No Tax Hikes for Middle Class, Says Yellen

Despite Tax Cuts and Jobs Act (TCJA; PL 115-97) provisions that are set to expire, Treasury Secretary Janet Yellen told the House Ways and Means Committee Tuesday that “no family earning less than $400,000 will face a tax hike” under President Biden’s proposed budget.

Yellen discussed a range of existing and proposed tax provisions with legislators at the April 30 hearing, but repeatedly emphasized Biden’s commitment to certain TCJA provisions that help lower- and middle-class Americans, saying Biden opposes their expiration. Yellen said that goal would be met through “negotiations.”

Representative Michelle Fischbach (R-MN) countered that “there’s no real plan” for extending the tax cuts for working Americans while Chairman Jason Smith (R-MO) said he would “love and welcome a plan.” Representative Ron Estes (R-KS) noted a recent tweet from Biden saying, “That tax cut is going to expire. If I’m reelected, it’s going to stay expired.”

Among the tax cuts legislators felt strongly about were the child tax credit — which Yellen called “critically important” — and the earned income tax credit.

There were several other recurring topics amongst the hours of testimony, ranging from corporate tax rates, to energy and housing tax credits, to the future of the IRS’ new e-filing tool.

Pillar Two.

Yellen emphasized that the Pillar Two agreement to establish a global minimum corporate tax rate is “very much in support of goals that are good for this country.” She said that it will stop the race to the bottom, explaining that the US is the only country that taxes the overseas earnings of its multinationals.

Several lawmakers questioned how the global minimum tax rate would be enforced and whether countries like China could simply not impose tax and win out. Yellen reiterated that Pillar Two has an enforcement mechanism — the “undertaxed payments rule” — so countries can tax firms based in countries that don’t go along with the minimum tax. If China imposes tax, they can collect the tax revenue, Yellen explained, whereas if they do not, the US can impose taxes and collect that revenue.

Clean energy.

Lawmakers also grilled Yellen on clean energy tax credits that they said were benefiting China and other countries at the expense of US companies.

Yellen explained that electric vehicles are not eligible for the $7,500 credit if their batteries contain components from foreign entities of concern. And limitations on sourcing clean energy product components from foreign entities of concern expand next year, said Yellen. The goal, she said, is to reduce our dependence on China and foreign entities of concern, while “expand[ing] sources of support among our friends.”

Yellen also announced the release of a guidance notice she said would incentivize the production of cleaner and more sustainable aviation fuel. (IR 2024-127, 4/30/2024)

Housing credits.

Yellen reflected on current high housing prices and mortgage rates, which she said create a “lock-in” situation where current homeowners don’t want to sell their starter homes and lose the benefit of prior low rates. To address that, said Yellen, Biden’s budget includes a pair of tax credits intended to help Americans purchase their first home: one credit for purchasers of new homes and another for those willing to sell their homes.

Direct File.

Over the course of five weeks, 140,000 people used the IRS’ new Direct File e-filing tool, Yellen shared, and users were generally “expressing positive reactions.” While data is still being complied on the e-filing pilot, Yellen said, “overall, I believe we’ll see that the experience was a very positive one.”

Initial data showed that taxpayers found Direct File easy to use, and that they spent about an hour filing taxes at no charge, versus the average 12-13 hours at a cost of $270 preparing taxes without Direct File, according to Yellen.

Representative Judy Chu (D-CA) questioned Yellen about changes that would be put in place if the pilot is expanded. Chu suggested that it be made available in more languages, and Yellen agreed that this was something that “would be considered over time.” Yellen also noted other possible changes should Direct File be rolled out for future tax filing seasons, including an expansion in taxpayer income levels and deductions eligible to use the tool and pre-populating information reported to the IRS.