House to Vote on Bigger Child Tax Credit, Business Breaks

House to Vote on Bigger Child Tax Credit, Business Breaks

Johnson faced complaints from both moderates and conservatives.
Sipa USA
By Yuval Rosenberg and Michael Rainey
Wednesday, January 31, 2024

Happy Wednesday! Here’s your fiscal update.

House Set to Vote on Bipartisan Tax Bill to Expand Child Credit, Restore Business Breaks

The House of Representatives is poised to vote tonight on a $78 billion bipartisan deal that would temporarily enhance the Child Tax Credit and restore a trio of corporate tax breaks. The measure is expected to pass with broad bipartisan backing, though the vote only comes after House Speaker Mike Johnson was able to reach a side deal to allay the concerns of blue state Republicans upset that the cap on state and local tax deductions was not raised in the legislation.

“The Tax Relief for American Families and Workers Act is important bipartisan legislation to revive conservative pro-growth tax reform,” Johnson said in a statement Wednesday. “This bottom-up process is a good example of how Congress is supposed to make law.”

The Child Tax Credit, now capped at $2,000, would be indexed to inflation for 2024 and 2025. The refundable portion of the credit would be raised from the current $1,600 to $1,800 for 2023, $1,900 for 2024 and $2,000 in 2025. Families would also be allowed to use their previous year’s earnings to set their eligibility for the credit. The deal also restores several business tax benefits that have ended or are set to expire. The plan is paid for, at least in the near term, by reining in the employee retention tax credit, which has been subject to widespread fraud.

The bill isn’t law yet, though. To get to Wednesday’s vote, Johnson had to maneuver around objections from both moderates and conservatives in his party. To assuage the moderates, he reportedly committed to bringing up separate legislation to boost or remove the $10,000 cap on state and local tax deductions imposed in 2017 to help pay for the Republican tax cuts. And to bypass conservatives who might otherwise block the bill over the child tax credit expansion, he’s bringing it up for a floor vote under a suspension of the House rules, meaning that it will require a two-thirds majority for passage — and that a large number of Democratic votes will be needed.

Even if the bill clears the House tonight as expected, it could still face challenges in the Senate, where some members have raised concerns about specific provisions — or about the general idea of passing anything that could benefit President Joe Biden’s reelection chances.

“I think passing a tax bill that makes the president look good mailing out checks before the election, means he could be reelected and then we won’t extend the 2017 tax cuts,” Republican Sen. Chuck Grassley of Iowa told Semafor, even though House Republicans insist that Biden is specifically prohibited from timing the refund checks to maximize his political benefit.

Why it matters: Backers of the bill say it will help 16 million kids from low-income families while also strengthening businesses, promoting innovation and improving U.S. competitiveness with China. Politically, the deal includes victories for both parties and represents a rare bipartisan accomplishment for a Republican-led House that has struggled to legislate.

While business groups support the legislation, some conservatives have decried the changes to the Child Tax Credit as an expansion of the welfare state that would disincentivize work, and some have claimed that undocumented immigrants would be able to get the credit — a claim that Republican House Ways and Means Chairman Jason Smith has said is “completely false.”

Some progressives, meanwhile, have said that the Child Tax Credit should be expanded further and that the balance of benefits in the legislation is tilted too far toward businesses. “The tax deal fails on equity,” Rep. Rosa DeLauro of Connecticut, the top Democrat on the Appropriations Committee, said in a statement this week. “At a time when a majority of American voters believe tax on big corporations should be increased, there is no reason we should be providing corporations a tax cut while only giving families pennies.”

The bottom line: The House is set to do something that looked highly unlikely just weeks ago, and an overwhelming vote could pressure the Senate to follow suit.

Fed Not Declaring Victory Yet in Battle Against Inflation

The Federal Reserve announced Wednesday that it is maintaining its benchmark interest rate in a range between 5.25% and 5.5%, where it has stood since July as part of the central bank’s effort to reduce inflation.

In a statement, the Federal Open Market Committee said the economy has been solid in recent months, with strong job growth and falling inflation. “The committee judges that the risks to achieving its employment and inflation goals are moving into better balance,” it said.

The improvement, however, is not yet sufficient to warrant a reduction in interest rates. Fed Chair Jerome Powell told reporters that Fed officials need to see “more good data" to be confident that inflation is truly under control before they start cutting rates. “It’s not that the six-month data isn’t low enough, it is,” he said. “It’s just a question, can we take that with confidence we are moving steadily under 2%.”

Powell pushed back against claims that the battle against inflation has already been won. “No, I don’t think we have achieved that,” he said in response to a question about whether the Fed had pulled off a “soft landing” — beating inflation without causing a recession. “We’re not declaring victory at all at this point, we think we have a ways to go,” he added.

At the same time, Powell said Fed officials have “growing confidence” that they are moving closer to their goals, and that it is unlikely that the Fed will need to raise rates again. “Let's be honest,” he said, “this is a good economy.”

What comes next: Although Powell poured cold water on the hope that the Fed would start cutting rates at its March meeting, he did say that it “will likely be appropriate to begin dialing back policy restraint at some point this year” – though, as always, any such move would depend on the data.

Many on Wall Street had hoped to see rate cuts in March, but after the Fed announcement, investors shifted their focus to the following FOMC meeting, with the CME FedWatch tool showing a 60.2% chance of a 25-basis-point cut in May.

The expectation of a later date for the first rate cut in 2024 was not welcome news to those worried that monetary conditions are too tight given the reduction in inflation over the last year. “The current stance of policy is no longer warranted by the inflation backdrop,” Daleep Singh, chief global economist at PGIM Fixed Income, told The Wall Street Journal. “The prudent policy stance is to return to a neutral setting. There are potentially serious costs and little benefit to waiting. The longer they wait, the larger the risks will grow.”

Comerica Bank’s chief economist Bill Adams said in a note that he expects the Fed to be extra cautious since the central bankers were “badly burned in late 2021 and 2022 when they thought high inflation would be transitory, then got caught by surprise when it was higher and more persistent than expected.” Adams added, per CNBC, that the “Fed will wait to pull the trigger on rate cuts until they see the whites of 2% inflation’s eyes.”

Quote of the Day

“Donald Trump’s plans for a universal 10% tariff on all imports and tariffs of up to 60% on imports from China specifically would subtract up to 1.5% from US GDP and trigger a rebound in inflation that could force the Fed to raise interest rates again.”

— From a research note by Capital Economics, cited Wednesday by The Washington Post’s Catherine Rampell.

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