The debt ceiling showdown is no more as President Biden signed the Fiscal Responsibility Act of 2023 late into law on June 3. The House initially approved the legislation on May 31 by a wide margin and with bipartisan support, followed by the Senate’s passage on June 1. The bill’s enactment comes just two days before the federal government would exhaust its borrowing authority needed to fund its ongoing obligations.
The legislation does not directly include any tax-related measures. The House passed an earlier version of the legislation in April, which would have rolled back nearly all of the energy tax incentives contained in last year’s Inflation Reduction Act. The Joint Committee on Taxation estimated that this rollback would have decreased the deficit by $515 billion, but that measure was dropped from the final legislation as a result of subsequent negotiations between House Speaker Kevin McCarthy (R-CA) and President Biden.
The legislation immediately rescinds $1.4 billion in IRS funding, which the Congressional Budget Office estimated would cost the government $2.3 billion in reduced revenue collections over the next ten years, for a net increase to the deficit of $0.9 billion. Additionally, a “side agreement” between President Biden and House Speaker McCarthy (which is not formally part of the legislation) calls for a $20 billion reallocation of the $80 billion in IRS funding previously secured in the Inflation Reduction Act. A preliminary estimate from the Congressional Budget Office indicated that this IRS funding reduction would increase the federal deficit by another $18 billion through decreased revenue collections.
The informal agreement to reallocate this $20 billion in IRS funding represents a compromise to the $71 billion cut in IRS funding that was part of the earlier House-passed legislation. The cut is not expected to affect IRS modernization and reform plans because this portion of the prior $80 billion funding package will not be spent by the IRS until after 2029.
With the enactment of the debt ceiling legislation, the debt borrowing limit is suspended until Jan. 2025, which falls after the next presidential election cycle. Nondefense discretionary spending must remain at near-current levels for the 2024 fiscal year, and discretionary spending will be limited to 1% growth for the 2025 fiscal year. This is the equivalent of a cut because a 1% spending increase will not keep pace with inflation. Additionally, discretionary spending levels will be cut to 1% below those of the 2023 fiscal year if Congress does not timely pass all 12 annual appropriations bills by Jan. 1, 2024.
Congress may next turn its attention to certain expiring tax provisions with widespread interest in the business community, such as research and development cost expensing under section 174, “net interest expensing” under section 163(j), and bonus depreciation.
Our tax professionals at CBIZ will continue to monitor these developments. If you would like to discuss how the Fiscal Responsibility Act or these expiring provisions may impact your business, please contact us.
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