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Forbes
6 days ago
- Business
- Forbes
Artificial Intelligence And State Tax Agencies
Abstract hologram 3D silicon CPU with futuristic matrix. Digital circuit components with Colorful ... More Digitalization Process. Data and Computational Power of Machine Learning. 3D rendering In this episode of Tax Notes Talk, Ryan Minnick of the Federation of Tax Administrators discusses how state tax agencies are approaching artificial intelligence and shares insights from the FTA's upcoming briefing paper on generative AI and its 2024 tax agency survey. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: AI and state tax. In the past few years, every industry has looked at implementing artificial intelligence into their workflows, and state tax agencies are no exception. But the sensitive nature of the data tax agencies must handle requires an especially careful use of the technology. So how can state tax administrators use artificial intelligence, and how can agencies balance the adoption of new technology with the need to protect taxpayer information? Here to talk more about this is Tax Notes reporter Emily Hollingsworth. Emily, welcome back to the podcast. Emily Hollingsworth: Thanks, Dave. Glad to be back. David D. Stewart: Now, there have been a lot of developments in the past year or so with state tax administrations and the adoption of AI. Could you give us some quick background on what's been happening and where we are? Emily Hollingsworth: Absolutely. Among states, AI policy and legislation have, in a word, exploded this year. The National Conference of State Legislatures recently said that all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands have introduced legislation about AI this year. Twenty-eight of these states and the Virgin Islands enacted legislation on AI, including AI regulations and also prohibiting AI use for certain criminal activity. For quick context, I'll be talking about two forms of AI. There's generative AI, which can generate text, images, or other items. ChatGPT is a well-known example of a technology that uses generative AI. Then there's machine learning AI. This is an older technology that uses algorithms to identify patterns and data. When it comes to examples of state tax administrations and recent developments on AI, California's Department of Tax and Fee Administration, or the CDTFA, announced back in late April, early May, that it will be working with the firm SymSoft Solutions to deploy a generative AI solution to enhance the department's customer services. This solution is trained on the department's reference materials, including manuals, guides, and other documents. When a taxpayer has a question, the solution will generate potential responses that the department agent can provide to the taxpayer. The goal is to use the solution to cut down on customer wait times and help alleviate workloads for agents during peak tax filing periods. Now, while the CDTFA and SymSoft are under a year-long contract to deploy the solution, as I understand it, the solution at the moment isn't currently being used in real time for customers' questions. David D. Stewart: Well, I know you've been following this area pretty closely. Could you give us an idea of what sort of things you've been working on lately? Emily Hollingsworth: Definitely. I'm currently working on a report about this generative AI solution from the CDTFA, looking more closely into the initial testing period the solution underwent in 2024, as well as the project's next steps. A separate report I'm working on looks into machine learning AI tools used by tax departments for decades, for everything from tax return processing to fraud detection and prevention. As state leaders, lawmakers, and advocacy groups call for oversight and regular inspection of AI tools, I'm looking into whether these machine learning tools would also be subject to this sort of inspection and oversight. David D. Stewart: Now, I understand you recently talked with somebody about this. Who did you talk to? Emily Hollingsworth: I talked to Ryan Minnick, who is the chief operating officer with the Federation of Tax Administrators. David D. Stewart: And what sort of things did you get into? Emily Hollingsworth: Well, the Federation of Tax Administrators, or FTA, has been doing an enormous amount to provide training and resources for state tax agencies looking to pilot or implement AI solutions. We got into the FTA's upcoming briefing paper on generative AI, as well as its 2024 tax agency survey. We also delved into topics like data security, transparency and trust, and the roles that state tax agencies are taking when it comes to piloting or implementing AI solutions. David D. Stewart: All right. Let's go to that interview. Emily Hollingsworth: Ryan Minnick, welcome to the podcast. Ryan Minnick: Awesome. Thanks so much for having me, Emily. I'm excited to chat with you today. Emily Hollingsworth: Likewise. So the Federation of Tax Administrators is developing a briefing paper on generative AI technology. The paper is intended to equip tax agencies with information around generative AI, particularly as states and state legislatures are facing increasing pressure to stay competitive with other states and pilot or execute generative AI. When is the briefing paper expected to be released, and what aspects of generative AI will this briefing paper cover? Ryan Minnick: It's a great question, and I guess I'll back up a little bit and explain how this project started and where we are in the scope of things. So as you know, FTA, working with all the states, we're very focused on emerging issues. So in the 10 years I've been here, whether it's blockchain or whether it's some movement to the cloud, there's always some sort of technical innovation on the horizon. And so whenever we see a big one, we tend to organize information around it to help our members understand what their peers are thinking, understand what's happening in the private and academic sectors, just to really make informed decisions for themselves. So the unique thing about states always is that states are sovereign entities. They're going to take whatever approach that they feel is best, but they rely on organizations like FTA to convene them and help guide them a little bit and give them the information that is the most important to them. So a little over a year and a half ago, we formed an AI working group, and we did it in two parts. We started with education, so we hosted, over the course of a 12-month period, two rounds of briefings with experts from every corner of the technology sector and academic sector. So we had researchers that focused on the application of transparency and ethics in AI, we had researchers who focused on large language models and how they actually work, and everything at every depth, from technical to business. We had some private sector groups graciously share with us concepts that they had built for other sectors that leverage these technologies, just so the attendees could get a feel for understanding how you take this fantastical thing of generative AI and start to translate it into what you could actually use it for in your day-to-day work — because there's been, I think, so much really good marketing by the companies that produce generative AI technologies that it becomes a little bit hard to conceptualize what you might actually do in a government agency with it. How is it potentially going to help us? What's the innovation there? So after those two rounds of briefings, we took a set of volunteers that represents a good number of our members. A couple dozen people got together, and they organized themselves into three groups. Those three groups have been focused on some background education information, so just helping anyone who's reading the white paper understand the terminology that's used frequently in the technology, the ways that we encounter the technology in our day-to-day lives, other forms of AI, because people often confuse generative AI for things like machine learning and other tools that have been around for quite some time. We have a group that focuses on opportunities — so not necessarily in production, although some are, but different examples of where this technology might be utilized or where it could be utilized. And they even went a step further and fleshed out some of those concepts just to articulate to both business and technology stakeholders what the possibilities are. And then the third group — which I have to admit, my partner in crime for this particular working group is our general counsel, Brian Oliner, who's formerly the AG representing the Maryland Comptroller's Office. And every time he and I talk about emerging technology, he's such a good foil for a nerd like me because he's a seasoned attorney who has seen complex vendor contracts and understands the ways that states need to protect themselves from a legal and statutory standpoint. And so he and I always like to hash out the details of technology. So he actually worked primarily with the third group, which is our considerations and risks group. So you get through this white paper, and the goal is everyone from executive and business stakeholders in the agency through to maybe some of the technology stakeholders that deal primarily in strategy, they're going to be able to consume the appropriate parts of this white paper and come out on the other side armed with information about how the technology might be applied, understand it maybe through the tax lens a little bit better — through the tax technology, tax agency technology lens a little better — and then also have at their fingertips a bunch of other resources to go out and look at. So our teams, we're not rewriting the book on generative AI. There's so many brilliant researchers out there that are every day coming up with innovations and reports. So in some cases, we're pointing the reader to those really great resources and just giving them the tax context they need to think about it. So that's been the whole purpose of the group and how we've structured so far. Illustration of abstract stream. Artificial intelligence. Big data, technology, AI, data transfer, ... More data flow, large language model, generative AI, binary concept And what's really exciting, and why I'm so glad about your question, is that I finally get to say that by the time our FTA technology conference happens the second week of August out in Tacoma, which is the only technology conference that serves the tax agency perspective. So there's a lot of tax technology conferences out there. They're usually practitioner or CPA driven; this one's hosted by us. It's for tax agencies and people who care about what tax agencies are doing with technology. By the time we get to that conference, we will have published the white paper. And so that will be a really great venue for the IT and business leadership for the agencies who will have, at that point, had the white paper in their hands for a little bit for when they get together and convene, take what they do at our technology conference every year, which is think about the possibilities and what people are doing with technology and hear about successes and new ideas, take it to the next level and see how this fairly new yet very popular-to-talk-about emerging technology might fit into that. Emily Hollingsworth: That sounds really interesting, and we certainly look forward as well to the briefing paper. We've discussed the working groups, and I was curious to know, is that program still open to FTA member agencies who may be interested in participating? We had also talked about this as well, but what are states learning or taking away from these work groups and sessions? Ryan Minnick: Absolutely. It's a great question. So the functional part of the working groups are starting to wrap up. So as we finalize the white paper — at least the first edition of the white paper — the folks that have worked in the three drafting groups that I mentioned before, they're going to have an opportunity to collaborate with us on that final white paper version that is ultimately published to our members. And it gets to the question that you asked, which is, what are states already getting out of this? I actually asked this question of our program co-leads when I was moderating the panel on this at the annual meeting, and the answers were really better than I had hoped. You always hope that people who participate in a working group, that they get value out of it even before the product is finished. And some of the things that they shared were, it was helpful for them to even hear how their peers — who were, as part of the working group, probably already people in their agencies who were thinking about this more than the average employee — to hear how their peers were thinking about this, to hear the level of curiosity, to hear the optimism for the possibilities. And then even for some of the working group members, they've shared with me that this has actually helped make the technology feel a little bit more tangible and a little bit more real. I think the hype curve for generative AI has been really substantial. The underlying technology has been around for a couple of decades, but if you look at — for our conversation today, if we look at ChatGPT launching 20 months ago or so, if you look at that as the inflection point of the generative AI craze, the hype curve was very scary for people in a lot of roles, but in particular in government, because the initial premise was, oh my gosh, this can do everything. It can think. It's a facsimile of a human, it can do all these wonderful things. But of course, as time has gone on, we've all realized that, like any technology tool, it's a new version of a tool that's going to hopefully help improve productivity. It's going to help our organizations do work better. But if you've played with some of these tools recently, they're not taking anybody's job away anytime soon; if anything, they're probably freeing up knowledge workers to do work a little bit more efficiently, a little bit more effectively. The bigger thing that I think is coming out of these trends, and that I think some of our members saw as they were participating in the working group, is the real opportunity for training in this space. This is a shift that is more like the shift from a typewriter to a word processor than it is a shift from a server in your server closet at the office to a server in the cloud. This is a fundamental change in how you interact with technology, which requires you to just completely rethink everything that you're doing. And it's also one of those inflection points where people entering the workforce now are already receiving substantial exposure to it. And so you're going to have a point where, much like the typewriter to the word processor, you're going to have a big chunk of your workforce who you're going to have to upskill and train on it, because they're going to experience it for the first time when they're in the middle stages of their career, but you're at the same time going to be bringing people in at the early stages of their career who are going to be natively understanding it. And it doesn't happen a lot with emerging technologies; it's always a little bit more subtle than, I think, the point that we're at now. Emily Hollingsworth: Thank you. How transparent do you believe that state tax agencies should be when informing the public about AI use? Ryan Minnick: It's a tricky question to answer, not because I don't believe in transparency, but because, like I mentioned before, every state's their own sovereign island, so they have their own regulations and rules that they go through. And so I genuinely believe that our members are as communicative as possible, as they're able to be, with all their stakeholders. And the only times that it might take a little bit more time to share information is when that information being shared might either compromise someone's data security, any data that we want to protect, or also that it might, potentially — in the case of fraud fighting — it might give away to criminals how we're doing something to prevent them from committing crimes. So I think those tend to be the two areas where you see maybe a lag in that sharing, because we want to make sure that we're not oversharing. So 10 or 15 years ago, when we started — in a collaboration for the security summit with the IRS and the tax software industry — developing better methods to protect individuals' identities when they were filing their individual income tax returns, a lot of that work now is very public. There's a lot of that work that's been made available, and people understand what that group is and how it works. WASHINGTON, DC - APRIL 07: A small sign indicates the headquarters of the Internal Revenue Service ... More on April 07, 2023 in Washington, DC. The Treasury Department announced an $80 billion plan for the IRS to become a 'digital first' tax collector and focus on improving customer service and cracking down on tax evasion by corporations and the wealthy. (Photo by) But at the time, we were putting those frameworks in place, and we were sharing as much as we were able to without compromising the nature of the work, because we prioritized making sure that the criminals couldn't figure out what we were doing as we were doing it, because you want to make sure that — unfortunately, the problem with the public internet is criminals — I know in the tax world we use "fraudster" a lot, but in general, criminals of any variety, whether you're committing fraud individually, you're targeting someone for identity theft, or you're doing it at scale because you're trying to use data from the dark web — those are areas where we are, in general, as transparent as possible. But when it comes to individual members and what they do, I don't govern what information they release and at what time. So I think we as an organization commit to keeping our members informed and, to the extent we can, keeping the broader tax community informed of trends as they happen. Emily Hollingsworth: Thank you. We'll move on now to the survey that the FTA had released in 2024 with EY. The survey looked at 37 state tax agencies and two city tax departments. I thought that its section, in particular, on AI was pretty interesting. For example — and I'll read a few of the numbers from the survey — but it said that 15 percent of tax administrations are "conducting pilots or are already using AI in core functions." It also said that 9 percent of respondents said that machine learning AI is being used in core functions, while 12 percent had said that they're conducting pilot programs on machine learning technology — again, distinct from generative AI. So I was curious, is the FTA planning to release a state tax agency survey this year? Ryan Minnick: So we've not released the follow-up survey yet; we're still working on determining what that survey design looks like. We see great value in continuing this effort. That was the first comprehensive survey we had issued in well over a decade. It was a priority of Sharonne Bonardi, our executive director, who formerly was the deputy comptroller for the state of Maryland. And when she joined FTA, one of the resources she wanted us to have —primarily for our members, but also for the general public — was a state of the state tax agencies, helping people understand the priorities and the ways that tax agencies were thinking about emerging issues. And so that was really that report that you mentioned — which I think is a great read, I think everybody should go to our website and download it — when it comes to the AI question, we actually drafted and sent out and published that survey right as generative AI was blowing up. You wish you had a time machine, right? Because I wish we could have structured that question a little bit differently, because as we have been for the last year and a half on a road show, talking about insights from the survey, I get a question about this little section all the time. And ultimately the nonexciting answer is that the question was so broad that it was really incredibly difficult to know exactly how somebody was thinking when they answered the question. We asked about AI because at the time, before generative AI came out, AI was seen as advanced machine learning — I mean, maybe some algorithmic work, maybe some natural language processing. So things like when you call into a phone tree and you say naturally what you're looking for, and the phone tree tries its best to help you find the right person. But that was really the intent of the question when we were writing it, because generative AI had just started emerging as this — we hadn't quite seen the splash from ChatGPT yet. Of course, now fast-forward, and everybody sees that question, they're like, "All these states have AI in production? Oh my goodness, this is crazy." No. They don't. Not the AI you're thinking of, this generative AI that's on everybody's brain today; AI in the sense that a lot of processing in tax agencies across the country, there's a lot of machine learning that takes place. It's programmatic. It's looking for patterns in terms of fraud. It's looking for noncompliance, so criminal fraud versus just general tax fraud, people that either underreport or don't accurately or correctly answer something. It's also looking for things like accuracy; it's monitoring trends. There's a lot of uses for those technologies. So I think the more accurate, interesting insight from that survey is exactly what you pointed out, which is the machine learning piece. Even years after a lot of these machine learning trends started to hit, there's still agencies that are looking at machine learning and how they can use it in different ways. And I'll say as a technologist supporting tax agencies, I think that's a great thing, because there's a lot of really great uses for what I think a lot of people in the public think is old technology, because right now we've all moved on to generative AI. We all want Siri to work better on our iPhones, and we're not really thinking about anything else. But machine learning in some contexts is a better solution to a lot of the problems people want to solve with generative AI. And it's not only better in terms of safety, but it could be better in terms of performance, in terms of cost. Siri logo is seen on a phone screen in this illustration photo taken in the store in Krakow, Poland ... More on September 26, 2024. (Photo by Jakub Porzycki/NurPhoto via Getty Images) Generative AI certainly has its place: It's powered by large language models; it handles language super well. There's a lot you can do with it. It has a lot of configuration that's required, a lot of training that's required so that you get accurate and nonhallucinatory answers. But machine learning, that's good old-fashioned math. That's really sophisticated math. And so what generative AI can't do really well is math. There's some exceptions, but for the most part it's good at language. And most of tax is math. So we actually find ourselves with pretty advanced machine learning capabilities that are available, that have been for a long time, that a lot of agencies use in production that, unfortunately for — I suppose for the hype of it, they fall under that form of AI. But I typically, even when I'm talking about these things on stage somewhere, I'll talk about machine learning, and I'll talk about generative AI. I almost never use the AI term broadly because AI is artificial intelligence, and so far nothing we've developed is artificially intelligent; it just has the appearance of it. So doing math really fast seems very intelligent. So that's machine learning. Interpreting language really fast, or drafting a country music song in the style of Garth Brooks or whatever people have asked ChatGPT to do, that seems very artificially intelligent, but in neither of those cases is that term accurate. I digress a little bit because I know your question was about our survey, but it's so interesting because, going through the results and seeing what states were thinking about and how they were responding to the survey, that was my takeaway, is that I feel like I wish I could go back in time and ask more separately about the different emerging forms of the technology because I think we would've gotten maybe a more representative answer. I think we got some good insights, but 12 percent of states are not actively using generative AI in production. So I hope no one reads the report and thinks that. Emily Hollingsworth: I guess that also leads into my question. So we have the percentage — for example, 12 percent said that they're piloting machine learning technology. Do we know how many states that translates to? Ryan Minnick: Yeah. Based on the survey itself, I assume, based on the data team that put all that together, to me that would be a handful, four or five states that responded to the survey. But that also, like I said, that question's a little bit of a misnomer in how you interpret it. So that could be four or five states at the time of the survey were actively piloting a new use of the technology. Those same states could probably have already had that technology in place doing something else at the same time. So that's something else I think bears explaining. If you're curious about how tax agencies work, people listening, we don't sit still. One of the things that I've learned in my 10 years at FTA is that agencies are always looking forward — how they can do their job better, how they can better serve the citizen, how they can take innovations and leverage them to do more with less, because unfortunately in government, I think that's a lot of the situation we always find ourselves with. So budgets don't necessarily grow as much as we'd like, or sometimes they get cut. Oftentimes legislatures ask for agencies to do new things, and they don't always give them money to do that. So everybody's trying to do the most with what they have. And so when you get innovative technologies that could be used in a line of business — and tax agencies have numerous lines of business: They have everything from receiving data, you have your traditional tax return processing, you've got auditing and collections and customer experience, and you have your legal and tax policy group that has to interpret things that come out of [the] legislature. And there's a lot of moving parts. And so with this question, the way I interpret the answer is four or five or six states at the time of the survey were looking at machine learning to potentially solve a problem somewhere in their agency, irrespective of wherever they were already using that technology, if they were, to solve problems in a different place. Emily Hollingsworth: This is a question that I had when we were discussing state transparency. It relates to California's announcement in April that it had secured a contract with a company and is testing a generative AI solution. Now, this agreement is going to test the solution under a limited — I think this is a testing environment, so it's not necessarily something that's going to go out to the public immediately or be used during large periods of time like filing season. But I was curious to know what your thoughts are on this development. California has also been very transparent about its developments in AI and has also done a lot of work to vet and test those solutions. So I was curious to know what your thoughts were on that particular development. Ryan Minnick: Well, it's a great question, first of all. California, certainly as one of the larger states, certainly by staff, they have the largest numbers of people working on tax administration across their several agencies that do that work. I think even in terms of technology, they're a great example of transparency in government. So you look at their technology modernization plan that they've been doing — I think they're in part two, and I forget what phase of part two they're in — but they started publicly sharing that modernization strategic plan 10-plus years ago, when they were in the first phase, or the first part. So it doesn't surprise me at all that they were incredibly transparent about piloting a technology and going about the process of securing a contract to do so. I think it's also helpful that they shared the scope of what they were thinking about. I know that oftentimes parts of the procurement process are public, and so people can see what states are doing in different agency areas on a regular basis. But California certainly in this case went one step further. I know you all covered it, I know a couple other media outlets did, and they shared, they said, "We're looking at the potential for this technology. It's a very controlled experiment." I can't comment on the project specifically because, first of all, I'm not a part of it. They're just a member, and we don't usually get into that level of detail about it. But in concept, what they did was great. They decided to do something, they shared what they were doing, and now I presume — not being familiar with the project specifically — I presume they're doing that. And then to the extent that they make a decision, they'll come back and take the next step. I think that's, generally speaking, what a lot of agencies look at in terms of a pilot. They want to be very upfront with people who are impacted by whatever they're testing. So sometimes we're able to test technologies in a bubble or in a vacuum, and so we don't necessarily have that need to share what we're testing, because we're not doing it — for example, if you're wanting to test the potential for a technology that would leverage generative AI, but you're not going to actually test it with taxpayers, so you're just going to test it internally, and you're going to test it only on maybe a synthetic data set — so something that's not even real data or real information, it's something that's manufactured for the purpose of testing — just to understand how [the] technology works. That's a super great, super safe experiment, because it's not touching anything sensitive, and if it's something that doesn't work out, then you didn't go through a big implementation to put it in front of everybody. Separately, if you go down the route like California did, and you want to do a limited trial of something, and you can define that scope and you can let folks know about it in the way that makes sense within that state's rules and how the agency operates and how the state as a whole has policies on it, I think that's really great, too. California - Interstate roadsign illustration with the map of California One of the fun things about technology in general — I guess one of the most fun things about technology — is that especially these days, really good ideas can come from anywhere. And the more — this is true inside of government, outside of government — this is my tip to nontechnologists from a technologist is, read about technology; understand how people are using it. Think about how they're using it, and think about how you might be able to. We're seeing so many innovative uses for not even just generative AI, but just tools in general that are being made available. And I think part of that is this increasing level of curiosity of people wanting to figure out how to be more effective, figure out how to optimize things a little better, figure out how to deliver on their mission in the way that best serves their stakeholders, whoever their stakeholders may be. In our context, it's taxpayers and tax administrators, but in somebody else's, it might be readers, if you're a journalist. How can you leverage technologies and understanding how other sectors are doing it? That's one of the reasons why our work group interviewed so many private sector professionals. Some of them weren't even in the tax world — they were just people working on generative AI in the private sector somewhere else. We just wanted to hear what they were thinking about and how they approached the project or what their view on the knowledge was. Because most of the time, I can talk about tax all day long, and Emily, you can translate it into journalism, whether it's tax or otherwise. Likewise, you could tell me something that you're doing in order to maybe reach readers of Tax Notes a little bit easier, a little bit better, get into their inbox a little bit faster. I'm going to listen with my tax administrator ears and think, "Oh, how could I potentially take this really cool thing that you're doing and help benefit my members or the taxpayers?" or, "How can I help my members benefit their stakeholders?" You get into the question of, is transparency important? Absolutely. I think data security is also very important, and fighting crime is also really important. So you have to balance everything. But at the end of the day, it's because there's so much curiosity out there, and I think people who pay attention to these things and can be helpful — especially if people have great ideas, there's some great careers in tax administration, I suppose I should put a shameless plug in — so if you have great ideas for tax administration, share them with tax administrators, because we want to hear them. We want to discharge those duties as faithfully and efficiently and effectively as possible. Emily Hollingsworth: Absolutely. And Ryan, again, thank you so much for coming on the podcast. Ryan Minnick: Oh, of course. Happy to do it anytime. It was great talking to you today, Emily.
Forbes
01-07-2025
- Business
- Forbes
Privacy Vs. Policing: Treasury's Tax Information Sharing Deal
Laptop and download file getty In this episode of Tax Notes Talk , Tax Notes investigations editor Lauren Loricchio discusses Treasury's information sharing agreement with the Department of Homeland Security and its implications for immigrants. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International . This week: data sharing. As we've covered extensively, the IRS has been under a continual spotlight since the beginning of the Trump administration. From funding rollbacks to staff reductions, concerns have mounted over the agency's future. And now, Treasury's decision to share taxpayer information with the Department of Homeland Security has led to increased uncertainty over the privacy of tax data. So what are the risks of this agreement, and how are those affected responding? Here to talk more about this is Tax Notes investigations editor Lauren Loricchio. Lauren, welcome back to the podcast. Lauren Loricchio: Great to be back. David D. Stewart: As I mentioned in the opening, Treasury entered into an information sharing agreement with the Department of Homeland Security. Could you tell us about that? Lauren Loricchio: They did. Treasury Secretary Scott Bessent signed a memorandum of understanding April 7, which established a mechanism for the IRS to share information with the Department of Homeland Security under Internal Revenue Code section 6103(i)(2). That code provision allows the IRS to share limited tax return information with other agencies if the information will help with criminal enforcement. This agreement first became a concern when The Washington Post reported in March that the IRS was getting close to reaching a deal with DHS and that IRS officials were worried it would run afoul of privacy protections in the Internal Revenue Code. We can now see some of the terms of the agreement after the MOU was revealed in court documents. David D. Stewart: What types of taxpayers are being affected by this agreement? Lauren Loricchio: The attorneys that I've spoken to say it is a particular concern for undocumented immigrants, who typically file their taxes using an individual taxpayer identification number, also known as an ITIN. The program allows people without a Social Security number to comply with their tax filing obligations, so many undocumented immigrants file their taxes this way. Not everyone who uses an ITIN to file their taxes is undocumented. To apply for an ITIN, taxpayers submit a form W-7, which asks for their mailing and foreign address, country of citizenship, type of U.S. visa, and date of entry into the United States. David D. Stewart: So what are the concerns about this information sharing agreement and the overall environment where it was entered into? Lauren Loricchio: Sure. Tax return information is protected from disclosure under Internal Revenue Code section 6103. The IRS has historically encouraged undocumented immigrants to file their taxes, saying it doesn't share their personal information with other agencies, like the Department of Homeland Security. While there was some worry about the safety of this data, tax professionals could say with relative certainty that undocumented immigrants should feel safe filing their taxes with the IRS. But now with this information sharing agreement in place, tax professionals say the advice they're giving clients has changed because the information their clients provide to the IRS, including their address, could potentially be used against them. Some of the tax professionals I've spoken to are worried this information sharing agreement will deter immigrants from filing their taxes, which can in turn have a negative impact on revenue collection. The Institute on Taxation and Economic Policy released a report last year, which found that undocumented immigrants paid nearly $100 billion in federal, state, and local taxes in 2022. David D. Stewart: So what led you down this path to look into this issue? Lauren Loricchio: When news of the information sharing agreement broke, I heard concerns from tax professionals that this data sharing agreement might deter immigrants from filing their taxes. So I wanted to learn more about the impact on tax filing this year, and I spoke with undocumented immigrants to find out how the situation was affecting them. David D. Stewart: And what sort of things did you learn? Lauren Loricchio: The stories I heard were different, but they all had something in common: Each person I spoke with said they wanted to comply with their tax filing obligations and follow the law, but they were scared that their information could be used against them. One person I spoke with, who's originally from Brazil and goes by the nickname Rob, said he normally files his taxes each year with an ITIN, but he didn't file this year because he was afraid that he would be deported. I spoke with a factory worker who fled Colombia to escape threats from a crime group. He said he paid his taxes this year despite the potential consequences. He fears for his life if he returns to Colombia, but he wanted to follow the law. Another woman I spoke with who is originally from Guatemala and is self-employed said she filed for an extension this year; she has an eight-year-old daughter who is a U.S. citizen, and she's afraid that she could be separated from her. David D. Stewart: I understand that there is some litigation over this. Could you tell us about that and where it stands? Lauren Loricchio: Back in March, two immigrant rights advocacy groups filed litigation to challenge the disclosure of immigrant taxpayer data. The complaint argues that section 6103 forbids the IRS and Treasury from sharing tax returns or tax return information for purposes of immigration enforcement. The man standing in the fog. evening night time getty Nina Olson, the executive director of the Center for Taxpayer Rights and a former national taxpayer advocate, submitted an affidavit in support of the plaintiffs. She's a member of Tax Analysts' board of directors, and Tax Notes also funds a joint transparency project with the Center for Taxpayer Rights. She argues that the MOU is flawed because it says the information sharing agreement is permissible under section 6103(i)(2), which permits the disclosure of tax return information in support of an investigation or preparation for judicial proceedings to help with criminal investigations, and the MOU says the information sharing is to facilitate civil immigration enforcement. But the judge in that case sided with the federal government, writing that the plaintiffs' reading of section 6103(i)(2) doesn't comport with the text of the statute, and she denied a request from plaintiffs to block Treasury from disclosing taxpayer information for immigration enforcement. The case isn't over yet; the plaintiffs filed a notice of appeal on May 21 with the D.C. circuit. David D. Stewart: So what are some of the other concerns you're hearing about this in your reporting? Lauren Loricchio: I spoke with Danny Werfel, who recently stepped down as IRS commissioner, and he said if the IRS begins sharing tax data without first seeking explicit statutory authority from Congress, it could have a broader impact. Werfel said, because the U.S. tax system is based on voluntary compliance, it doesn't take a large amount of noncompliance to make a big impact on tax receipts. If this expansion of IRS authority affects voluntary compliance even by 1 percent, it could lead to tens of billions of dollars in lost revenue, he said. Another issue raised by Nina Olson is that IRS employees could be subject to penalties for disclosing or inspecting information in violation of section 6103. David D. Stewart: Does this policy raise other tax administration concerns? Lauren Loricchio: Yeah, I think the concern is that it could deter immigrants from filing their taxes, and part of that is that a lot of people are living in mixed-status households. So some people might have a relative who is undocumented, and they might be afraid to file their taxes because they're afraid that someone in their household could be deported. David D. Stewart: So since you are primarily interested in our investigative side here at Tax Notes , is there a way that listeners could reach out to you with more information that they may have? Lauren Loricchio: Yeah, we're watching this issue closely. If you have tips or want to speak with us, you can reach us via email at or you can reach our reporters securely via the Signal app at taxnotesnews.08. David D. Stewart: Well, Lauren, thank you so much for being here. This has been an interesting conversation. Lauren Loricchio: Thank you for having me.
Forbes
24-06-2025
- Business
- Forbes
International Tax In The Reconciliation Bill: House Versus Senate
The US Capitol is seen in Washington, DC, on January 3, 2018 before the opening of the second ... More session of the 115th Congress. - The US Congress hits the ground running as its 2018 session kicks off, with President Donald Trump facing a two-week deadline to forge a compromise between Republicans and Democrats on immigration reform and the budget. (Photo by NICHOLAS KAMM / AFP) (Photo by NICHOLAS KAMM/AFP via Getty Images) In this episode of Tax Notes Talk, Jonathan Samford and Kevin Klein of the Global Business Alliance discuss the proposed section 899 retaliatory tax and other international tax provisions included in the Senate version of the One Big Beautiful Bill Act. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: two big beautiful bills. We've been closely following the progress of the reconciliation bill, with episodes on Opportunity Zone changes and clean energy tax credits included in the House version, which you can find linked to in the show notes. And now, the Senate has released their version of the bill text. When the House released its take on the One Big Beautiful Bill Act, one international tax provision left stakeholders concerned. The proposed section 899 would allow the executive branch to raise taxes on taxpayers connected to countries believed to have discriminatory or extraterritorial tax regimes. So how did the Senate address the House's retaliatory tax and other international tax provisions? And what effects could the international business community feel from either chamber's version of the bill? To walk us through all of this, joining me now from the Global Business Alliance is president and CEO, Jonathan Samford, and senior vice president of government affairs, Kevin Klein. Jonathan, Kevin, welcome to the podcast. Jonathan Samford: Thanks, David. Excited to be here. Kevin Klein: Thank you, David. Appreciate the opportunity. David D. Stewart: So why don't we start off with setting some levels here? Could you give us some background on the state of U.S. international tax before the reconciliation bill? Jonathan Samford: Well, I appreciate that question. The Global Business Alliance, we are representing about 200 of the most well-recognized brands in the world. Our members are originally companies that were founded abroad, found success, and brought that success here to the United States. They collectively are from 23 countries, all of them friends and allies of the United States, and have massive operations here in the United States in their own right. So they're large U.S. employers. The lion's share of foreign direct investment flows into manufacturing — a little over a third of it is in manufacturing. So a lot of our companies are in the manufacturing space, but they cover every facet of the economy and are collectively in every congressional district across the country. So that gives us a really good perspective on how the U.S. is doing in terms of its international competitiveness for economics and policy. And I can tell you that Republicans really led the way in 2017 with the Tax Cuts and Jobs Act in setting international frameworks that really didn't exist, prior to that. Things like BEAT [base erosion and antiabuse tax], GILTI [global intangible low-taxed income], FDII [foreign-derived intangible income] — these were the frameworks that created an international system that made the U.S. more competitive in conjunction with the lower tax rate that was introduced at that time. And what we've seen is a surge in global investment into the United States, about 35 percent since 2017. David D. Stewart: What was the international business community looking for or hoping to see out of a new tax bill? Jonathan Samford: Well, I think there was a lot of things that were really positive in 2017, as I mentioned, with the frameworks that were created. A few of those provisions were set to change. And so I think that there's an opportunity for Congress to improve on what was already put in place in 2017 with this latest iteration. There's also a big issue that we're concerned about, but I think there are some positive elements to what has been proposed in the One Big Beautiful Bill for international investment. Kevin, do you want to talk a little bit about that? Kevin Klein: Sure. So I think that a lot of the focus on potential changes within a new reconciliation tax bill at this stage, coming almost 10 years after TCJA, and the timeline that was laid out at that point, is fixing some of the cliffs and penalties that were set to come online due to the reconciliation process when TCJA was first passed back in 2017. So as Jonathan alluded to, some of the international provisions specifically were set to get somewhat less taxpayer favorable — FDII rates, GILTI rates both set to change in a negative direction for taxpayers. Also, the BEAT was set to get worse at the end of 2025. The rate would go from a current 10 percent to 12.5 percent, and the treatment for various tax credits would also get more harsh within the BEAT. There's also some general business provisions around R&D [research and development] expensing, section 174, bonus depreciation, business interest expense deductibility under section 163J, all of which have gotten slightly less taxpayer friendly over time that the business community was hoping to get fixed in this bill. Jonathan Samford: One of the interesting things about the international businesses that have chosen to invest and create jobs here, I mentioned at the top that a lot of that investment goes into the manufacturing sector. And today, one in four Americans who work in a manufacturing role earn their paycheck from an international company, and about $80 billion annually is reinvested by these international companies back into their R&D, doing work that is really incredible in terms of pushing the latest in technology and innovation. They are leading the way for America's innovation advantage. And again, it's companies that made that deliberate decision to invest and create jobs here. David D. Stewart: So let's get into what we have seen. First, we'll start with the bill as it came out of the House. I understand that there was some movement largely on the intellectual property side, the FDII, GILTI sort of things. So can you tell us what did we see from the House version? Kevin Klein: Sure, so I'll dive in on that. So in the House version, we saw some temporary fixes to a lot of the provisions that I mentioned earlier. So section 174 R&D, the GILTI revision, and FDII revisions that I mentioned earlier were to be addressed but only for a shorter timeline. In the Senate version, those have been extended coming forward. But also in the House version, we saw some other changes in international tax that are directly tied to pillar 2 and the global minimum tax regime that's being negotiated abroad, which we can dive into further. David D. Stewart: Let's talk a bit about that. We weren't necessarily expecting it, but we saw this section 899 retaliatory tax that seems to be tied to pillar 2. Could you tell us what does that do? Jonathan Samford: Yeah, so as I mentioned, there's a lot to like in the One Big Beautiful Bill. Unfortunately, there is one provision that is squarely aimed at international companies that operate here in the United States. This provision known as 899 — or the revenge tax, as some have called it — it would not only contradict President Trump's investment vision for America, it also guts a lot of the gains that have been made from TCJA. As I mentioned, we've seen a tremendous amount of investment come into the United States as a result of America becoming more competitive in international tax. And that surge is exactly what is targeted by this provision. PALM BEACH, FLORIDA - JANUARY 07: U.S. President-elect Donald Trump speaks to members of the media ... More during a press conference at the Mar-a-Lago Club on January 07, 2025 in Palm Beach, Florida. Trump will be sworn in as the 47th president of the United States on January 20, making him the only president other than Grover Cleveland to serve two non-consecutive terms in office. (Photo by) We actually did an economic analysis study of what the consequences of this provision would be, and what we found is quite stark. Seven hundred thousand jobs here in the United States are at risk because of this one provision. It's expected this provision would eliminate about $100 billion of GDP annually in the long run. And when you look at the economic growth potential of the entire One Big Beautiful Bill, this one provision, this discriminatory and punitive provision, eliminates one third of that economic growth potential. Kevin Klein: Yeah, so I guess I would follow up on that and just dive into a little bit of the mechanics of the provision and how it was first presented in the House bill and where it stands now. So to set the stage a bit, there have been legislative efforts, mostly around House Republicans, that were aimed at pillar 2 and the global minimum tax for a number of years now, and we've been following those for a while. Chairman Smith from the Ways and Means Committee in the House has been a big proponent of doing something on the global minimum tax for quite a while. Other members of the committee as well have been supportive. So that's not entirely a surprise that there was an effort to put something on the bill, but what we got in proposed section 899 is in some ways a mashup of previous proposals and in some ways new. And what it would actually do is, it gets at the issue through three punitive taxes. One is increased tax rates on effectively connected income for foreign nationals. So this is something that, for most companies, is going to hit hardest if you're in a branch structure. It's going to be most impactful, because of that, on financial services forms for the most part. The second is increased withholding tax rates that would go up 5 percent a year, up to a potential cap of 20 percent over the statutory rate. And that's an important detail because many companies that are headquartered in countries where we have a bilateral tax treaty actually pay withholding tax rates that are sometimes 0 percent, 5 percent, 10 percent — something lower than what the statutory rates are. So here you would have a 5 percent rate increase each year up to a cap based on the higher statutory rate. You could, over 10 years, go from a 0 percent withholding tax rate to a 50 percent withholding tax rate, which of course is very, very punitive. And then the third is changes to the BEAT. Many of those changes are limitations of various safe harbors that keep folks out of that tax, but also increases the rate from 10 percent to 12.5 percent. Therefore, it would apply to many more taxpayers that it doesn't currently apply to. David D. Stewart: Are there any particular industries that would be more hard hit by this than others? Jonathan Samford: That's a great question, and within the confines of this provision, it's rather indiscriminate. It targets companies based on where they're globally headquartered, not what activity they are providing or what benefits they're providing to the U.S. economy and America's workforce. In that regard, it's quite indiscriminate. I will note though that most of the foreign direct investment in the United States is highly concentrated from just eight countries. Seventy-five percent of all the cross-border investment that has come into the United States is originating from all longtime friends and allies of the United States. It's countries like Japan, Canada, Great Britain, and some European countries. And so this is going to disproportionately impact, just based on that fact, those companies from countries that either have a DST or a UTPR on the books. Blue Globe viewing from space at night with connections between cities. (World Map Courtesy of NASA: ... More David D. Stewart: I understand there was a bit of a question about whether this could be included in the Senate version of the bill. Could you tell us about the sort of procedural issue that it ran into? Kevin Klein: Sure. So bills that are moving through the reconciliation process in the Senate are subject to what we colloquially call the Byrd rule, which is actually a series of rules that determines whether or not a bill or provision within a bill is correctly situated within reconciliation or can be done under reconciliation. Because it is a series of rules, there's a series of challenges, and one of the ones that was raised around this particular provision is whether or not this provision was actually within the jurisdiction of the Senate Finance Committee, or if it should be within the jurisdiction of a different committee, specifically the Senate Foreign Relations Committee. And this is important because under the Byrd rule, you can't include a provision that is within the jurisdiction of a committee that didn't receive budget reconciliation instructions. So the argument here would be that the provision violates tax treaties and supersedes tax treaties, and tax treaties are within the Senate Foreign Relations Committee's jurisdiction. Our understanding is that the Senate parliamentarian has reviewed that and decided that it is a proper tax provision within Senate Finance and can be included in the bill. There are other potential Byrd rule challenges that might still be made under other aspects of the Byrd rule, including whether or not the revenue impact of this bill — which the Joint Committee on Taxation has scored as raising $116 billion over 10 years — whether that is merely incidental to the policy impact of the bill, which obviously would be extraordinarily high, given the bill's intent to change foreign tax law and get involved with diplomatic conversations. David D. Stewart: What would this do to the international consensus from the OECD? What happens to all these countries that had agreed on a global minimum tax? Jonathan Samford: Well, I think the bigger question is, what is it going to do to America's workforce? And the answer to that is it's going to put many, many thousands of jobs at risk. You look at our analysis and it shows 700,000 jobs, and we actually go into a state-by-state analysis of that. There are a number of states that have a disproportionate amount of jobs supported by international companies that made a deliberate decision to invest and create jobs here in the U.S. But even the Joint Committee on Taxation's analysis of the House bill shows that this is a tax hike that is a revenue loser in the long run. It shows, if you look at those numbers over that 10-year window, that it basically increases the revenue collected for the government for the first three years. But then starting in year four, it's less and less each year. And actually in the last two years of that 10-year window, it loses revenue. And that's a recognition, a sobering recognition, that companies will not be able to operate in such a punitive and discriminatory tax environment. David D. Stewart: So what have we been hearing from international businesses? Have they been vocal in opposition to this? Jonathan Samford: Well, our organization is the premier voice for the inbound business community, and we have certainly raised concerns around this issue, talking about it when many people weren't. So I think what's really interesting on this is maybe two points. First, President Trump has made a focal point of his second administration to encourage more companies to invest and create jobs in the United States. You look at the open investment policy that he issued in February where he says, and I'm quoting, "Welcoming foreign investment and strengthening the United States world-leading capital markets will be a key part of America's golden age. My administration will make the United States the world's greatest destination for investment dollars." During the first 100 days, when we clicked over that milestone, a central focus of the accomplishments that the White House espoused was over $5 trillion in new investment pledged in the first 100 days of his second administration. We've seen continual announcements of companies making decisions to invest here, and the White House has been promoting those appropriately. So the president has set a pro-growth agenda here in terms of attracting more companies to invest and create jobs. And this one provision, which is highly punitive and discriminatory towards companies who are guilty of nothing more than deciding to create opportunities here in the United States, is in direct contradiction to the president's vision. David D. Stewart: So we're recording today on June 17, and just last night we finally got a look at the Senate's version of this bill. So what have we seen from the Senate version here? Jonathan Samford: Yeah, I don't think Kevin's been able to get much sleep as he's been piling through the various details, but I think that there is recognition in the Senate version that the House version was not ready for law. There's a lot of real concerns that have been raised around what was proposed, and I think there's room for further refinement with this provision. Kevin Klein: Yeah, I agree with that. I think that the Senate version reflects that there has been more heartburn amongst lawmakers in recent weeks as they've come to understand the potential impact of the provision, potential impact on investment in the United States if [section] 899 were to actually be enacted. To get into some of the more specifics, the biggest feature — the biggest change, I should say — of the Senate version of the bill is that there is now a one-year delay in implementation, which to Jonathan's point, really speaks to a recognition that this thing is not entirely baked and not ready to go right now, and that there needs to be more time for negotiation at the OECD and on pillar 2 before these provisions can really bite and have the force of law. So there is that change. A participant stands at the OECD headquarters in Paris during the presentation of the Economic ... More Outlook at the 2013 OECD Week on May 29, 2013. AFP PHOTO ERIC PIERMONT (Photo credit should read ERIC PIERMONT/AFP via Getty Images) There are also some other changes within the technical aspects of it, and as you mentioned, we just got this last night, so we're still reading through it. But I would highlight that the increase in withholding tax rates in the provision now is capped at 15 percent after three years. So instead of having that 5 percent increase up to potentially a total of 30 percent, if you're in a 0 percent treaty situation under the House bill, now you would have 5 percent a year up to a cap of 15 percent over whatever your treaty rate is. So that's a better provision, but still problematic and still deeply painful. Within the BEAT space, there is also some changes to the BEAT itself that are in other parts of the bill and change the BEAT outside of the context of section 899 that roll through into this, one of which is a big rate increase. So the current BEAT rate is 10 percent. I noted that if we did nothing under TCJA, it would go to 12.5 percent at the end of 2025. This bill changes it to 14 percent, and part of why it changes it to 14 percent is to offset a high-tax exception that exists in the regular BEAT in one part of the bill. But you don't get that high tax exception in section 899. So the BEAT portion is still there and still very punitive within section 899. David D. Stewart: So is this Senate version more palatable to the international tax community? I assume there's definitely still areas for lobbying. Jonathan Samford: Well, we certainly are putting forward a couple of ideas that I think would help refine the purpose of this legislation, this provision, and help align it with the president's investment vision. And to just clarify, our organization is not a proponent of DSTs [digital services taxes] and the frustrations that congressional Republicans and congressional Democrats had with the prior administration as they were setting up the OECD framework, the pillar 2 framework. So this isn't about defending pillar 2 or DSTs. This is about the consequence of this punitive and discriminatory tax provision and the impact it'll have on American workers. That's our concern. But I think there is a way that this provision can be further refined to still accomplish the goals that proponents have, while at the same time better aligning it with the president's investment vision. Kevin, do you want to talk a little bit about what that proposal might look like? Kevin Klein: Sure. To your point, there's definitely still some opportunity to make some positive changes here, and we're hoping that this proposal will be part of those positive changes. We are floating this with policymakers now, but the idea is to have an investment incentive safe harbor. And let's take the president's two competing priorities, one of which is incentivizing more investment in the U.S. and making the U.S. the best place in the world to do business, and the other one of which is to get the U.S. out of pillar 2 [and] create a potential parallel track system where the U.S. taxes are not touched by pillar 2. Let's align these goals and we think that that can be done within section 899. The way that we would do that, the way the investment incentive safe harbor would work, is that there would be an exclusion from the effects of section 899 for any taxpayer whose U.S. capital expenditures or R&D expenditures have averaged out to more than a $100 million per year over a three-year period. So the idea here is that by linking relief from the retaliatory tax provisions to newer sustained U.S. investment, you turn 899 into an onshoring incentive rather than a penalty. And then foreign headquartered firms would have a very clear measurable path to avoid the surcharge moving forward. And to do so would be to double down on the United States. David D. Stewart: So with this provision just hanging out there as somewhat threatening, are businesses reacting to it? Jonathan Samford: Unfortunately, we are already starting to see reports in the press about companies who are hitting pause on long-term U.S. investments. There was a story today in Bloomberg about an Australian company that is putting pause on future investments out of concern for this one provision. Republicans deserve a lot of credit for what they did in terms of leading the way on international policy and making the U.S. more competitive in terms of international tax in 2017. It is really disheartening to see that there are provisions that are not only threatening American jobs and the gains that have been made since TCJA was enacted, but are actually pushing away future employers from making that decision to create jobs here. There's an open question: Is the United States still welcoming of international companies? David D. Stewart: Well, it's going to be fascinating to watch how this plan develops over time. Jonathan, Kevin, thank you for explaining that to us and walking us through it. Jonathan Samford: It's been a pleasure. Thanks, David. Kevin Klein: Thanks so much.
Forbes
03-06-2025
- Business
- Forbes
One Big Beautiful Bill: Breaking Down The House Tax Package
UNITED STATES - DECEMBER 15: HOUSE CHAMBER—The Speaker's well on the House floor. (Photo by Scott ... More J. Ferrell/) In this episode of Tax Notes Talk, Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco discuss the final version of the House's reconciliation bill and what's next as the legislation heads to the Senate. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: reconcilable differences. On May 22 the House passed the One Big Beautiful Bill Act, a giant reconciliation bill that has been hotly debated over the past few months. Factional disagreements over the state and local tax deduction cap and energy credits, as well as the need to balance tax cuts with revenue raisers, made the road to a finished bill a rocky one. So how did those issues get resolved, and what's next for the bill as it goes to the Senate? You can find a link to our deep dive into the clean energy tax credit changes in the show notes. But joining me now to walk us through the bill as a whole are Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco. Cady, Katie, welcome back to the podcast. Cady Stanton: Thanks for having us. Katie Lobosco: Good to be here. David D. Stewart: So there was a bit of drama leading up to this bill. Could you walk us through what happened in the lead-up to the vote? Katie Lobosco: Sure. There was still a lot of moving parts a week out from this vote. House Speaker Mike Johnson would later look back and call it "a perilous time with a number of pivotal moments." So one of the first signs of some trouble came when it was time for the House Budget Committee, which combines different parts of the bill together. They failed to advance the legislation. Now, this was the Friday before the vote. So, initially, four members on that committee — members who are part of the staunchly conservative House Freedom Caucus — they voted against advancing this bill. So they took the weekend to negotiate a little bit more, and that committee came back on Sunday at 10 p.m. to revote, and they were able to advance the bill at that point. Now, Monday came, and Johnson tells reporters, "We're still building consensus; there's still some sticking points that have yet to be decided." These were things like the SALT cap and cuts to the Medicaid program. But Tuesday comes, and there's a little bit of a shift on the Hill. President Trump comes to speak to the Republican caucus, and several members come out of that meeting saying they think the president moved the needle and we're getting closer to where we need to be. House leaders start singing a different tune, and the leaders say the time for talk is over. That comes partly true. On Wednesday — early Wednesday, 1 a.m. — the Rules Committee convenes. Now, they're the last committee to have to vote on the bill before it heads to the floor, but we still don't have a final bill text yet. They're still hammering out some of these details, and some of the holdouts — again from the House Freedom Caucus — they're still concerned about the deficit impact of the bill. They go and meet with the White House, and they return, and House Speaker Mike Johnson says, "We're going to move forward." WASHINGTON, DC - MARCH 20: Speaker of the House Mike Johnson (R-LA) speaks during a news conference ... More following a closed-door caucus meeting at the U.S. Capitol Visitors Center on March 20, 2024 in Washington, DC. Congressional leaders announced Tuesday they had reached a deal on a FY2024 spending package that includes budgets for about three-quarters of all federal discretionary spending, including Defense, Homeland Security, Labor-Health and Human Services, and other bills. Without a deal, the federal government would be facing a partial shutdown at midnight on Friday. (Photo by) We're about 5 p.m. now; we still don't have a bill text. The Rules Committee is still meeting, and we finally get this final bill, what we call the manager's amendment, that makes changes to the bill around 9 p.m. Rules advances it out of committee by midnight, and eventually the final vote happens just before 7 a.m. David D. Stewart: So tell me about this manager's amendment. What sort of changes were being made by the Rules Committee? Cady Stanton: Yeah, it's really important to point out that manager's amendment because, as Katie was mentioning, there were quite a few changes in the 11th hour to this bill. So some context on timeline here, since it all came together quite quickly. The original full bill text was released May 12, ahead of the House Ways and Means Committee markup, then amended slightly through the Budget Committee May 19, and finally that manager's amendment with the biggest swath of changes was released late May 21, less than 12 hours before the final vote. Those changes included a further increase on the SALT cap — even higher than the $30,000 cap set in the original version of the bill. It also included accelerated phaseouts for clean energy credits from the Inflation Reduction Act, with carveouts for nuclear energy projects and changes to transferability rules. There were also adjustments to FDII, GILTI, and BEAT calculations. That manager's amendment also undid a repeal originally in the bill on the excise tax for indoor tanning services, which is very specific. And there were also changes to itemized deduction limitations for those with income in the highest tax bracket. The point of these, as Katie discussed, was largely to convince holdouts. There were also some changes to Medicaid work requirements to please the House Freedom Caucus, and SALT members in the end were pretty happy with the SALT cap in the bill, and they called it a victory for SALT on social media. David D. Stewart: So how did the votes shake out ultimately? Katie Lobosco: In the end, the bill passed the house 215 to 214. So there were two Republicans that voted no — Thomas Massey of Kentucky and Warren Davidson of Ohio — and they have concerns about how much this bill will add to the deficit. I'll note that House Freedom Caucus Chair Andy Harris, he voted present. He wanted to move the bill along in the process, but he said, "There is still a lot of work to be done in deficit reduction and ending waste, fraud, and abuse in the Medicaid program." And then there were two Republicans that actually missed the vote that raised some eyebrows, because they were David Schweikert of Arizona and Andrew Garbarino of New York, and they were both very involved in getting this legislation together. Schweikert had just missed the vote; he showed up at the last second and didn't get his vote in. And Garbarino apparently fell asleep, according to Mike Johnson. Again, this vote was just before 7 a.m. in the morning. They had been going all night, and he didn't get to the floor in time to vote. David D. Stewart: So let's turn to the actual content of the bill. What sort of tax cuts are we seeing in the legislation heading to the Senate? Katie Lobosco: So the bill would extend most of the individual and estate provisions of the Tax Cuts and Jobs Act, which are set to expire at the end of this year. So it makes permanent lower tax rates for individuals and makes the expiring standard deduction permanent and temporarily boosted by $1,000 for individuals and $2,000 for joint filers through 2028. It permanently extends the child tax credit at $2,000, with a $500 boost through 2028, and it increases the estate and gift tax exclusion from $14 to $15 million for individuals and from $28 to $30 million for couples in 2026 and indexes that amount to inflation thereafter. There's also some reforms to business taxes: The bill would permanently increase the passthrough deduction from 20 to 23 percent, and it also would slightly adjust and make permanent three international business provisions. One is the amount of foreign-derived intangible income, known as FDII, that a domestic corporation can deduct. There's the GILTI, which is the amount of a corporation's global intangible low-taxed income deduction, and BEAT, the base erosion and antiabuse tax. David D. Stewart: So you mentioned that there was an increase in the SALT cap. What happened with the SALT cap and these energy credits? Cady Stanton: Absolutely. SALT was definitely the producer of the most drama over the past few weeks, particularly in the tax realm. For context, the SALT cap is currently set at $10,000, and that was set by the TCJA, but that provision is set to expire at the end of 2025. So after a lot of late-night meetings and pretty loud pushes from Republican members of the SALT Caucus, the bill in the end included an increase on the SALT cap to $40,000. It also included a phaseout for that cap, starting at people who make income over $500,000, and there's also a slight increase both in that cap and that phaseout every year until 2033. And after 2033 it remains what it was for 2033, so it doesn't go back down. Now, this high number was considered a pretty big win for the SALT Caucus, but it's important to note that there really aren't that many SALT allies in the Senate, particularly among Republicans. So it would be pretty surprising if this stays as-is after the Senate is done with the bill. Now, turning to the IRA credits. When we talk about IRA, we're obviously referencing the Inflation Reduction Act, a bill that was passed by Democrats in 2022 and included a variety of clean energy tax credits. At the time the bill was passed, there was a certain cost estimate for these credits, but that estimate has gone up significantly, according to estimates from the Joint Committee on Taxation. As a result, the credits have been the target of Republican ire ever since, especially after they achieved the trifecta of the White House, Senate, and House control in November. Now, the reconciliation bill includes a mix of accelerated phaseouts and repeals of those credits, including the electric vehicle credits. The wording in the bill would restrict Chinese involvement in projects under this "foreign entities of concern" clause, and the reconciliation bill also specifically targets wind and solar power projects with restrictions. There are specific carveouts for nuclear projects that were included as a way to appease some moderates concerned about these cuts. And the last-minute changes to the bill specifically targeted restrictions on the clean electricity investment and production tax credits. BEIJING - OCTOBER 02: Chinas national flag is flown during a rock-and-roll festival to mark Chinese ... More National Day on October 2, 2005 in Beijing, China. Various activities are being held in China to mark the National Day. (Photo by) David D. Stewart: Now, what became of President Trump's campaign promises? Things like no tax on tips, no tax on social security? Katie Lobosco: So a lot of his priorities did get in the bill, but they got in as temporary measures, so they are only implemented for a certain amount of time. Why would lawmakers do this? That would reduce the overall cost over the 10-year budget window, which is how it's usually estimated. So, for Trump's priorities, the bill does make tip and overtime income deductible through 2028. Now, the bill doesn't touch Social Security specifically — that might run afoul of certain rules in the Senate — but it does increase the standard deduction for seniors by $4,000 through 2028. It also makes auto interest deductible for owners of cars made in the U.S. through 2028. The bill also creates what it calls Trump Accounts. These would be tax-advantaged savings accounts, and the government would contribute $1,000 for children born between 2025 and 2028, and it would also temporarily restore a trio of business tax cuts. This includes immediate expensing for domestic research and development through 2029, 100 percent bonus depreciation also through 2029, and 100 percent expensing for qualifying structures for which construction begins before the end of 2028 and the placed-in-service date occurs before the end of 2032. David D. Stewart: Now, you mentioned that some lawmakers were having trouble with the price of this bill. So what did it come out to in the end? What sort of costs are we expecting from this bill? Katie Lobosco: So the key takeaway here is that the bill overall will increase projected deficits by nearly $3 trillion over a 10-year period. Now, some Republicans are claiming it won't add to deficits because the changes will spur so much economic growth, but that's just not likely to be the case, according to a number of independent analysts. Since there were last-minute changes in the bill, we don't have a full official score from the Congressional Budget Office at this time, but the Penn-Wharton budget model has done its own estimates, and they find that the bill as written would increase deficits by $2.8 trillion over 10 years. The tax provisions alone would cost $4.3 trillion over 10 years. Most of that is due to the extensions of the TCJA's individual and estate tax provisions. The bill also boosts spending on defense and border security. The House did find more than $1.5 trillion in savings, mostly from changes to Medicaid, food assistance programs, and changes to federal student loans, but that only partially offsets the cost. David D. Stewart: So what are we expecting to happen next when this bill gets to the Senate? Cady Stanton: That's a really great question in terms of looking ahead. So passage through the House was a huge win for Republicans, and particularly for House Speaker Mike Johnson, who a lot of people honestly underestimated. He proved he can whip votes for passage within a very thin margin for his conference. But there's more tough work ahead for Republicans in the Senate, where members haven't been shy to share their laundry list of desired tweaks. Top of the list for many members, as they told Katie and I, is more permanency on provisions that the House bill makes temporary, including the three big promises from President Trump on the campaign trail: no tax on tips, no tax on overtime, and a bonus deduction for seniors, all of which currently end in 2029, as Katie mentioned. And that would be at the end of President Trump's presidency, as well. There's also a push to make permanent that trio of business tax cuts from the TCJA that Katie mentioned, and those had already started to expire or phase out, and this bill would restore them, and senators would really want to make that restoration permanent. As I said before, I also wouldn't be surprised to see changes to the SALT cap, as well as a fresh look at the IRA credit changes in the bill. A few senators have already mentioned that they're pretty worried about the impacts on their districts from repealing and phasing out these credits, where projects have been really bolstered by these tax credits. Finally, jumping back to what Katie was saying about the cost, the deficit impact of the bill will likely take a pretty large role in conversations over the next few weeks, as it did in the House with the deficit hawks. The Senate is going to use this current-policy baseline we've talked about before, which gives them some more flexibility to their scoring on the legislation, but some deficit hawks — specifically Senators Rand Paul and Ron Johnson — have already said that they want to see deficit reduction be top of mind in talks of changes in the coming weeks. So expect that to be a big part of the conversation. David D. Stewart: What are we expecting as far as the timeline? When should we expect movement to happen in the Senate? Cady Stanton: It's really tough to read exactly when the next step might be taken in the Senate, but there are a couple of important dates to pay attention to to see how things progress. The Senate won't get its chance to leave its mark on the bill until it returns from recess June 2, but once they return, senators will get to work on their changes to the bill ahead of this July 4 deadline. That's been suggested by Treasury Secretary Scott Bessent and reiterated by Republican leaders in recent weeks. There's also the chance that after changing the bill in the Senate, the House wants to change it again, which would send it back to the Senate a second time and obviously would extend the timeline, as well. WASHINGTON, DC - MARCH 13: Treasury Secretary Scott Bessent speaks to reporters outside the West ... More Wing after doing a television interview on the North Lawn of the White House on March 13, 2025 in Washington, DC. Bessent stopped to speak to reporters briefly and took a question on tariffs and voiced his concerns about a potential government shutdown. (Photo by) Like the Memorial Day deadline that the House set for itself, this July 4 deadline is largely self-imposed, but members do have a hard deadline for this version of the bill because it includes a debt limit extension. The "X date" for the debt limit could come in early August, so Treasury Secretary Bessent has encouraged Congress to get that addressed by mid-July, and it has to be done by the end of July since the House and the Senate take the entire month of August off. Now, it's important to note that they could always pull the debt limit out of the bill and work on it separately, but that would definitely disrupt the balance of the legislation and create some problems that would require Republicans to go back to the drawing board on the bill and on reconciliation in general. Another big factor on the timing of when this moves to the Senate is how Republicans in that chamber choose to make the changes they want. I wrote a pretty in-the-weeds story recently on the procedural options that senators have for these changes, but what it really comes down to is how much of an opportunity members will push for to be heard on the changes they want. Senate Majority Leader John Thune has said pretty openly that he wants to return to regular order in the Senate, which would draw out a process for amendments on the bill that would really stretch out work and create issues with the thin majorities that Senate Republicans have on their committees. But that process might also just be necessary, given how many people want changes, not just to the tax title of the bill, but also to areas like these SNAP and Medicaid program changes. Now, senators and their staff are likely working on filling out which of those choices they want to move forward with during recess, so it's worth keeping an eye out for which method they decide upon. David D. Stewart: Well, definitely sounds like they're going to be keeping you two busy for the next few months. Thank you for being here. Cady Stanton: Thanks, Dave. Katie Lobosco: Thank you.
Forbes
19-05-2025
- Business
- Forbes
Tariffs As Hidden Taxes: Was Amazon Right About Price Disclosures?
Several weeks ago, I used this column to suggest an unconventional idea: The taxpayers of the United States would benefit greatly from the creation of a national tariff-payer advocate. Such an officeholder would take on responsibilities that parallel those of the national taxpayer advocate — a position that has existed within the IRS since the mid-1990s — but in the tariff context. The officeholder would be supported by a professional staff and function as an independent actor, at liberty to raise whatever concerns she deems appropriate insofar as they affect taxpayers. While the national taxpayer advocate is known as 'your voice' inside the IRS, this new position would represent your voice within the External Revenue Service — an entity that does not exist yet, but one that President Trump has promised to establish. The idea has drawn some criticism, including the observation that the U.S. public has been getting along just fine all these years without such an advocate. Fair enough, although tariffs have recently acquired a gravity that's been absent for roughly the last 100 years. The public might not have needed this kind of advocate before, but it does now. The fiscal balance between internal and external taxes is experiencing a generational reset. A separate criticism is that a tariff-payer advocate would have little to do, given that cross-border trade is thought to be a dry subject matter. Nuts to that, I say. Look no further than Tax Notes' headlines since the start of the year. Four months into 2025 the business of tariffs is more dramatic than the comparatively sedate world of income taxation. Rest assured that a national tariff-payer advocate (if we had one) would be inundated with projects. Consider what transpired during the last week of April. Unconfirmed reports began appearing on the internet that Amazon — the Goliath of online retail shopping — was poised to unveil a new feature in how it displays prices. The following blurb, posted on Punchbowl News on April 29, tells the story: 'Amazon doesn't want to shoulder the blame for the cost of President Donald Trump's trade war. So the e-commerce giant will soon show how much Trump's tariffs are adding to the price of each product, according to a person familiar with the plan. The shopping site will display how much of an item's cost is derived from tariffs — right next to the product's total listed price.' A national tariff-payer advocate could have had a field day with this development. The impetus for Amazon's move was a policy change the Trump administration had announced a few weeks earlier. In a move that was overlooked amidst the 'Liberation Day' hoopla, Trump eliminated the long-standing de minimis rule for international parcels with a declared value not exceeding $800. Previously, these shipments were exempt from duties on the grounds of practicality. This subcategory of imports was regarded as being too insignificant (and too numerous) for customs officials to worry about. The conventional thinking had been that the meager revenue generated by imposing tariffs on these items wouldn't justify the associated inspection and processing costs. In other words, the juice was not worth the squeeze — or so we thought. It has been known for some time that the de minimis exemption had gradually developed into a prominent gap in tariff enforcement. It's estimated that the quantity of diminutive shipments has increased sixfold over the last decade, now numbering more than a billion parcels per year. Because each package cannot be separately inspected, there's no telling what they contain — perhaps contraband, perhaps fentanyl. Critics began referring to the de minimis exemption as the U.S. tariff loophole. Technically speaking, they were not wrong. On April 2 the White House changed all of that. It announced that, going forward (effective May 2), de minimis items sent through the international postal network would be subject to a duty equal to the lesser of a 30 percent tariff on the declared value or $25 per item. The move will especially affect small-scale vendors that conclude sales to U.S. consumers through popular online platforms like eBay and Etsy. It will also affect online vendors that reach U.S. consumers through foreign-based platforms such as Shein or Temu — the massive e-commerce marketplace operated by the Chinese company PPD Holdings. Amazon likewise found itself needing to adapt to the removal of the de minimis exemption — thus, the proposed change in how the company would display prices on one of its affiliated platforms. But for the retailer's display of the embedded tariff cost, users might be baffled by the unexpected spike in prices and falsely conclude that Amazon was simply gouging them. By way of example, consider a hypothetical listing of an imported espresso machine normally priced at $100. With Trump's rescission of the de minimis exemption, the listing might read as follows: 'Price: $125 — excluding local sales tax, including $25 tariff.' That kind of disclosure seems harmless enough. As long as the pricing data is honest and accurate, who could possibly have a nonfrivolous complaint? Amazon is no better off than if it had omitted the price disclosure. It's merely passing along a tax cost, which companies do all the time. More importantly, the retailer is taking the beneficial step of informing consumers what it's doing. In this manner, U.S. consumers would be better educated about the tax-induced costs they're facing. They would know the listed price is tax-inclusive as to tariff and tax-exclusive as to local sales tax — the precise amount of which would vary according to the purchaser's location, as determined by the provided mailing address. Given that our fictional purchaser would be asked to bear both tax burdens, I hardly see what's objectionable about spelling it out. The more detail, the better. I ask the readers of Tax Notes International, is transparency not optimal policy? Why would anyone prefer that U.S. consumers be kept in the dark? What strange virtue lies in keeping a federal tax burden concealed from public scrutiny? None that I can think of. Readers know what happened next. White House press secretary Karoline Leavitt, flanked by the Treasury Secretary Scott Bessent, lashed out against Amazon during a morning briefing with reporters. She labeled Amazon's move a 'hostile and political act.' She went further, accusing Amazon of inappropriate bias, noting that the company proposed no similar pricing disclosure to reflect the rise of inflation that occurred during the Biden administration. Her remarks were astonishing in how they framed Amazon as the bad actor, when all the company had done was to consider making tariff cost visible to the public. Moreover, Leavitt conveniently ignored that inflation (a dilution of household purchasing power) is not a distinct tax assessed and collected by the federal government, unlike a tariff. The bottom line is that recent inflation numbers (while highly embarrassing to Biden) cannot be compared apples-to-apples with Trump's tariffs. Leavitt's complaint would have made more sense if she had instead focused on Biden's own tariffs. That would have presented a like-for-like scenario. So, why didn't Amazon come up with the bright idea of displaying per-item tariff costs a few years ago, while Biden was in office? The answer, as discussed above, is that Biden isn't the one who eliminated the de minimis rule, which initiated the disclosure controversy. Of course, Amazon's senior management might have done us the favor of presenting per-item tariff costs irrespective of the status of the de minimis exemption. Ideally, that would have been done long ago, for the sake of transparency and enlightening retail consumers. Had that occurred, it would scarcely matter who happened to be in the White House. Both Trump and Biden imposed heavy tariffs that translated to higher consumer prices. Objectively, what Leavitt describes as a 'hostile' act by Amazon is nothing more than economic transparency. The alternative is that the federal tax burden be intentionally obscured from public sight. What are we to make of that? It's troubling that anyone in government — at any level of government — would actively seek to keep a tax concealed from U.S. consumers. Rather than scold Amazon, the White House should have praised the company's pricing scheme as a step forward in commercial stewardship. Leavitt and her boss should have hailed the move as an advancement in 'America First' economic policy. After all, but for such disclosures at the retail level, consumers might not realize they're poised to purchase a product made on foreign soil. One might liken the disclosures to a tool of economic patriotism. When you think about it, the proposed disclosures would likely encourage the consumption of domestically produced goods. The feared chilling effect on consumption, if any, would be limited to imports. Isn't that how protectionism is supposed to work? The right call here would have been an approach that embraces transparency: Allow Amazon to implement its price disclosures, then encourage all other retailers to follow suit. Give U.S. consumers as much price information as possible, and let them exercise discretion in the marketplace as they see fit. Instead, the administration revealed itself as overly fixated on dictating which tidbits of pricing data are visible and which are deemed so politically sensitive they must be concealed. Pardon my frankness, but that's weak. There's no way around it. Tariffs affect retail prices and everybody knows it. The White House needs to own it. Back to our timeline. Within a few hours of Leavitt's remarks, Trump phoned Amazon CEO Jeff Bezos. The purpose of the call was to urge Bezos to reverse course on the price disclosure. Bezos accommodated the request. Tim Doyle, a spokesperson for Amazon, later explained the situation as follows: The team that runs our ultra-low-cost Amazon Haul store considered the idea of listing import charges on certain products. This was never approved and is not going to happen. There you have it: a dust-up over nothing. Amazon's senior management never even approved the disclosure policy, supposedly. Trump later commented that 'Jeff Bezos was very nice . . . he solved the problem very quickly.' Again, the only 'problem' was that somebody wanted to keep people ignorant about tariff costs being passed to retail consumers. Trump and Bezos have a peculiar relationship. By way of reminder, Bezos is the second wealthiest man in the world (behind Elon Musk and ahead of Mark Zuckerberg), with an estimated net worth of $220 billion. Trump frequently criticized Bezos during his first term, accusing Amazon's business model of undercutting competitors on price and thereby harming traditional brick-and-mortar establishments. This friction did not last. Last year, with the presidential election fast approaching, Bezos seems to have made goodwill gestures toward Trump. Perhaps coincidentally (or not), The Washington Post, which Bezos owns, refrained from endorsing a presidential candidate. While superficially neutral, the policy shift was tantamount to a win for Trump. Unlike Musk, Bezos did not contribute to Trump's campaign ahead of the election, but he did donate a cool $1 million to Trump's inauguration fund. Bezos dined with Trump at Mar-a-Lago in December 2024 and was in the Capitol rotunda when Trump was inaugurated on January 20. Whatever their prior differences might have been, the two are now getting along quite well. I mention this because it relates to my earlier point about the role of an independent voice within the federal government — my proposal for a national tariff-payer advocate. The above episode confirms that retailers cannot be counted on to voluntarily display pricing data that fleshes out per-unit tariff costs. That means the job of educating the public on these matters must fall to someone else — why not a dedicated public servant? This is also why such an advocate must be formally recognized, by statute, as an independent actor. It's at this point that I turn to an unlikely source of inspiration: the late congressman Phil Crane, a Republican who spent 36 years in the House of Representatives. To paraphrase Crane, the 'worst tax imaginable' is a hidden tax. Hidden taxes are sinister things, Crane told me on more than one occasion. His concern was that because people don't realize they're paying a tax, they don't know enough to protest loudly against it. That conforms to Crane's ideological stance that all taxes must hurt a little bit, and to that end they must first be visible to the taxpayer. Crane offered these comments in the context of a conversation about VAT, to which he was vigorously opposed. I quibbled with his characterization of VAT as a hidden tax. Sure, VAT is price-inclusive (unlike the retail sales taxes used by most U.S. states), but I'd point out that VAT charges are typically listed on a consumer's receipt. Crane had a ready response for that, noting that few people these days bother to study their receipts. Besides, the appropriate time to inform consumers of the tax burden they're facing is not after the purchase has been completed, but before it takes place — when the acquired knowledge is able to influence their purchasing decision. Touché, congressman! Crane's criticism wasn't limited to VAT; he detested all forms of tax-inclusive pricing. He once told me that even the federal gasoline excise tax wasn't as transparent as it could be, and that upset him. Despite that, the excise tax is sensitive enough that neither Republican nor Democratic lawmakers have dared to increase it since 1992. Crane was a deeply conservative lawmaker, one whose positions I often disagreed with. But he had a valid point about transparency. I wonder what he would have thought about Amazon's augmented pricing policy, which would have spelled out the embedded tariff cost. More to the point, I wonder how U.S. consumers would have reacted to Amazon's pricing scheme, had it been allowed to play out without intervention from the executive branch. It's pure speculation on my part, but I'd guess that most consumers would greatly value the additional pricing details. Indeed, there's emerging evidence they do. Increasing numbers of U.S. consumers are logging on to their Temu accounts and taking screenshots of product listings, then circulating the images over social media. It's an impromptu response to such information not being made available by U.S.-based retailers like Amazon. Think of it as tax transparency via crowdsourcing. Temu, as it turns out, has chosen to be transparent about embedded U.S. tariff costs — a direct consequence of Trump's termination of the de minimis exemption. Temu has adopted the identical disclosure practice that Amazon considered before backing down under pressure from the White House. As a result, with a little digging, U.S. consumers should be able to easily discover embedded tax costs resulting from the imposition of U.S. tariffs. It's pathetic, however, that we need to resort to the sharing of screenshots from a Chinese website to be fully informed. Knowledge is power, as they say.
