The Fiscal Responsibility Act of 2023 – What Might be the Impact on 2023 Tax Legislation?

On June 3, 2023, President Biden signed H.R. 3746 Fiscal Responsibility Act of 2023 into law just two days before Monday’s default deadline. Treasury Secretary Janet Yellen had indicated that the government would shut down if nothing were done by June 5, 2023. 

The legislation suspends the federal debt limit through January 1, 2025, and increases the limit on January 2, 2025, to accommodate the obligations issued during the suspension period. It also establishes new discretionary spending limits for FY2024 and FY2025 that are enforced with budget sequestration, i.e., a provision of United States law that causes across-the-board reductions in certain kinds of spending included in the federal budget. The Act also rescinds spending of unobligated funds and expands work requirements for federal programs.

The Fiscal Responsibility Act of 2023 provisions include:

• Suspend the debt ceiling, allowing for continued borrowing;
• Impose discretionary spending caps;
• Provide for defense spending increases;
• Improve veteran benefits;
• Rescind unspent COVID funds, reducing some Inflation Reduction Acts pending;
• Redirect $20 billion of an $80 billion funding commitment to the IRS;
• Require federal agencies to increase spending by $1 billion to propose equal offsets;
• Cancel regulations that suspended student loan payments;
• Impose work requirements on Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP) benefit programs;
• Modify environmental policies to streamline environmental review processes; and
• Approve the Mountain Valley Pipeline through West Virginia and Virginia.

The bill does not reduce the overall deficit; rather, it aims to simply slow its growth.

The Committee for a Responsible Federal Budget released the following chart on June 1: 

(Source: https://www.cbo.gov/system/files/2023-05/hr3746_Letter_McCarthy.pdf)

From a tax perspective, there are no provisions included in the bill that directly impact the taxation of individuals or businesses. There is, however, a provision to reduce the $80 billion provided to the IRS as part of the Inflation Reduction Act by $20 million. These cuts may ultimately be somewhat symbolic and may not have an immediate impact on the short-term plans of the IRS; for example, the $20 billion reduction may come near the end of the 10-year period of the planned $80 billion spend.

More importantly, it’s not immediately clear what impact this legislation has on the tax priorities of Democrats or Republicans – or even bipartisan groups. For instance, there has been bipartisan support for restoration of the full research and development deduction in the year incurred rather than the required capitalization and five-year amortization rules currently in place. Many Republicans and other pro-business organizations are also hopeful for a return of 100% bonus depreciation (80% applies for 2023 and 60% applies on 2024), while a Democratic party priority is expansion of the child tax credit. These priorities may now be deferred unless other spending offsets can be negotiated or already have been negotiated through the “side agreements” to which the chart above alludes.

Other longer-term tax-related deadlines that will need to be addressed include Tax Cuts and Jobs Act individual tax expirations at the end of 2025 and impending Social Security Old-Age and Survivors Insurance Trust Fund exhaustion, projected to be sometime around the year 2033. 

You’ve heard our thoughts on the Fiscal Responsibility Act, now let us know yours. If you have any questions, please reach out to your Schneider Downs tax consultant. 

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