New Tax Bill, Tariff Pause, & Research & Development Tax Break
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Tax Policy/News:
May 12: Judge refuses to block IRS from sharing tax data to identify and deport people illegally in U.S.
A federal judge refused to block the Internal Revenue Service (IRS) from sharing immigrants’ tax data with Immigration and Customs Enforcement (ICE) for the purpose of identifying and deporting people illegally in the U.S. U.S. District Judge Dabney Friedrich denied a preliminary injunction in a lawsuit filed by nonprofit groups, which argued that undocumented immigrants who pay taxes are entitled to the same privacy protections as U.S. citizens and legal immigrants.
Friedrich, appointed by President Donald Trump, had previously refused to grant a temporary order in the case. The decision comes after former acting IRS commissioner Melanie Krause resigned over the deal allowing ICE to submit names and addresses of immigrants inside the U.S. illegally to the IRS for cross-verification against tax records. The plaintiffs expressed disappointment but noted that the case is far from over and will be closely monitored to ensure compliance with the law. The IRS has faced upheaval over Trump administration decisions to share taxpayer data, with a previous acting commissioner announcing retirement amid controversy.
The Treasury Department says the agreement with ICE will help carry out Trump’s agenda to secure U.S. borders as part of a larger nationwide immigration crackdown. The acting ICE director stated that the collaboration is strictly for major criminal cases. Advocates argue that the IRS-DHS information-sharing agreement violates privacy laws and diminishes the privacy of all Americans. Friedrich ruled that the agreement doesn’t violate the Internal Revenue Code, as the IRS is using existing statutorily authorized tools to assist with criminal investigations.
Federal law allows the IRS to release some taxpayer information to other agencies if it may assist in criminal enforcement proceedings and meets certain criteria. However, not all information held by the IRS can be turned over, and the investigating agency must provide specific details to the IRS for the information to be released. The law contains a significant exception, stating that a taxpayer’s identity, including name, address, or taxpayer identifying number, isn’t considered part of protected tax return information.
May 9: After mass layoffs, IRS to plug holes with AI
The IRS plans to leverage AI to address workforce gaps following the layoff of over 3,000 tax agents. During a May 6 oversight hearing, U.S. Treasury Secretary Scott Bessent explained that AI solutions would help accommodate further budget and staff reductions without compromising tax collection.
The Treasury's budget proposal includes the removal of another 40,000 jobs. Bessent sees proposed cuts to the agency's IT budget as an opportunity to modernize its infrastructure, enhancing collections through smarter IT. The IRS already uses AI for operational efficiency, compliance, fraud detection, and taxpayer services.
Since Trump appointee Elon Musk aimed to downsize the federal government, the IRS has lost about 11 percent of its workforce, with 31 percent of agents terminated or taking deferred resignation plans between January and March. Elsewhere in the federal government, agencies are implementing more AI solutions, with generative AI becoming a priority for the Department of Defense, FDA, and HHS.
Musk announced the development of an AI chatbot to analyze government contracts and increase productivity among U.S. General Services Administration employees. He was later accused of using AI to surveil internal communications between federal workers, including EPA employees.
May 7: A ‘bunch’ of tax provisions in megabill could be temporary, GOP tax writer says
Republicans may include several temporary tax provisions in their budget package to reduce its cost, according to Rep. Ron Estes (R-Kan.), a member of the Ways and Means Committee.
While they aim to make as many provisions permanent as possible, including tax breaks for things like business research and investment expenses, cost pressures may force lawmakers to accept shorter extensions for some parts of their plan. Estes mentioned that some provisions might be temporary, lasting four, six, or eight years. This approach is often used to hold down the cost of tax plans, with the hope that future Congresses will extend them.
However, this may antagonize colleagues in the Senate, including Finance Chair Mike Crapo (R-Idaho), who prioritize permanency. The debate in the House is intensifying as the Ways and Means Committee aims to approve its bill next week, which would extend expiring provisions and fulfill some of President Donald Trump’s campaign promises for additional tax cuts.
Republicans are considering scaling back their tax cut to $4 trillion from $4.5 trillion, as they struggle to find $2 trillion in required cuts. The total size of the tax cuts is contingent on lawmakers simultaneously cutting spending by prescribed amounts. If they don’t, the tax cuts shrink accordingly.
Economic News/Policy:
May 12: House panel releases sweeping GOP tax bill
The House Ways and Means Committee released a fuller version of its part of Republicans’ bill full of President Trump’s legislative priorities, kicking off what is expected to be a showdown over the tax provisions in the sprawling measure. The 389-page measure increases the state and local tax (SALT) deduction cap from $10,000 to $30,000 for single and joint filers, a figure lower than the proposal floated by key stakeholders.
Moderate Republicans from high-tax blue states have been pushing for a higher SALT deduction cap, but deficit hawks are opposed to it. The bill includes several tax-related promises Trump made on the campaign trail, such as getting rid of taxes on tips and overtime, exempting car loan interest payments through 2028, and making the 2017 income tax rate reductions permanent.
The bill also increases the pass-through deduction to 23 percent from 20 percent, which is welcomed by the National Association of Manufacturers. Critics argue that the GOP tax framework is another example of trickle-down economics, benefiting businesses, investors, and managers more than workers and consumers.
The bill includes a temporary expansion of the child tax credit, bumping it up to $2,500 through 2028. It also increases the debt ceiling by $4 trillion and rescinds some renewable energy incentives in Democrats’ 2022 Inflation Reduction Act. The Republican tax plan leaves in place the carried interest loophole, which Trump has criticized in the past but appears to have left alone.
May 12: US and China reach a deal to slash sky-high tariffs for now, with a 90-day pause
The United States and China agreed to reduce their massive recent tariffs, restarting stalled trade between the world’s two biggest economies and setting off a rally in global financial markets.
The deal lasts 90 days, creating time for U.S. and Chinese negotiators to reach a more substantive agreement, but leaves tariffs higher than before President Donald Trump started ramping them up last month. U.S. Trade Representative Jamieson Greer announced that the U.S. agreed to drop the 145% tax Trump imposed last month to 30%, while China agreed to lower its tariff rate on U.S. goods to 10% from 125%.
Treasury Secretary Scott Bessent emphasized that the triple-digit tariffs amounted to “the equivalent of an embargo,” and neither side wants that. The delegations met for at least a dozen hours over the weekend in Geneva, deepening personal ties in the effort to reach a deal. The 30% levy on Chinese goods includes an existing 20% tariff intended to pressure China into preventing the synthetic opioid fentanyl from entering the U.S., and a 10% baseline tariff Trump has imposed on imports from most countries. China’s Commerce Ministry called the agreement an important step for resolving differences and laying the foundation for further cooperation.
May 9: Treasury Dept. asks Congress to raise debt ceiling before August to avert default
Treasury Secretary Scott Bessent urged congressional leaders to extend the debt ceiling by mid-July, before Congress leaves for its annual August recess, to avert economic calamity.
In a May 9 letter, Bessent warned that the U.S. will likely run out of borrowing authority by August, citing "significant uncertainty" in the exact date. He emphasized the need to increase or suspend the debt limit to protect the full faith and credit of the United States.
Republicans, who control the House and Senate, plan to raise the debt ceiling by $4 trillion or $5 trillion in their sweeping party-line bill to pass President Donald Trump's agenda. However, the party is struggling to unify on various components of the legislation, making it unclear if they will pass the bill before August.
If they fail to meet the timeline, they may have to address the debt limit issue separately and seek Democratic support to avoid an economic crisis resulting from a default on U.S. debt. Bessent warned that a failure to suspend or increase the debt limit would wreak havoc on the financial system and diminish America's security and global leadership position.
President Donald Trump privately pressed House Speaker Mike Johnson to add two additional proposals to the massive package for his agenda: raising the tax rate on the highest earners and closing the carried interest loophole.
These eleventh-hour requests complicate the process for Republican lawmakers as they try to find enough savings for the bill, which seeks to extend Trump's 2017 tax cuts, boost funding for immigration enforcement and defense, and raise the debt limit. The White House has considered hiking the top tax rate for the wealthiest people for months and is close to finalizing a topline number for the bill.
Trump is considering allowing the rate on individuals making $2.5 million or more annually to revert from 37% to the pre-2017 39.6% to protect Medicaid and help pay for middle- and working-class tax cuts. While Republicans have floated the idea of allowing tax rates on top earners to go up when major parts of the 2017 tax law expire, GOP leaders have resisted a tax increase on the wealthy. Trump previously shot down the idea of increasing taxes on millionaires, calling it "disruptive."
However, with Trump pushing Johnson to reverse course and House Republicans struggling to make the math work for their massive bill, leadership is reconsidering its options. The House Ways and Means Committee plans to mark up its part of the reconciliation bill next week, but it is still sorting through issues such as how to raise the cap on the state and local tax deduction. House GOP leaders aim to pass the final package on the floor before Memorial Day.
May 7: Fed holds rates steady despite pressure from Trump
The Federal Reserve’s interest rate setting committee held rates steady at a range of 4.25 percent to 4.5 percent, despite calls from President Trump to lower borrowing costs amid price pressures from his trade war. This rate hold was the third in a row, following pauses during meetings in March and January, after the central bank cut rates three times in the latter half of 2024.
The Fed’s move was in line with market expectations, with one prediction algorithm putting the probability of a hold at about 98 percent just prior to the announcement. Fed officials emphasized the sturdiness of the domestic economy and the uncertainty driven by Trump’s tariffs, which complicated plans for future rate cuts. Fed Chair Jerome Powell stated that solid fundamentals in the economy allow the central bank to be patient as new trade, fiscal, and regulatory policies unfold.
The pause follows a healthy April employment report, which saw 177,000 jobs added to the economy, and a significant moderation in inflation, falling to a 2.3-percent annual increase in March from 2.7 percent in February. Trump has been calling on the Fed to lower interest rates amid his trade war with China, which has led to a major slowdown in commercial activity between the two countries.
Treasury Secretary Scott Bessent is scheduled to meet with Chinese Vice Premier He Lifeng in Switzerland to discuss trade de-escalation. The economic drag created by the trade standoff has prompted responses from both Chinese and American policymakers, with the People’s Bank of China announcing measures to shore up the domestic economy, including reducing its policy interest rate and commercial lending rate.
May 6: US trade deficit hits record high as businesses, consumers try to get ahead of Trump tariffs
The U.S. trade deficit soared to a record $140.5 billion in March as consumers and businesses tried to get ahead of President Donald Trump’s latest tariffs. The deficit, which measures the gap between the value of goods and services the U.S. sells abroad against what it buys, has roughly doubled over the last year.
In March 2024, the gap was just under $68.6 billion. Federal data shows U.S. exports for goods and services totaled about $278.5 billion in March, while imports climbed to nearly $419 billion. Consumer goods led the imports surge, increasing by $22.5 billion in March, with pharmaceutical products climbing $20.9 billion, signaling that drugmakers sought to get ahead of Trump’s threats to slap tariffs on the sector.
Analysts noted that almost all pharmaceutical products were imported from Ireland. Retailers may not have bought as many clothes, toys, and furniture from abroad due to previously-implemented levies or uncertainty. Imports of capital goods, automotive parts, and cars also increased in March, while industrial supplies and materials, such as metal and crude oil, fell. Service-based imports like travel also decreased.
The White House insists that new tariffs will help close long-standing trade deficits, reinvigorate manufacturing in America, and generate government revenue. However, economists warn of significant consequences for businesses, households, and economies worldwide under the proposed rates.
Energy and Environmental Policy/News:
May 12: Republicans axing EV credit, phasing out ones for green energy in budget bill
House Republicans announced plans to repeal Democrats’ tax credits for electric vehicles (EVs) and phase out those for climate-friendly energy sources. The green energy credits have been a point of conflict within the GOP, with some members calling for their full repeal while others advocate for retaining credits for low-carbon energy projects in their districts.
The Ways and Means Committee's bill proposes terminating tax credits for pre-owned EVs purchased after this year and new vehicles put in service after next year. It also includes a cap for new EVs put in service between 2025 and 2026, limiting eligibility for the tax credit to manufacturers who have sold fewer than 200,000 EVs in the U.S. between 2010 and 2025.
The bill seeks to phase out credits for low-carbon energy sources, reducing them to 80 percent for projects beginning in 2029, 60 percent for projects beginning in 2030, and 40 percent for projects beginning in 2031, with no new projects eligible after 2031. The bill also phases out tax credits for nuclear energy along the same timeline and ends credits for hydrogen energy projects starting after this year.
Additionally, tax credits for electric vehicle chargers, home energy efficiency updates, and home renewable energy like rooftop solar are axed after this year.
May 9: States fight back against Trump’s wind and EV attacks
Democrat-led states are suing the Trump administration to protect wind farm and EV charger construction. Attorneys general from 17 states and Washington, D.C., filed a lawsuit against Trump’s executive order that paused the approval of new federal leases, permits, and loans for wind farms. The suit alleges that Trump’s actions threaten thousands of jobs, billions of dollars in investments, and the country’s clean energy transition.
New Jersey Attorney General Matthew Platkin stated that Trump’s anti-wind orders are unconstitutional and counterproductive to increasing domestic energy production. Additionally, a coalition of 16 states and D.C. sued the U.S. Transportation Department for withholding billions of dollars for a national electric-vehicle charger buildout, arguing that the funding was allocated as part of the 2021 bipartisan infrastructure law and only Congress has the power to pull it back.
This rollback would jeopardize hundreds of charging stations that haven’t yet been built. More cuts could be on the way as the Trump administration and Congress work to roll back Inflation Reduction Act tax credits. Despite federal animosity toward offshore wind, developers like Ørsted and Dominion Energy continue building wind farms in New York, Rhode Island, and Virginia.
The Trump administration’s actions have put 26 U.S. manufacturing projects and thousands of jobs at risk, and there is disagreement among Republicans over whether to preserve, edit, or repeal Inflation Reduction Act tax credits.
May 6: Policymakers chart middle path on climate, energy under Trump 2.0
The article discusses the polarized atmosphere around U.S. energy and climate policy, highlighting a broadly popular path forward as discussed at The Hill’s Energy and Environment Summit in Washington. Despite disagreements over fossil fuels, urgent climate action, and support or opposition to President Trump, key policymakers found broad consensus on the issues.
Congressional Republicans and the Secretary of Energy are pushing to slash Biden-era clean-energy tax credits to pay for Trump’s party-line tax bill. However, leaders like Rep. Randy Weber (R-Texas) and Sen. Ed Markey (D-Mass.) urged keeping the Biden-era credits and speeding infrastructure build-out. Weber emphasized the need for streamlined permitting for various energy sources, while Markey warned against corporations running roughshod over communities and stressed the acceleration of ongoing energy projects.
The article also notes the rapid fall in price for renewable energy systems and the bottleneck of supply chains for gas power plants. Attendees argued for a broad shift back toward the middle on climate action, with conservative members taking subtle swipes at President Trump’s energy policies.
The proposed elimination of Biden tax credits has provoked alarm, with analysis suggesting it could cost nearly 400,000 jobs. Republican members have called on Congress to preserve these credits, emphasizing the importance of permitting reform for the credits to yield true potential.
Technology:
May 12: House GOP proposes 10-year ban on state AI regulations
A Republican tax bill released late Sunday seeks to block states from regulating artificial intelligence (AI) models for the next 10 years. The bill, from the House Energy and Commerce Committee, would bar states from enforcing laws or regulations governing AI models, AI systems, or automated decision systems.
It provides exemptions for laws and regulations that aim to remove legal impediments, facilitate the deployment or operation of AI systems, or streamline licensing, permitting, routing, zoning, procurement, or reporting procedures. State laws that do not impose substantive design, performance, data-handling, documentation, civil liability, taxation, fee, or other requirements on AI systems would also be permitted.
The bill aligns with the administration’s emphasis on AI innovation instead of regulation. Shortly after taking office, President Trump rescinded former President Biden’s executive order establishing guardrails around AI and fielded input on his own forthcoming “AI Action Plan.” Vice President Vance criticized excessive regulation of AI during his first international trip in February, stating that it could kill a transformative industry just as it’s taking off.
Meanwhile, states have sought to develop laws around the rapidly developing technology, with state legislatures considering nearly 700 AI bills last year, 113 of which were enacted into law. California launched a controversial effort last year to regulate extreme risks from AI, which faced pushback from federal lawmakers. State S.B. 1047, which sought to require powerful AI models to undergo safety testing before release and hold developers liable for severe harms, was ultimately vetoed by California Gov. Gavin Newsom.
May 9: Tech Industry Warns US Investment Pledges Hinge on Research Tax Break
Major tech companies are lobbying to salvage a tax deduction for research and development (R&D), warning they may pull back from high-profile pledges of new US investments if Congress doesn’t fully reinstate the break.
Big tech companies have pledged more than $1.6 trillion in investments in the US since Donald Trump took office, promising to build factories and data centers in alignment with Trump’s push to build in America. However, industry representatives are signaling those promises will be imperiled if Congress doesn’t fully reinstate the R&D tax deduction, which was pared back to help offset the massive cost of Trump’s 2017 bill. Jason Smith, chair of the House Ways and Means Committee, indicated that he expected R&D expensing would make it into the final package.
There is evidence that US corporations pulled back on research investment once the R&D tax break became less generous in 2022. Lobbyists are optimistic Congress will restore the full break, allowing companies to write off the entire cost of research and development in the year they incur the expense. A bipartisan group of two dozen senators introduced a bill to revive full upfront R&D deductions for businesses, which would restore the benefit retroactively.
The cost of making R&D expensing retroactive to 2022 and permanently extending it would be high, with estimates ranging from $139 billion to $161.4 billion over ten years. Industry advocates are focusing on getting Congress to make the new break retroactive, effectively reimbursing companies for the money they missed out on while the value of the R&D deduction was curtailed under the Trump tax law.
For Fun:
May 8: Asking chatbots for short answers can increase hallucinations, study finds
A new study by Giskard, a Paris-based AI testing company, reveals that instructing AI chatbots to provide concise answers can increase their tendency to hallucinate. The study found that prompts for shorter answers, especially on ambiguous topics, negatively affect an AI model’s factuality.
Researchers noted that simple changes to system instructions significantly influence a model’s tendency to hallucinate, which has important implications for deployment as many applications prioritize concise outputs to reduce data usage, improve latency, and minimize costs.
The study identified that leading models, including OpenAI’s GPT-4o, Mistral Large, and Anthropic’s Claude 3.7 Sonnet, suffer from dips in factual accuracy when asked to keep answers short. Giskard speculates that when models are told not to answer in great detail, they lack the space to acknowledge false premises and point out mistakes, leading them to choose brevity over accuracy.
The study also found that models are less likely to debunk controversial claims when users present them confidently and that models preferred by users aren’t always the most truthful. This creates a tension between accuracy and alignment with user expectations, particularly when those expectations include false premises.