. But there's been no real indication that either of these bills would end up passing either chamber. These tariffs may come up later as we get a full reconciliation package. Now, they won't be included in the bill, but I could see some Republican lawmakers pointing to the revenue from the tariffs as an offset for government spending — some of these members that are really concerned about the deficit. But I think it's worth noting that the official score of the package will not consider the tariffs because they came from the executive branch. David D. Stewart: One other issue I want to touch on: the potential expansion of existing credits like the child tax credit and the earned income tax credit in the Senate. What's happening there? Cady Stanton: I think that's going to be one of the most interesting debates — specifically on the child tax credit — this year. So just for some context, the child tax credit was doubled from $1,000 to $2,000 in the Tax Cuts and Jobs Act, but that provision is set to expire at the end of the year. Now, CTC expansion historically has received bipartisan support. Democrats expanded it to the highest level it's ever been in the American Rescue Plan Act, though that eventually phased back. And a bipartisan bill last year that we covered extensively that passed the House but stalled in the Senate included CTC expansion alongside retroactive restoration of expired business provisions from the TCJA. So those were paired together. Now, there's debate over how to expand the CTC within the Republican caucus. So some have pushed, for example, for some enhanced work requirements for the credit or raising the qualified income level. There's definitely going to be a lot of back-and-forth as to how to tweak the dials on the credit. The idea of CTC expansion most recently came up in the past week or two, when Senator Chuck Grassley, who's on the Senate Finance Committee, said that one of the proposals Republicans are considering is raising the top marginal income tax rate to pre-TCJA levels as an offset to CTC expansion. Now, we should be really clear here that many Republicans have objected to the idea of changing that rate for the highest earners, but Senator Grassley discussing this shows that CTC expansion and how to pay for it is going to be part of discussions in the coming weeks and months. Now, turning to the earned income tax credit, which you also mentioned, I feel like that's a different ballgame here. Changes to that might be a little less likely. I wrote a few weeks back about how advocates both for expansion of the EITC or for pared-back reform of the credit have both been pushing for legislative change for many years, and really upped that push a few weeks ago ahead of the 50th anniversary of the credit. But unfortunately, there's really little to no appetite in Congress for a real full overhaul as both groups have been pushing for. So we may see some modest changes to the EITC, but the primary focus in terms of reform to those two credits will likely be on the child tax credit. David D. Stewart: Well, I guess the one thing that we can be sure of is you're going to have a lot to do over the next few months, and I thank you so much for helping us understand all that's gone on so far. Cady, Katie, thank you for being here. Cady Stanton: Thanks so much for having us. Katie Lobosco: Thank you.
Forbes
22-04-2025
- Business
- Forbes
Behind The Story: Investigating The Faults In The IRS's FOIA System
In this episode of Tax Notes Talk, Tax Notes chief correspondent Amanda Athanasiou discusses her recent investigation into the IRS's handling of Freedom of Information Act requests and trends from two decades of agency data. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: The waiting is the hardest part. The Freedom of Information Act grants individuals the right to request access to federal records, a transparency tool that has long been used by reporters and lawyers. But what happens when response times get longer and the appeals function works more like a rubber stamp on the initial responses? A recent Tax Notes investigation explored flaws practitioners have identified in the IRS's FOIA disclosure and appeals systems, which have led to taxpayer frustration and a growing backlog. Here to talk more about what was uncovered is Tax Notes chief correspondent Amanda Athanasiou. Amanda, welcome back to the podcast. Amanda Athanasiou: Thanks for having me, Dave. David D. Stewart: So why don't we start off with a background on what FOIA requests are and how they usually function, specifically at the IRS? Amanda Athanasiou: Sure. So as you said, the Freedom of Information Act is a federal law that enables individuals to obtain records from government agencies as long as those records don't fall into specific exemptions for things like individual privacy, national security, proprietary interest, things like that. In the tax context, taxpayers who are, say, engaged in disputes with the IRS will often use FOIA to gain access to what's in their file or records on their own investigations by the IRS or the DOJ. But it's also used often by journalists and members of the public to uncover agency records on a whole variety of things. In the IRS context, that can include requests that are targeting information on rulings or the agency's positions on certain matters. It could be training materials, historical data. The sky is really the limit, as long as the requester is asking for records that do actually exist and that are not exempt from disclosure. Reporters at Tax Notes have used FOIA to inform some of our investigations into litigation that we're following or to gather information for topics that we're looking into for stories. We generally do receive requests for extensions after we've filed those FOIAs, so we can relate to some of what our sources said and what the data shows about response times. David D. Stewart: So how did you uncover the information you've reported about in this series, and what did you find in your investigation? Amanda Athanasiou: So I got a tip from one of our sources for this story that initial FOIA disclosures from the IRS are upheld on appeal at a rate that is kind of surprisingly high historically. So to back up, when a taxpayer receives a response to their initial FOIA request that doesn't seem quite right — maybe they feel that the agency is claiming they don't have records that they should, or maybe they're improperly withholding them by citing various exemptions that don't seem to fit — taxpayers can generally appeal that response through what's called an administrative appeal. But this high sustension rate means that the appeals function is affirming the vast majority of responses at the disclosure level. So taxpayers are now really unlikely to get anywhere by filing that appeal, which basically leaves them with the options of litigating, filing more requests and trying to get at the information other ways, or basically giving up. Lauren Loricchio, our investigations editor, and I did some digging into 20 years of FOIA data that the IRS and other federal agencies are required to keep. And we found that, yes, this tip was accurate. An average of 93 percent of those initial FOIA responses that were appealed since 2008 were fully affirmed higher up. That's a much higher rate than other agencies. And basically what it means is that either the IRS disclosure office is giving perfect answers over 90 percent of the time — in some years, the rate was 98 percent or even 100 [percent] — or the administrative appeals process has turned into a rubber stamp, which is what several practitioners told us that they have experienced. We also found some other interesting trends while we were working through all of this data, namely that FOIA requests coming into the IRS have consistently fallen over the last 15 to 20 years. But the time it's taking the IRS to respond to those requests has gotten longer. David D. Stewart: So what did you find in the data, and did you see any reasons behind the trends? Amanda Athanasiou: Well, we found that on average FOIA response times for the IRS have doubled since 2008, from 24 days to about 48 days. Before 2024, they were actually on track to triple, but they came down quite a bit last year, giving us that 48-day average. So this trend is a little concerning on its own, but when it's considered in light of this two decade decline in the number of FOIA requests coming into the IRS, it's even more surprising. The data basically raises two questions: One, why are FOIA requests falling so consistently? And two, why hasn't that led to a quicker response time, or at least not a worse one? We did find some conclusions on the first question. The reasons offered by practitioners and the IRS itself for the drop in FOIA requests are generally that alternative ways of obtaining the needed records have been rolled out over the years. So the IRS pointed out that there are increased online and digital offerings. There's a FOIA library. There are upgraded routine access procedures. After passage of the Taxpayer First Act, there's a requirement to release administrative files for cases going to appeals that are under a certain dollar threshold. There's also a direct release mechanism, and all of this should theoretically help reduce the FOIA burden. It was also pointed out that with less enforcement activity, fewer audits over the years, there will be fewer taxpayers pursuing FOIAs within their own dealings with the IRS. Practitioners did counter that some of these fixes are not always successful or enforceable. So some feel that they're not necessarily a good substitute for FOIA. And it's also not clear that these mechanisms explain all of the declines in FOIAs, which has been quite dramatic if you include Privacy Act and FOIA requests dating back to the early 2000s. But generally, these theories seem to make sense. David D. Stewart: Is there any sense of why response times are going up and what sort of effect is that having? Amanda Athanasiou: Well, on the response time side of things, the explanation isn't totally clear. But there are certainly theories that constraints with staffing and funding, training, and an increase in complexity of cases, the involvement of more subject matter experts, that kind of thing — are probably all contributors to the increased response time. More than one practitioner commented that their experience with any given FOIA request really depends on who at the IRS is handling it. So some personnel are more responsive than others, better informed, that kind of thing. The issues that this presents is that attorneys are saying that they're not getting files they need to represent their clients in time to prepare for, say, hearings or other deadlines. So it is having real world consequences. David D. Stewart: Now, all this data sort of dates back. Everything is looking back. But we now have a new administration in town. What are we expecting to see happen with the FOIA backlog? Amanda Athanasiou: That's a great question. So as of 2024, staffing levels in the IRS FOIA office were about the same as they were in 2008. But as you'd expect, there are concerns going forward about funding cuts and staffing issues and freezes during the Trump administration having the effect of exacerbating an already somewhat worsening backlog. Another logical extension of reduced funding, though, is that enforcement could decrease, which as we talked about, that could itself lead to a decline in FOIA requests as fewer taxpayers are being audited, say. So that's a factor that could actually neutralize the effect on the backlog. It was pointed out in one of the stories in the series that was an increase in FOIA requests during Trump's first term. At the IRS, the requests still gradually declined a bit during that timeframe, but both of those points are probably worth considering if we're trying to read the tea leaves on FOIA. Between the already increasing wait times and reduced agency resources, one trend to watch out for is increased FOIA litigation. We already see a lot of examples of taxpayers going straight to court when they don't get a timely response to their FOIA requests. So these are cases in which there is no response from disclosure in the first place by the required statutory deadlines to administratively appeal. Reduced resources tend to increase wait times, so the current environment seems to be one in which we're likely to see that possibility of litigation increase. David D. Stewart: So what's likely to happen in an environment where there are fewer resources for handling these FOIA requests and these are going to litigation? How's that going to play out in court? Amanda Athanasiou: So the concern is, how sympathetic are the courts going to be to arguments that an agency doesn't have the personnel or the person power to get through the FOIA backlog? And there's some evidence that the answer is not very sympathetic. We actually saw a Florida district court handle that kind of argument from the Department of Justice's tax division recently. The tax division was accused of improperly holding documents that had been FOIA'd, and it argued it had only one attorney on FOIA requests. It was under court order to respond to unrelated requests. It had asked for various extensions throughout the process of this request, and it was going on three years to complete the requested issue. And the court said, "No dice." The agency isn't getting out of FOIA compliance based on what the court itself described as staffing challenges that amounted to a self-inflicted handicap. So the upshot is that agencies are statutorily required to comply with FOIA, and courts will likely uphold those requirements even in the face of staffing and funding objections. But as we've seen, the real world effects means that those FOIA response timelines and the lawsuits that result could creep upwards anyways, which could be costly to taxpayers. David D. Stewart: Well, Amanda, thank you so much for being here. This series has been fantastic, and we'll have a link in the show notes so that our listeners can take a look at it for themselves. And I think that there's probably going to be a lot of issues that we need to track and see the trends in the years ahead. Amanda Athanasiou: Certainly. I look forward to seeing what happens. And thank you again for having me.
Forbes
15-04-2025
- Business
- Forbes
Trump, Tariffs, And Trade Turmoil
PARIS, FRANCE - DECEMBER 7: President-Elect Donald Trump reacts during his meeting with Prince ... More William, Prince of Wales at the Embassy of the United Kingdom's Residence on December 7, 2024 in Paris, France. Donald Trump was among the wave of foreign dignitaries descending on Paris this weekend to attend a reopening ceremony at Notre-Dame Cathedral, more than five years after it was damaged in a major fire. (Photo by) In this episode of Tax Notes Talk, Mat Mermigousis of BDO discusses the Trump administration's ever-changing tariff policies and what they may mean for U.S. businesses. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: operation reciprocity. On April 2 President Trump announced the official tariff rates affecting every country importing goods to the U.S., though they were later put on pause. But this wasn't Trump's first move on tariffs. Back in February, the administration imposed individual tariffs on Canada, Mexico, and China. The negotiations following that announcement were still unfolding when Trump unveiled his larger slate of tariffs. So how are countries dealing with the news and what does this uncertainty mean for the future of U.S. trade? Here to talk more about this is Tax Notes legal reporter Michael Smith. Michael, welcome back to the podcast. Michael Smith: Thanks for having me, Dave. David D. Stewart: So there are a lot of moving parts on all of this tariff news. Could you just give us a basic rundown of where things stand and how we got here? Michael Smith: Yeah, certainly. So on April 2, President Trump did two things. He placed a baseline minimum tariff rate of 10 percent on every country. And then, separately for countries that he determined had increased trade barriers or nonmonetary barriers of entry, he introduced a country-specific tariff rate that stacked with other tariff measures. For example, China was hit with a 34 percent increase on their tariff rate. This all changed a bit on April 9, when the president announced a slight delay to his plan. He determined that the country-by-country specific tariff rates should be paused for the next 90 days for every country except for China. Meanwhile, the 10 percent baseline tariffs are going to continue to remain in effect. This is largely due to the fact that China is one of the only countries that directly retaliated against the United States, and the president has had some strong animosity regarding their position. So that brings us into the China trade war. I believe [Treasury] Secretary Bessent declined to call it a trade war, but I'm not really sure what else to interpret a 100 percent increase in tariffs on a country as, so we'll kind of work from there. But to better understand the situation, I think we need to take a trip back to the first Trump administration and the growing narrative of reciprocal tariffs that started there, and how the White House is continuing to bring that to the forefront. The Trump 1.0 tariffs started with solar panels, washing machines, steel, and aluminum tariffs for most countries around the world. That caused varying levels of dispute with the EU, India, and China that were all eventually resolved. However, China remained a little pesky in those negotiations. And then we got to the China Phase 1 agreement, which reduced the tariffs on certain goods and required China to increase the amount of goods purchased from the United States. That remained in effect in the Biden administration, except for a few changes. Biden ended up increasing tariffs on electric cars, solar cells, and EV batteries. This is part of what the government is seeing as an issue with the way that China's able to do business. Their companies are able to receive direct subsidies from their government. And that allows for some types of price manipulation, where they're able to theoretically flood markets with various low-value goods or goods that are produced at a significantly cheaper quality. This reached its head with the EV market, where the U.S. ended up putting, I believe, over 100 percent tariff rate on Chinese EVs to stop them from flooding the local market. And during that time, there was a lot of concern that China wasn't fulfilling all of their agreements with the Phase 1 negotiations. They weren't purchasing enough of the specified goods, and just generally following through. CORTE MADERA, CALIFORNIA - JULY 28: A Polestar electric car prepares to park at an EV charging ... More station on July 28, 2023 in Corte Madera, California. Seven major automakers announced plans earlier this week to increase the number of high-powered electric vehicle chargers in the country with 30,000 new charging stations along highways and in urban areas. According to the Energy Department, there are currently an estimated 32,000 chargers across the country. (Photo by) That sat on the back burner until a Trump campaign trail, where he started to push for policies like increased tariffs on China, Canada, and various trading partners to bring back onshoring of jobs. After Trump was elected, he put out his America First trade policy, which really set the tone for what the administration wanted to do in the coming months. Tariffs kind of hit a head in February, when Trump initiated increased tariff duties under IEEPA, the International Economic Emergency Powers Act. This has traditionally been used for things like sanctions on Iran or increasing trade barriers with other countries that we aren't necessarily on the most friendly terms. So it was a bit surprising to see it used against three of our largest trading partners, two of them being Canada and Mexico. These were also accompanied by tariffs on cars, steel, and aluminum coming from every country around the world, generally. The big takeaways of this is that the U.S. is currently embroiled in a trade war with China. In February the U.S. imposed a 10 percent tariff on all imports coming from China. China generally retaliated, targeting specific U.S. agricultural products with various increase in duties. The Trump administration doubled that to 20 [percent], and now we are getting into the astronomically high numbers that came late on April 9. Since then, the U.S. has decided that 125 percent is the appropriate rate to put tariffs on Chinese imports. And that leaves a tariff rate on U.S. exports of China sitting at around 84 percent. This is kind of reminiscent of some of the issues that happened during the first Trump administration, where we saw increased tariff and duties on agricultural products being shipped to China. So I think that's kind of a good wrap-up of where tariffs land us today. We have country-by-country specific measures that nobody knows when they'll actually go into effect. We have the 10 percent baseline minimum. We have auto tariffs, and we're embroiled in a trade war with China. David D. Stewart: OK. Well, it sounds like there's certainly a lot going on. Now, I understand you recently talked to somebody about all this. Who did you talk to? Michael Smith: Yeah. I talked with Mathew Mermigousis. He's the national practice leader of customs and international trade services over at BDO. David D. Stewart: Now, before we get to the interview, I should note that this was recorded early on April 9. And this is a fast-moving story, so some things have changed since it was recorded. All right. Let's go to that interview. Michael Smith: All right. Hey, Mat, welcome to the podcast. Mat Mermigousis: Hi, Michael. Great to be here. Michael Smith: Let's get onto the tariffs. So I think before we jump into everything, it may be good to tell people the general authority provisions used for tariffs. And tell people what those general investigations look like, and what kind of processes those take. Mat Mermigousis: Sure. So at a high level, Congress has delegated a broad range of, we'll say, tariff powers to the president. And there are a number of provisions the president can use to increase tariffs. But I'll focus on the key ones, the ones that are currently being used. Back in 2020, 2018, when the president — Trump at the time — imposed the initial China tariffs, the provision he had used was section 301. And that provision requires an administrative review. And at the end of that review, there are recommendations around what the tariff levels would be. And that's what was used back in Trump's first administration. The provisions that are being used currently are one called the IEEPA, the International Emergency Economic Powers Act. That particular provision allows a president to effectively declare a national emergency. And based on that, the president can impose tariffs. And that does not require an administrative review. And it's this IEEPA provision that was used for the more recent tariffs on Mexico, Canada, China, and the reciprocal tariffs that were announced. And another provision the president uses is called section 232, also focused around national security interest. But that one also requires an administrative review. And that's what was used for the automotive tariffs that were imposed, the steel and aluminum tariffs, and current investigations around copper, lumber, and some other products. But effectively for the audience to know is that depending on the provision, some have an administrative review and some the president can impose unilaterally. I will say with respect to IEEPA, this was the first time that provision was used to impose tariffs. And I believe last week there was the first court case filed to challenge that particular authority. Michael Smith: That's a good point to get into what the trade policy has been looking like. I know that starting back in January, Trump issued his America Trade First policy and started touting the phrase reciprocal tariffs to talk about the trade deficit that the U.S. has with the rest of the world. This brought reciprocal tariffs to the forefront. And as somebody actively engaged in this space in dealing with tariffs on a day-to-day basis, what do you make of this phrase "reciprocal" and how it's being used in tariff policy? Mat Mermigousis: Sure. So when you look at how the administration defined reciprocal tariffs, when they started their review or their investigation prior to the imposition of the tariffs, their focus was on what were the actual tariff rates our trading partners were imposing on U.S. goods. But also the administration focused on, we'll call them nontariff barriers. So what type of taxes might've been imposed on U.S. imports, looking at any type of restrictions to the market or access the U.S. goods have to that particular market? And they analyze all of these factors to arrive at a tariff level that they deemed was what was being tariffed on U.S. products. And that's what they used. And that's when they announced those reciprocal tariffs. And that's why you'll see that, for specific trading partners, where they deemed there was a significant trade deficit, those particular partners have specific rates. And all others, they're roughly at 10 percent. WASHINGTON, DC - APRIL 02: U.S. President Donald Trump holds up a chart while speaking during a ... More 'Make America Wealthy Again' trade announcement event in the Rose Garden at the White House on April 2, 2025 in Washington, DC. Touting the event as 'Liberation Day', Trump is expected to announce additional tariffs targeting goods imported to the U.S. (Photo by) And I think for many companies, they're struggling with the increase. Some of those trading partners, it's pretty significant. So they're really looking at understanding what the impact is to their supply chain. What are they able to do to mitigate particular impact of these tariffs? And also, at the same time, they're also monitoring the negotiations that are happening. And the fact that there could be some sort of reduction or concession that our trading partners may make, that may be over the next few months that might provide some relief. But for many of these companies, it's what can they immediately do to strategize around these tariffs to make their products affordable and be able to mitigate that increasing cost. Michael Smith: I think that's a good point to start in a bit more on the April 2 tariff that you were talking about. The formula has gotten a lot of criticism from economists across the aisle. Essentially, it was meant to calculate the tariffs that countries place on U.S. exports, and include the nonmonetary barriers of entry into the market, and then have that to give a tariff rate that the U.S. is going to impose. But many economists are saying that that's a self-fulfilling prophecy, because the way that the formula is written means that it basically only calculates what is the trade deficit between the two countries. Do you have any thoughts on how that's operating and what that means for negotiations going forward, on whether or not eliminating things like the VAT or other nonmonetary barriers will actually change any of the calculation? Mat Mermigousis: I'm not an economist, so I can't comment on the formula itself. But to your point, we did hear some economists questioning the formula itself or the math in the formula. And there were a few economists that also supported the formula. But I think for companies specifically, what they need to understand is that there are negotiations. And even prior to the reciprocal tariffs being imposed, the administration did issue term sheets to some of the trading partners, asking them what type of concessions that they're willing to make. And I think to really answer your question on the formula, really depends on the specific trading partner. There could be some trading partners where just a reduction of the duty rate might be sufficient for the U.S. to provide some relief for those particular countries. And then for others, a reduction in tariff rates may not be enough because they have specific barriers to U.S. products. For example, some countries have restrictions on U.S. agricultural products or food products because of GMOs, and hormones, and those sorts of things. So even a reduction in rate might not be enough, provided those markets are opened. And then, also, the administration has been pretty open about the digital services tax, being against that. If countries remove that or impose that, that might also play into the negotiations. But I think, ultimately, it will be country by country. And that was part of the testimony that Jamieson Greer, the USTR [U.S. trade representative] gave yesterday. So I think, provided they provide some concessions and that U.S. goods have access to those markets, though you'll likely see some reduction in those rates. Michael Smith: This is a good moment to take a small step back in time and look at the February IEEPA tariffs that Trump placed, because interestingly enough, two of the countries are not mentioned in the country-by-country tariffs, Canada and Mexico. Do you have any helpful insight into that? Mat Mermigousis: Because of the IEEPA tariffs in the 25 percent that's currently imposed on Canada and Mexican origin products, part of the notice that was announced last week stated, "If those IEEPA tariffs do go away, then there will be a 12 percent reciprocal tariff on Canada and Mexico." But I think, for many companies, what they need to focus on is their actual manufacturing process and their supply chain. So when you look at the IEEPA tariffs that are imposed on Canada and Mexico back in March, there was a provision in there that said, "If products qualify for the free trade agreement for USMCA [United States-Mexico-Canada Agreement], then those products are exempt from the IEEPA tariffs." Which now requires companies to focus on their other manufacturing process, focus on the bills of material, focus on their content and their process to make sure that their products qualify. And this might be a struggle for some companies, because there are those who traditionally were manufacturing, let's say Mexico, but the products, their normal duty rate, was zero. So they never really had to use the free trade agreement. Now because of the IEEPA tariffs, they're taking a closer look at it to see whether their products qualify. And they may not be as experienced in terms of understanding the rules, which then might trigger more audits from U.S. Customs [and Border Protection] to make sure companies are compliant with the USMCA. US Customs and Border Protection form to fill out The other piece that ties into the reciprocal tariffs is when you look at the executive order and the notices that were issued, it does mention that if there are products where the U.S. content within a product is at least 20 percent, then the reciprocal tariffs would not apply on any of the U.S. content within that product. So this goes back to the companies, once again, looking at the bill of materials, looking at their sourcing. Can they identify the U.S. content of those products so that they get some relief from the reciprocal tariffs? And this is where of late we're getting a lot of questions on how do we do this, how do we manage it, providing companies advice as to how to identify that information within their bill of materials, how to solicit their suppliers and be able to mitigate that particular impact. This is a little bit different than your question, but also ties back to the automotive tariffs that were imposed, were brought for vehicles, for example, that are manufactured in Canada and Mexico under the 25 percent automotive tariffs. They're still subject to 25 percent. But once again, what they're saying is if your product qualifies for USMCA, even though you're not exempt from the tariffs, they'll focus on the U.S. content within that vehicle. And the U.S. content will not be subject to the tariffs. So companies looking at the cost of what these tariffs are, but then the process around mitigating and looking at the bills of material, tracing their supply chain. And I think that's where many companies are focusing on, as one of the key strategies to help mitigate the impact, because it's something that could apply across the board and leverage some of those processes, whether you're subject to the section 232 tariffs on auto, reciprocal tariffs, or the IEEPA tariffs on Canada and Mexico. Michael Smith: The third country that was part of the February IEEPA tariffs. There is a lot of volatility happening right now between the U.S. and China, in terms of trade and tariffs. Do you care to explain any of that or what's happening between the countries? Mat Mermigousis: Sure. So just a little bit of background in history. So back in Trump's first administration, there were tariffs imposed on China under section 301. And depending on your product, those rates can be 7.5 percent, 15 percent, 25 percent, 50 percent, or 100 percent, depending on the product. Those tariffs, those section 301 tariffs were still extended under the Biden administration. And for some of those — some products — the Biden administration even increased the original tariffs. Now, in February, the administration imposed an additional 10 percent tariff on all Chinese products under IEEPA. And then in March, added on another 10 percent under IEEPA on Chinese products. So you'll see that these are all stacked, they're all tacked on. So there's an additional 20 percent above the section 301 tariffs on products. Then, under the reciprocal tariffs that were announced last week, the administration provided a specific rate on Chinese products, which is also another add-on of 34 percent. But what ended up happening was China retaliated then against U.S. products, issued a tariff of 34 percent on U.S. goods coming into China, also implemented certain export controls. So for U.S. companies, certain U.S. companies exporting out of China are prohibited from exporting certain products. And then, also, they have this entity list, where if you're on this list, there's certain restrictions on the level of investment and import and export in and out of China. And they listed a number of U.S. companies. Last night, the Trump administration retaliated even more against China and added another 15 percent to those reciprocal tariffs. So the reciprocal tariff rate went from 34 percent to 84 percent. So now you have on average over 100 percent tariff on all Chinese products. And then China, also, this morning or late last night, increased their retaliatory tariffs on U.S. goods also to 84 percent, and then also added more companies in the entity list and also more export control restrictions. So we're effectively seeing a back and forth between the U.S. and China, so many companies also struggling with how to manage the impact now of some of these tariffs. What is that going to do from market competitiveness perspective? And then the other piece is where maybe it's getting a little less press or news is that — so when you import into the U.S., you have a bond. You have a surety bond that covers your import process. And if you'll have to pay duties, there's a bond that supports that. And that's based on how much duty you pay. So now, for many companies, especially smaller companies, the cost of increasing their bond to cover the additional tariffs and potentially adding on collateral to support the surety, there's another sort of cost there for many companies. And we're also working with them on how to manage that as well. So I think these back and forths is just changing the strategy that some companies are using, and really looking at how they're going to change their import process, maybe change sourcing and try to manage, we'll say, the changes that can happen day to day in the current tariff landscape. Michael Smith: As Mat just noted, these things are moving incredibly quickly. Shortly after we recorded the interview, President Trump decided that he was going to delay the country-by-country specific tariffs on everybody except for China. This means that he's also going to increase the tariff rates on China, which are now looking to be at around 125 percent. And China is increasing their tariff rates against United States, which are resting at about 84 percent as of April 10. The Chinese national flag is seen on a flagpole in Beijing on August 8, 2016. - Most of the five ... More stars on the Chinese flags being used at medal ceremonies at the Rio Olympics are misaligned, officials said, prompting a diplomatic protest and online fury. (Photo by AFP) (Photo by STR/AFP via Getty Images) It seems like everything's moving really fast in this area. So as somebody dealing with and advising companies on how to interact in this landscape, what are the biggest things that you're telling people, the biggest things that companies are doing to counteract these levels of uncertainty? Mat Mermigousis: Sure. The first thing that they're doing is they're looking at, first, their processes and controls around the import and export process. So as a quick primer, when companies import, they file an import declaration on every shipment that comes into the country. So look at it as a tax return that's being filed on every single shipment. There are a slew of reporting requirements, but the three key elements that are part of that declaration are, one, the tariff classification of the product. And that tariff classification is a 10-digit number that lets the U.S. government know what's being imported into the U.S. And then that particular tariff classification has its own associated duty rate. And for many of these additional tariffs are being imposed, you'll have to see whether your tariff number is included within the scope of some of these tariffs. The second piece is around customs value. What is the right value to report? And the third piece is, what is the country of origin? Where is the product produced? So they're taking a step back and looking at their controls around all three elements, because that can impact whether you pay more in duty or maybe you pay less in duty. So we're working on companies on strengthening those particular controls. The second piece is a modeling exercise. So here in the U.S., companies can access their own import-export information out of a government portal, so they can see all their transactional data going back roughly at least five years, both import and export. We're working with them on taking this data, and based on these tariffs that are being imposed, what is the financial impact? Also modeling potential future increases, so they have a sense in being more prepared. But then also, because you can see from this data, the outbound exports out of the U.S. and the countries of destination, when retaliatory tariffs are imposed, you can also take those rates and start modeling out based on U.S. exports and the country destination, to see not only what the U.S. exposure might be, but just the global impact. Once we've done that, we'll work with companies on mitigation strategies. So one of the mitigation strategies, one we talked about earlier. So focusing on USMCA and U.S. content within products to see if companies can — you have to qualify for USMCA, but see if there's ways to increase their U.S. content to mitigate the impact. The other strategy that we're helping companies with is a concept called duty drawback. So here in the U.S., if you import a product and reexport the same or a like product, you can get back 99 percent of the duties taxes and fees paid at the time of import, going back five years. Now, the caveat there is, is that some of these tariffs are not eligible for duty drawback. So the section 232 tariffs are not eligible, as well as the IEEPA tariffs that were imposed on Canada, Mexico, and China. However, the reciprocal tariffs that were issued last week, even though they were issued under IEEPA, the administration has said that those are eligible for duty drawback. So that provides another avenue of relief for companies. The other strategy we're working with companies on is foreign trade zones. So, effectively, many companies who have warehouses or manufacturing facilities here in the U.S., they could designate their own facility as a foreign trade zone, which means they can import product, not pay any duty until that product enters U.S. commerce. So it provides a time-value-of-money cash flow benefit. If those products are reexported, then you avoid duty altogether. So that provides a relief mechanism, depending on your supply chain. And then lastly, companies are focused on what is the right customs value. So for many of our clients, they import from related parties, so they're importing based on a transfer price. So we're working with companies to understand what's embedded within that transfer price, because sometimes there're costs embedded within it that may not be dutyable. So we're working with our clients to understand the transfer price: What are the cost elements within it? If some of those are not dutyable, then you can unbundle the price or effectively extract those costs and create a separate service payment back to the seller. And what that does is it reduces the customs value and the basis for how much duty is paid. And there are certain costs, like advertising and promotion. If the U.S. is a distributor, and embedded in that price is effectively a distribution fee, you can extract all of those to reduce the customs value. And that provides a significant benefit. And then lastly, the U.S. allows your first sale. So for example, if you have a contract manufacturer who's manufacturing in China and selling a product for $100 to a middleman, which can be a regional principle for $100, and then that principle entity may be based in Singapore, is then selling to the U.S. importer at $150. If you meet certain requirements, you can use that $100 value for customs purposes, rather than the $150. And what that does is you've effectively lowered your duty expense because you're not paying duty on a markup on that price. So these are some key strategies that we're helping clients. These are key strategies that companies are focused on to help mitigate the impact, in addition to some of the lobbying efforts that some industries are doing. I know the automotive industry is talking to the representatives and having meetings with the administration, but those are some of the key strategies that companies are focused on. Michael Smith: Thanks again for coming on the podcast and talking with me, Mat. It's been great to chat. Take care. Mat Mermigousis: My pleasure. And I will say, too, Michael, these strategies aren't, we'll say, new. It's just in this environment, they've become more crucial. I did want to end on good news, in that there is ways to mitigate the impact and things that companies should focus on. And I really do appreciate your time today. David D. Stewart: That's it for this week. You can find me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@ And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
