March 4, 2024

By Hunter Hammond, Capstone Congressional Analyst

In our experience, major congressional deals are often only struck in the 11^th hour, when lawmakers face a hard catalyst and an imminent deadline. No news or even pessimistic news can reverse quickly in an “it’s always darkest before the dawn” type of way. However, as the late Senator John McCain (R-AZ) was fond of saying, sometimes “it’s always darkest before it gets pitch black.” For the stalled $208 billion tax extenders package, that is the question we face. Is it almost dawn, or is it about to be pitch black?

We continue to believe Congress will pass the tax package this month, a view that we believe is now significantly out of consensus.

After a Bipartisan tax bill was passed out of the House in January—backed by a broad coalition of disparate stakeholders—progress has notably stalled in the Senate. However, we continue to believe Congress will pass the tax package this month, a view that we believe is now significantly out of consensus. But risks are growing. As such, we are lowering our probability to 60% (down from 75%) that Congress will enact a tax extenders package by the end of March 2024, including restoration of the R&D tax credit, bonus depreciation, EBIT to EBITDA for net interest deduction, and child tax credit, and elimination of the employee retention tax credit. The odds reduction reflects a relatively uneventful February and the looming deadline to get something done.  But there are enough signs of momentum to remain positive.

On Wednesday, February 28, Senate Republicans held a meeting to discuss the tax package, among other subjects. Coming out of that meeting, Sen. Mike Crapo (R-ID), the top Senate tax writer, released a statement raising concern with the generosity of the child tax credit and explaining that he would only support a bill that has support from a majority of Senate Republicans. That view was echoed by Sen. John Thune (R-ND), a top Senate Republican in the race to replace Minority Leader Mitch McConnell (R-KY) at the end of this year.

While Sen. Crapo’s statement was not entirely positive—he chastised “efforts to pressure Senate Republicans to rubber stamp the Wyden/Smith tax deal”—it signals an openness to negotiate. Additionally, several other Republican senators—Sens. Todd Young (R-IN), Steve Daines (R-MT), and Markwayne Mullin (R-OK)—appear to be on board with the tax package as written. We continue to think that with enough time, Senate Republicans will get to yes. As we wrote previously, “Ultimately, the tax deal is just that—a deal. It gives Democrats something on the child tax credit, gives Republicans something on business taxes, and contains a bipartisan pay-for in the form of the ERTC. Progressives may want more and conservatives less, but we believe this is a deal that gets done ahead of primary races.”

In January, we assigned a 70% probability that Congress would pass one or more regular-order appropriations bills by the end of March, significantly discounting the prospects of a government shutdown. At the time, we noted that a “short-term CR may be needed in early March before full-year appropriations.” On February 29, Congress did just that, passing a continuing resolution (CR) and punting the two-tranched government funding deadlines to March 8 and March 22 (from March 1 and March 8 originally). We believe our appropriations call will prove correct, especially considering the news of an agreement on several of the 12 subcommittee-level spending bills.

We believe our appropriations call will prove correct, especially considering the news of an agreement on several of the 12 subcommittee-level spending bills.

We believe the government funding punt is only helpful for our tax call as it gives Senators more time to negotiate and build support for the tax bill. The next three weeks will be pivotal for the outcome of the tax package, and we will be closely following discussions on the Hill. We think it is almost dawn.

---