The Deduction

Exploring the Impact of the 2024 Tax Relief Act

• Dan Carvajal

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Today, we're exploring the intricacies of the latest congressional act stirring up Washington—The Tax Relief for American Families and Workers Act of 2024. 

Erica York, Senior Economist and Research Director at the Tax Foundation, joins Kyle Hulehan to dissect its key features, including the restoration of crucial business investment provisions, an expansion of the Child Tax Credit, and changes to pandemic-era tax credits.  

The conversation also sheds a light on the act's temporary and retroactive dimensions, which could leave taxpayers in uncertain, and confusing, territory. 

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Kyle Hulehan:

Today we're exploring the intricacies of the latest congressional act that's stirring up Washington. The Tax Relief for American Families and Workers Act of 2024. We'll dissect its key features, including the restoration of crucial business investment provisions, an expansion of the child tax credit and changes to the pandemic era tax credits. As well as shedding a light on the act's temporary and retroactive dimensions, which cast a shadow of confusion, leaving taxpayers in uncertain territory. Hello and welcome to the Deduction, a Tax Foundation podcast. I'm your host, Kyle Houlihan, and today we are joined by Erika York, Senior Economist and Research Director here at TF. Erika, how are you doing today?

Erica York:

Hey, I'm doing well Kyle.

Kyle Hulehan:

So Erika, it is the new year. It's 2024 now. I have a really quick question for you. Do you like resolutions? Are you a resolutions person? Do you start the new year with resolutions?

Erica York:

Actually this is the first year I have not done any resolutions and the thought never even occurred to me until you just asked that question, so I guess no, I'm not a resolutions person anymore.

Kyle Hulehan:

Honestly, I get that. I'm actually, I'm not a resolutions person. You can change at any time. I don't understand why you need the new year to change anything. we all know at this point, I mean, time's a relative concept. We can change it whenever. but I am curious. I've sort of been taking a poll of people and are you a resolution person or not? I, I feel like resolutions maybe are going out of style a little bit.

Erica York:

Yeah, well, I have two young kids and so it's, it's always just kind of keeping up with them, not, not really thinking about. That it's a new year, just, my daughter did start preschool in January, so I guess maybe that's, that's the resolution, getting her to, to preschool on time and, and being in the pickup line and, and all that.

Kyle Hulehan:

Yeah. I think that's a much Much better resolution than most right there. Yeah. So to kind of transit transition here to, uh, hopefully we get a resolution with Congress or some sort of any movement from Congress whatsoever. But could you just give us a little bit of a brief rundown of the dynamics that are going on in Congress and set the stage maybe for our audience a little bit about, the tax relief for American workers and active 2024. Okay.

Erica York:

Yeah, so a big part of what Congress is looking at right now is this general idea called tax extenders. those are temporary tax policies that lawmakers, typically provide temporary extensions for. So there are things that, you know, last one or two years, they're going to expire, but then they get kicked down for, for another one or two years. But the last time that Congress did that was at the end of 2020. So we have not had a piece of bipartisan tax legislation since the end of 2020. And here we are sitting at the beginning of 2024. at that time they, they dealt with some expiring provisions. Again, doing, doing temporary stuff. And so in the interim since that 2020 law, a lot of things have expired. We've also had some new expirations come online, so some major scheduled changes from the 2017 Tax Cuts and Jobs Act have taken place. Those are tax changes that have increased the cost of investment, and so just given the timing of where we're at, how, you know, one of the big priorities for lawmakers right now is competitiveness with China, ensuring that we have strong supply chains, but they haven't been doing anything on the tax policy front for Three and a half years. And then of course we had the new administration come in, the Biden administration after that, and that took tax policy in a different direction. either, you know, you can think of the American Rescue Plan Act. So another round of COVID relief that significantly increased things like the child tax credit. And then we had the Inflation Reduction Act, which had tax increases for businesses in it. And now we've had one year of divided government in 2023, and we've seen virtually no legislative action. So tax policy has sort of been in limbo. And in that period of limbo, lawmakers have been trying to reach an agreement on what do we do with all this expired stuff. They haven't been able to do that until right now, the beginning of, 2024, and they've released a bill that would address some of these, provisions that have just been sitting there with a high level of uncertainty surrounding them.

Kyle Hulehan:

Well, it's nice to see Congress actually making some movement on something, and I, I just want to touch on this briefly. It's a complex issue, but I just wanted to see how you felt or saw some of the child tax credit changes. Is that a big change? How do you see that on your end?

Erica York:

Yeah, so we're coming on the heels of the really large expansion from the American Rescue Plan in 2021, which significantly boosted the child tax credit, made it fully refundable and eliminated the phase in. So even families that didn't have any tax liability, that didn't have any income, got the child tax credit, which was a. big departure from what we've seen the credit do historically, which is offset taxes and provide a work incentive. And so there has been a desire since that credit expired in 2021 to bring back that full change. But it's a pretty fundamental change to the child tax credit, and it's really expensive. And so that's been a hurdle. and that's not what we're talking about here in this new tax bill that's been released. What we're looking at now is relatively minor changes. to the Child Tax Credit. the proposal in the Tax Relief for American Families and Workers Act of 2024, it increases how fast the credit phase is in for families that have multiple children. It starts providing some inflation adjustments to the credit amounts. One particular change that's gotten some, people concerned is this idea of a look back. it would allow people, when they're calculating how much refundable child tax credit they get, to go back to the previous year and use their previous year's income, if that would provide them a larger amount of credit. there's been some concern that that would dramatically change work incentives. In our assessment, it's not that dramatic of a change, particularly because we're only talking about a temporary change. it's, it's allowing that for 2024 and 2025 and as well as the taxes people are filing, getting ready to file now. So compared to what we saw in the American Rescue Plan, this is a pretty small scale change to the child tax credit that generally retains, the work incentives that, that are embedded in that credit.

Kyle Hulehan:

Yeah. And I think in general, we're talking about a bipartisan bill and something we talk a lot here at the Tax Foundation about is there's trade offs in taxes. You have to work with both sides and everyone has to come to a common agreement. And moderation is sort of what you hope for in a lot of ways in almost everything, when it comes to these changes. So I think that's pretty understandable there that maybe we've actually come to some sort of middle ground there. but I want to, I want to transition a little bit to here, the main things, the big things we want to focus on here that are in this bill. What are the main features that you see of the 2024 tax relief act and how are they different maybe from previous tax laws?

Erica York:

Yeah, so in addition to that change to the child tax credit, which I would say is one of the major features, two other major changes are restoration to two provisions for business investment. That's first investment in research and development. So like what you're spending to pay scientists and other researchers to come up with innovative new ideas, and what businesses spend for machinery and equipment and software. So both of those types of investment would get full and immediate deductions under this proposal rather than having to stretch those deductions out over time. Other features besides those Two big ones for business investment in the child tax credit are, restoring a provision for business interest deductions, expanding the low income housing tax credit, particularly increasing the amount that states receive for their allocation of credits and some other bipartisan priorities related to Taiwan and to disaster relief. another thing, I think. That's an important element to know about. This bill is that it provides retroactive tax cuts in some cases, like for the R and D provision that's being restored. it provides that all the way back to 2022. And I think that's partially a reflection of what I talked about earlier about. These have all been in limbo. Congress hasn't been able to address them. And so now that they're finally able to go. Maybe get to a compromise on it. They're, providing that relief and those changes retroactively because they couldn't get to that business, back in 2022 2023.

Kyle Hulehan:

Actually, I want to follow up on the retroactive thing because then I feel like that could be a little bit confusing Is it's retroactive because congress hasn't been productive. So these are things these are the law is going to apply to prior years Is that that's what you mean?

Erica York:

That's exactly it. So these are tax policies that changed in the past. So starting in 2022, when a company had expenses, say they paid a scientist, instead of getting to deduct the full cost that they paid that scientist in 2022, they could only deduct essentially a fifth of it and had to wait to take those deductions over time. So that's a change that took place in 2022. In 2023, that remained the treatment for R& D. And the treatment for, bonus depreciation, so what a business spends to purchase a new machine, that treatment started changing, so they could no longer deduct the full cost of what they spent on the machine. They could deduct part of it, and save the rest of it for later years. the retroactive element is saying, okay businesses, you can go back and amend your 2022 tax returns, you can amend your 2023 tax returns, and deduct those full costs in those years. So it will require, some work on the part of businesses to go back and amend those returns, do the calculations they need to do for any other interactions. Pretty complicated stuff. It's a similar thing for the child tax credit. Some of the changes particularly surrounding the faster phase in and some of the adjustments to how much is refundable. We'll apply for 2023. That's the taxes we're getting ready to start filing next week. so depending on the timing of if this makes it through Congress, we could be looking at a situation where people have filed their tax returns thinking their child tax credit for 2023 is going to be one thing, but then Congress might change it mid filing season. So again, pretty complicated.

Kyle Hulehan:

Erica I know that you're a pro and I apologize for going off script here a little bit I just want to follow up on this because it, that doesn't seem fair. Like it doesn't seem like fair. It doesn't really seem like it's the right thing for us citizens who are paying taxes that things have taken so long and then they're retroactive. It's very confusing. Like if, if you were confused by what Erica was saying. That makes sense because it is confusing. So I just want to touch on that, that this is not particularly fair or, or just.

Erica York:

No, this is no way to do tax policy. This is no way to structure a tax code. Some of the principles we talk about at Tax Foundation are that taxes should be stable and transparent, which means you know what you're going to pay, It's relatively easy to see and to expect what your tax liability is going to be over time. And when we're talking about temporary tax policy, that's bad enough because Congress is saying, yeah, we're going to do this thing, but we're only going to do it for a year or two. And then if we keep doing it, we haven't decided yet. So just wait and see. That's been the MO with these things, but now it's also. Yeah, we couldn't get around to it, so we're also going to go back in time and change things. so it, creates a high level of instability and uncertainty. And it also undermines the effectiveness of these policies in the first place. One of the benefits of full deductions for R& D and for machinery and equipment is that it reduces the cost of capital. When a business can take that deduction up front, it means there's no tax penalty on that investment. So we get a higher level of investment, but that's only true if businesses know that that's the tax treatment. If they don't know, they, they can't plan for that. And another issue with retroactive tax policy in particular is that we can't go back in time and change our behavior. So Congress is providing a tax cut for 2022, but 2022 is closed. You can't go back and invest more now that that investment would receive better tax treatment. So it's, it's very unfair. it's very complicated and we haven't even gotten into what it means for the IRS to even administer these things, especially if it's coming in the middle of the tax filing season. That's another big headache.

Kyle Hulehan:

Yeah. And we all know that that is an incredibly complicated issue as well. You know, the IRS and how they're trying to handle everything and work through what they need to. That kind of rolls perfectly, I feel like, into my next question, what are the overall economic effects of the 2024 tax relief act?

Erica York:

Unfortunately, zero in the long term. So in the short term, particularly the better, change it this for, for cost recovery. So R and D and machinery and equipment that will temporarily increase incentives to invest, but without a business having the certainty that those better incentives are here to stay, they don't have the certainty they need to. permanently respond to those better incentives. So that's why in our estimates, we find that the act would not boost the long run economy. Whether we're talking about wages or investment or output, we find no change in the long run. Now, if we were talking about a different bill where Congress made these changes permanent, The changes to cost recovery would boost the economy. We've estimated that permanence for R and D and machinery and equipment expensing would increase long run GDP by about half a percent. and if you compare this, you can make a bang for the buck metric where you look at How much GDP growth you get from a tax change for each dollar of revenue that it costs the government. R& D expensing and expensing for machinery and equipment investment are the most powerful changes by far compared to any other tax policies. So the potential for economic impact here with these provisions is really high, but because we're just talking about temporary changes, we're not actually realizing that potential, at least not yet.

Kyle Hulehan:

Real quick. I feel like some of these terms, they're not always like super easy to understand. So when we're saying expensing and R& D expensing, I'm just going to paint a picture real quick. I think that maybe can be helpful for the audits. Full expensing is like if I had a business and I bought a 50, 000 tractor, If I have full expensing, I could expense the whole thing in that particular year. And in 2024, I could expense the 50, 000 value of it. When that doesn't exist, it's over time being expensed. So I have a certain number of years, so I can only do, 5, 000 for 10 years or something like that. Is that correct? Am I on the right track with that?

Erica York:

That's exactly right. And the reason Taking those 5, 000 deductions over 10 years is problematic is because, as we've all experienced a lot recently, inflation means that your dollar becomes less valuable over time. if I asked you, you know, hey, Kyle, can I borrow 100 and in a decade from now I'll pay you back, but I'm only going to pay you back. 100 in nominal terms, you'd say, well, that's a pretty bad deal for me because if I actually had that 100, I could invest it and earn a return in 10 years from now, I'd have a lot more than a hundred dollars. Those exact same principles are true. When you tell a company they have to wait to take a deduction for something that they actually expended money on this year, the inflation and the time value of money or the. opportunity cost of what they could be doing with that money in the interim mean they don't get to actually deduct the real value of, of what they spent. And so it creates a tax penalty on productive investment.

Kyle Hulehan:

you know, In addition to that, you're talking about the temporary nature of all of this. And I think, it's hard to understand maybe for everyone, but when you're talking about economic behavior and how businesses behave, not every company is a, a giant company that's gonna be able to know how to Take advantage of their taxes immediately. Right away. It takes time for people to understand all of these things. And when they can't consistently rely on something or a tax code being the same or being able to take the same deductions, they're going to be wary of investing. And I think that's something that, even small businesses and other businesses, not, not just big corporates, have a hard time with, they don't have maybe the same resources or understanding of the law. And I, I think the temporary nature really undermines what businesses are able to do and how they're thinking about it.

Erica York:

That's totally right. And we saw a lot of this play out with the change for R& D expenses in 2022. That was scheduled to take place by a law that was passed in 2017. But there was sort of this general thought, Oh, Congress isn't really gonna let this take effect, because this would really create a tax penalty on R& D. And we want to encourage R& D. So this requirement to take R and D deductions over time probably isn't actually going to happen. But then 2022 came and 2023 came and it's been in effect and we've seen, lots of reporting and, lots of anecdotes on Twitter from small tech companies that have gone to file their taxes and they find I spent most of my revenues on R and D, but I can only deduct a small amount of that. And now I have this huge tax bill. even though I don't have the money to pay it because my money is tied up in the R& D that I already spent and so it's creating, these really tough liquidity problems for, for small firms. a lot of uncertainty over, whether they're going to get relief, what the treatment is going to be going forward. so yeah, this is not an ideal, policy and it's not an ideal way of policymaking to maybe temporarily and retroactively change it, but then still leave the long term, status uncertain.

Kyle Hulehan:

We could talk about this all day long and the unfairness of this and the frustration of this, but, but I'm going to tangent real quick over to the, how are we paying for this part of it? Because that has been also a focus of the tax foundation. We've talked about the deficit a lot. We've talked about a lot of issues that involve, things paying for themselves. How does this actually pay for itself?

Erica York:

Yeah, so I think this is a really bright spot of the bill. Typically, when we're looking at these types of extenders policies, they're not paid for. Congress is just going to say, Oh, we were going to temporarily extend this, it's going to increase the deficit, and they move on. That's not what's happening here. They still are just temporarily extending the policies. So the cost looks smaller than what it would look like if they were permanently addressing the issues, but even given that, the, the tax changes altogether with the retroactive elements, the temporary extensions cost about 78 billion dollars. The 10 year budget window that Congress uses to determine the cost of things. And they're offsetting about all of that higher cost with tighter enforcement from a pandemic era tax credit. So this is the employee retention tax credit that was passed first in the CARES Act of 2020. And the idea was businesses are shut down. But we think we want employers to keep paying their employees, but we understand because they're shut down, they don't have the revenue to do that, so we're going to provide a tax credit to help them keep employees on during the pandemic, and it was supposed to be the short term relief, very targeted, just at that pandemic era and businesses that had to be shut down for the pandemic. It has since expanded, and then we've seen a lot of, fraudulent claims for that credit, pop up, such that it's starting to cost the government a lot more than it first anticipated. And so what the bill does to clamp down on that is say, Alright, at the end of, at the end of this month, 31st, We're no longer going to process claims from this credit. We're cutting it off, because we're very far removed from the pandemic now. So that makes sense. They're also increasing the statute of limitations so that the IRS can have longer to investigate these fraudulent claims and then apply penalties and fees on essentially the ERTC promoters, these companies that popped up to try to get people to file for the credit. They were taking a cut of the credit. So it's a really good pay for. Ending a credit that, that no longer serves a purpose because we're far removed from the pandemic and tightening enforcement around fraudulent claims.

Kyle Hulehan:

That is actually like a pretty impressive, uh, system that they came up with. It's something that's very interesting, a unique solution, I would say to this problem. One thing that I am wondering about real quick is since the act does not, add to the deficit from what we're seeing, what might this mean for inflation and, and future tax policies?

Erica York:

Because it's revenue neutral over the budget window, it's not likely to have a substantial effect on inflation. We're not doing anything dramatically to, you know, boost spending and not offsetting that. So because it's offset, it's It's not going to have a big impact on inflation. I hope that it gives us a signal for what lawmakers are thinking going forward. So of course at the end of next year, we'll have the expirations that are scheduled by this bill, plus we'll have the expirations of the 2017, individual tax cuts. Nearly all of those tax cuts are scheduled to sunset at the end of next year. And so that means next year lawmakers are going to be debating what's the future of the tax code. And hopefully we're, we're seeing that they're going to pay a bit more attention to deficits and debt and be mindful of, you know, fiscal responsibility, coming up with a way to offset what you want to do in the tax system. I don't know if it will pan out that way, but, but if this is any indication, It's showing us that lawmakers are a bit more worried about the deficit than they have been in the past, and so pay fors might be a bigger part of the conversation.

Kyle Hulehan:

How do you see this bill continuing the conversation, throughout the election year that we're about to be in? How do you, how do you see that evolving? And even, we touched on this earlier, but the temporary nature and the retroactive taxes. It's all a bit unfair and complicated, and this is, a lot of a question, but, you know, I think you can tackle it.

Erica York:

So a couple of things. the tax filing season is kicking off, uh, in five or six days. We have a Congress that is considering changing the tax system for which we're about to file taxes. We've seen this happen for decades now, and that's not an exaggeration. I was watching a tax hearing the other day, rewatching one from 2014. and one of the Congressman's remarks was, we have these provisions that incentivize business investment, but often they're temporary and sometimes they're retroactive. And I was like, yes, a decade here. We are a decade later and we're, we're having that same conversation. I'm a bit pessimistic because here we are again debating a temporary tax bill with retroactive tax cuts, but I think maybe two reasons for optimism are that lawmakers are probably setting up this 2025 expiration in this bill to align it with those broader TCGA expirations in the hopes of permanent solutions. And an inevitable deal next year because we know they have to debate and they have to pass a tax package in 2025 to address all of those expirations. So maybe they'll learn the lesson, maybe they'll take it to heart and say We're done with, with this needless complexity, with this needless uncertainty, with the headaches that we're causing taxpayers, with the headaches that we're causing tax administrators, and we're going to do something, you know, permanent. I guess that's my, my optimistic take on it. if history is any indication where we're probably, you know, looking at more temporary changes, Bottom line, it's unfair to taxpayers, it's complex, it undercuts the purpose of these provisions when you only do them on a temporary basis, and most lawmakers are already familiar with this, so maybe 2025 will be the tipping point where they, they put those lessons into practice.

Kyle Hulehan:

I have two quick follow ups, real quick, as we're closing out here. One being, I think if there is a reason for optimism, we've seen that the UK has adapted full expensing, and I'm hopeful that we will see, obviously, really positive steps forward there. Do you, do you think that will be the case in the UK and maybe that'll help propel our government or enact them to maybe change something?

Erica York:

Yeah, I would hope so, I think looking at that and then also looking at China and how there's a heightened sense of needing to be competitive with respect to China and looking how they treat R& D and investment in their tax code. They provide a super deduction for research and development. Meanwhile, we require amortization. From the international competitiveness standpoint, from these strategic and economic interests of the United States, it absolutely makes sense to, to address these and to address them on a permanent basis. yeah, I hope so.

Kyle Hulehan:

Okay, and my second follow up, and I underlined this twice so it's very important, is you are watching a hearing from 2014? I need you to explain this right now. I, I need to know why were you watching a 10 year old hearing?

Erica York:

Yeah, so I created a playlist of basically all of the Ways and Means Committee hearings in the run up to the 2017 Tax Cuts and Jobs Act, so I'm going back and re watching all of those, and it started with one of the hearings in 2014.

Kyle Hulehan:

That is incredibly thorough and maybe incredibly nerdy as well, but that just shows you the level of dedication. I appreciate that. I love that level of really being into it and really being invested. But I, I honestly, I had to follow up on that because I was like, why are you watching a hearing that's 10 years old?

Erica York:

Yeah, I even tweeted out a clip of it, so you can go find it on Twitter, that quote that I gave.

Kyle Hulehan:

Oh my God, I might have to go in and, uh, retweet that for the main, for the main Tax Foundation, uh, uh, uh, Twitter right there. Yeah. So thank you, Erica, for being on the show today. I appreciate you walking us through this and helping us, understand what can be very complicated and confusing and sometimes unfair. I really appreciate you being on the show today. Is there anything that you want to share with the audience that you're working on right now or that you're putting out, uh, in the next couple of weeks?

Erica York:

I, I will say I'm, I'm watching all of those hearings for projects we're doing related to what happened in 2017. later in the year, you can, you can look for some research on the 2017 Tax Cuts and Jobs Act, and then what to expect in, in 2025, or at least options for, for 2025.

Kyle Hulehan:

All right, Erica, thank you for being on the show today.

Erica York:

Thanks, Kyle.

Kyle Hulehan:

This has been another episode of the deduction to learn more about the tax foundation and the deduction. Visit us at taxfoundation. org slash podcast. You can follow us on Twitter, Facebook, and LinkedIn at tax foundation. If you've been enjoying our show and want to help us grow, please leave a five star review on Apple Podcasts, Spotify, or wherever you get your podcasts. It helps others find the show. And if you didn't enjoy the deduction, well, keep it to yourself. Another way you can support our work is by donating to the Tax Foundation on our website. Thank you all for listening, and we'll see you next time.