Accounting
Surging long-term rates stoke GOP tensions on tax cuts
Surging long-term interest rates and stubborn inflation are inflaming divisions among congressional Republicans over paying for the sweeping tax cuts Donald Trump promised, complicating the path to passage with the party’s already tenuous majority.
“The bond vigilantes are coming,” Representative Andy Barr of Kentucky warned a group of House Republicans behind closed doors on Wednesday, resurrecting a catchphrase of the 1980s and 1990s, when concern over high interest rates set by the bond market drove Washington to take painful steps to bring down budget deficits.
Barr, a senior member of the Financial Services Committee, pointed to a jump in long-term rates since September. “This is a tipping point,” said Barr, a firm tax-cut supporter, urging his colleagues to come up with credible spending cuts to assure bond investors the federal deficit won’t balloon.
The mood in markets and the nation’s financial situation are starkly different from 2017, when Trump and congressional Republicans passed a deficit-expanding tax cut. Yields on benchmark 10-year Treasury notes touched 4.8% this week, double what investors demanded just before Trump started his first term. Total US government debt held by the public
Fresh deficit projections due Friday from the nonpartisan Congressional Budget Office are expected to show a worsening fiscal outlook as higher rates add to the cost of the government’s debt-servicing
Cost-of-living concerns loom large after an election in which public discontent with the surge in prices in recent years was pivotal. Americans’ long-term inflation expectations jumped this month to the highest since 2008, according to the
The bond market’s travails have pushed mortgage rates back up above 7%, putting homes out of reach for more Americans. Higher yields also threaten to undermine the bull market in stocks.
None of this has cooled congressional Republicans’ enthusiasm for large-scale tax cuts. But it has intensified fiscal conservatives’ calls to offset revenue losses with substantial spending cuts, stoking further conflict within the party’s fractious and slender majority.
In the House, the defection of just a few Republicans can defeat any party-line legislation. GOP leaders already face internal struggles over causes such as California and New York lawmakers’ demands to lift a ceiling that the 2017 tax law imposed on deductions for state and local taxes.
Meanwhile, Republicans’ dominant establishment wing has long favored spending more on defense, agriculture and other projects important to their individual districts. Trump himself is among those calling for a military build-up and wants more resources for border security. The sweeping spending cuts the party’s fiscal conservatives demand also risk backlash from key political constituencies that could endanger lawmakers representing competitive districts.
But hardline conservative Chip Roy of Texas laid down a marker on the House floor Wednesday, saying spending cuts should be at least big enough to pay for the tax cuts so that the deficit will shrink rather than expand.
“As we speak, interest rates are going up, our debt is getting refinanced at higher interest rates, and we have more debt,” Roy told the House. “The American people didn’t send us here to keep racking up debt.”
Trump’s nominee for Treasury secretary, Scott Bessent, expressed concern Thursday at his Senate confirmation hearing that maintaining current budget deficits would threaten the government’s capacity to respond to a future crisis. But he blamed spending levels, not tax cuts.
Until recently, interest rates had largely remained subdued, going back to the 2008 financial crisis — reducing the burden of borrowing costs for the U.S. government as well as consumers and businesses.
Not anymore. The COVID shutdowns and subsequent massive government stimulus reset things not just for the U.S., but the global economy. Inflation has since been persistently higher.
Yields on 10-year Treasury notes have climbed roughly a percentage point since mid-September, even after the Federal Reserve embarked on a course of cuts to its short-term benchmark rate — a jarring disconnect that has few precedents in recent history. The jump in longer-term yields is partly due to the economy being stronger than expected, but Trump’s agenda of tax cuts and tariff increases also has provoked anxiety.
“The bond market has begun to express their discomfort, and inflation being sticky is also a warning for Trump 2.0,” said Stephen Jen, chief executive of Eurizon SLJ Capital.
It’s likely that the dollar’s dominant role in global finance will continue to shield the U.S. from the kind of fiscal scare that has shaken other governments, such as the U.K. and Italy, as investors demanded a higher premium to hold their debt, Jen said.
“The U.S. will probably enjoy a higher ‘boiling point’ than Italy did,” said Jen. Even so, investor worries are sufficient “to start to price in this risk through a higher term premium,” he said — referring to the extra yield demanded for longer-term securities instead of just rolling over holdings of short-term ones.
Republican Rand Paul of Kentucky, who has tried for years to slash the budget, said rising long-term rates have “unmasked the problem” of the national debt and prompted behind-the-scenes debates among Republicans over how much new debt is acceptable. But he said the members of his party who don’t want big spending cuts remain dominant.
“Everybody professes to care,” he said. “There is a very small number that would actually cut serious spending.”
The House unanimously passed four bipartisan bills Tuesday concerning taxes and the Internal Revenue Service that were all
- H.R. 1152, the Electronic Filing and Payment Fairness Act, sponsored by Rep. Darin LaHood, R-Illinois, Suzan Delbene, D-Washington, Randy Feenstra, R-Iowa, Brad Schneider, D-Illinois, Brian Fitzpatrick, R-Pennsylvania and Jimmy Panetta, D-California. The bill would apply the “mailbox rule” to electronically submitted tax returns and payments to allow the IRS to record payments and documents submitted to the IRS electronically on the day the payments or documents are submitted instead of when they are received or reviewed at a later date. The AICPA believes this would offer clarity and simplification to the payment and document submission process while protecting taxpayers from undue penalties.
- H.R. 998, the Internal Revenue Service Math and Taxpayer Help Act, sponsored by Rep. Randy Feenstra, R-Iowa, and Brad Schneider, D-Illinois, which would require notices describing a mathematical or clerical error to be made in plain language, and require the Treasury to provide additional procedures for requesting an abatement of a math or clerical error adjustment, including by telephone or in person, among other provisions.
- H.R. 517, the Filing Relief for Natural Disasters Act, sponsored by Rep. David Kustoff, R-Tennessee, and Judy Chu, D-California. The process of receiving tax relief from the IRS following a natural disaster typically must follow a federal disaster declaration, which can often come weeks after a state disaster declaration. The bill would provide the IRS with authority to grant tax relief once the governor of a state declares either a disaster or a state of emergency and expand the mandatory federal filing extension under Section 7508(d) of the Tax Code from 60 days to 120 days, providing taxpayers with more time to file tax returns after a disaster.
- H.R. 1491, the Disaster related Extension of Deadlines Act, sponsored by Rep. Gregory Murphy, R-North Carolina, and Jimmy Panetta, D-California, would extend the amount of time disaster victims would have to file for a tax refund or credit (i.e., the lookback period) by the amount of time afforded pursuant to a disaster relief postponement period for taxpayers affected by major disasters. This legislative solution would place taxpayers on equal footing as taxpayers not impacted by major disasters and would afford greater clarity and certainty to taxpayers and tax practitioners regarding this lookback period.
“The AICPA has long supported these proposals and will continue to work to advance comprehensive legislation that enhances IRS operations and improves the taxpayer experience,” said Melanie Lauridsen, vice president of tax policy and advocacy for the AICPA, in a statement Tuesday. “We are pleased to work closely with each of these Representatives on common-sense reforms that will benefit taxpayers, tax practitioners and tax administration and we’re encouraged by their passage in the House. We look forward to continuing to work with Congress to improve the taxpayer experience.”
The bills were also included in a recent Senate
The House also passed two other tax-related bills Tuesday that weren’t endorsed in the recent AICPA letter.
- H.R. 1155, Recovery of Stolen Checks Act, sponsored by Rep. Nicole Malliotakis, R-New York, would require the IRS to create a process for taxpayers to request a replacement via direct deposit for a stolen paper check. If a check is determined to be stolen or lost, and not cashed, a taxpayer will receive a replacement check once the original check is cancelled, but many taxpayers are having their replacement checks stolen as well. Taxpayers who have a check stolen are then unable to request that the replacement check be sent via direct deposit. The bill would require the Treasury to establish processes and procedures under which taxpayers, who are otherwise eligible to receive an amount by paper check in replacement of a lost or stolen paper check, may elect to receive such amount by direct deposit.
- H.R. 997, National Taxpayer Advocate Enhancement Act, sponsored by Rep. Randy Feenstra, R-Iowa, would prevent IRS interference with National Taxpayer Advocate personnel by granting the NTA responsibility for its attorneys. In advocating for taxpayer rights, the National Taxpayer Advocate often requires independent legal advice. But currently, the staff members hired by the National Taxpayer Advocate are accountable to internal IRS counsel, not the Taxpayer Advocate, creating a potential conflict of interest to the detriment of taxpayers. The bill would authorize the National Taxpayer Advocate to hire attorneys who report directly to her, helping establish independence from the IRS.
House Ways and Means Committee Chairman Jason Smith, R-Missouri, applauded the bipartisan House passage of the various bills, which had been unanimously passed by the committee.
“President Trump was elected on the promise of finally making the government work better for working people,” Smith said in a statement Tuesday. “This bipartisan legislation helps fulfill that mandate and makes improvements to tax administration that will make it easier for the American people to file their taxes. Those who are rebuilding after a natural disaster particularly need help filing taxes, which is why this set of bills lightens the load for taxpayers in communities struck by a hurricane, tornado or some other disaster. With Tax Day just a few days away, we must look for common-sense, bipartisan ways to make filing taxes less of a hassle.”
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