Lawmakers from both parties talk tax cuts even as US debt reaches new highs

Lawmakers from both parties are pushing for a deal on new tax cuts that could help poorer Americans and businesses but could also add new red ink at a time when US national debt is at a record high.

These negotiations are ongoing, according to two sources familiar with the situation, and are set to resume in earnest when Congress returns next week. But they face an uphill climb amid a jam-packed 2024 agenda.

Those discussions could also run headlong into government funding talks that are expected to hinge on deficits and fiscal responsibility. The US government's debt recently topped $34 trillion for the first time in history.

"Yeah, it feels very disjointed to be worried about debt and deficits but then reduce revenue by a hundred billion dollars or potentially more," said Erica York of Washington’s Tax Foundation in a recent interview, citing the possible budget impact of a tax deal. The Committee for a Responsible Federal Budget further estimates that costs could balloon much higher if the changes are made permanent with a tab of $830 billion through 2033.

The tax talks, which continued at the staff level over the holiday break, have centered around the idea of pairing a Republican priority to renew three expired business-world deductions from the Trump era with a Democratic focus on bringing back some version of the pandemic-era enhanced child tax credit.

"The tax-writing committees are continuing to have productive, bipartisan discussions as we work toward an agreement," Ryan Carey, a spokesperson for Senate Finance Committee Chair Ron Wyden, told Yahoo Finance Thursday.

Wyden is leading the talks from the Democratic side, paired with House Ways and Means Chair Jason Smith on the GOP side.

Paying for all or part of any potential deal appears to be a key sticking point, with the Washington Post reporting Thursday that negotiators are weighing an end to the pandemic-era employee retention credit as one possible avenue to fund at least some of the cost.

A wave of small businesses apparently filed improper returns to try and claim that credit, recently forcing the IRS to take action.

The potential space for compromise

The outlines of such a deal have been discussed on Capitol Hill for over a year now. But advocates say there could be a new window of opportunity, in spite of the budget concerns, as the removal of these provisions continues to bite at pocketbooks and balance sheets across America.

"People know what's possible," notes Jessica Fulton, the interim president at the Joint Center for Political and Economic Studies and a proponent of bringing back the enhanced child tax credit.

Her argument is that a jump in poverty after the credit expired and new fiscal challenges that await poorer Americans in the coming months — from student loan payments to the expiration of other aid programs — could increase the urgency for action.

"People having the opportunity to see that and feel what that meant for their day-to-day lives was really important," she added.

Progressive lawmakers continuously pushed for the enhanced child tax credit since it expired at the end of 2021.

The one-year measure was signed into law in 2021 by President Biden, temporarily raising the credit to a maximum of $3,600 per child from $2,000. It also made the credit refundable and it was paid out as monthly benefits.

But it reverted in 2022 and a renewal effort at the time faced opposition from Republicans and figures like Sen. Joe Manchin (D-W.V.).

The credit has gradually gained some notable allies across the aisle. In one memorable 2022 letter, figures like Newt Gingrich and Mike Huckabee argued for an expansion of the credit to $3,000 as part of "legislation that supports children and families."

A parallel focus on corporate taxes

There is increasing space for compromise, some hope, around much-debated tax changes for the corporate world that also began to expire at the end of 2021. Those provisions deal with business deductions for research and development, equipment investments, and interest costs.

The removal of these credits will continue to eat into American competitiveness especially vis-à-vis China, according to York.

It "doesn't matter what industry you're in, the tax treatment of that got worse this year [and] it'll get worse next year and the following years" as the provisions continue to phase out, she said.

The hope among the negotiators is they can make something happen quickly — and perhaps even retroactive to 2023.

Carey says of the talks that "we're optimistic, and the goal remains getting this done in time for changes to take effect in this upcoming filing season."

Whether or not that comes to pass, taxes are set to be at the top of Washington's agenda after the election, with many additional tax breaks included in the 2017 Trump tax cuts set to expire on Dec. 31, 2025.

Advocates like Fulton promise to keep the child tax credit on Washington’s agenda whether or not a deal comes to fruition in the coming weeks.

"We know that the folks who have the least optimistic views of the economy are the people who would largely benefit from the tax credit expansion," she notes, adding that "I don't see communities backing down from pushing for this."

This post has been updated with additional context.

Ben Werschkul is Washington correspondent for Yahoo Finance. Janna Herron contributed additional reporting.

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