Summary
- D.C. prepares for President Trump’s State of the Union as Supreme Court strikes down tariffs and Congress considers the scope of this year’s legislative agenda.
- Mayor Mamdani releases preliminary budget with property tax increases if New York State won’t increase corporate and income taxes.
- President Trump signs resolution to overturn D.C. law decoupling from the OBBBA, but D.C. says Congress missed the deadline.
- Treasury and IRS issue Notice 2026-7: Additional Interim Guidance Regarding the Application of the Corporate Alternative Minimum Tax.
- Treasury and IRS issue Notice 2026-16: Interim Guidance on Special Depreciation Allowance for Qualified Production Property.
- Treasury says OECD’s Pillar 1 is dead.
Congress returns this week with President Trump scheduled to deliver the State of the Union on February 24. As is usually the case, the Executive Branch did not release its proposed annual budget by the first Monday in February for the upcoming fiscal year, as is required by statute. The budget will likely be released in the next few weeks. Treasury has not said whether the budget will include a “Green Book” of legislative tax proposals.
There are no signs of progress on an agreement to fund the Department of Homeland Security, which lapsed at midnight of February 13, resulting in a partial government shutdown. The remainder of the federal government is funded through September 30, 2026, the end of the fiscal year.
There is also no sign of any agreement regarding the COVID-era increased tax credit for Affordable Care Act health insurance premiums that expired at the end of the year. Despite President Trump’s recently expressed skepticism about enacting a budget reconciliation bill this year, some Republicans, including House Budget Chairman Arrington (R-TX) and Senate Budget Committee Chairman Graham (R-SC), are continuing to push on this front.
The Supreme Court decision issued on February 20 in Learning Resources v. Trump, striking down the tariffs imposed by President Trump raises the possibility that Congress would enact those tariffs, but it does not appear there is sufficient support for doing so. The decision is explored further in this S&C memo. The Republican margins in the House are very thin – with all House Members voting, Republicans can only lose one vote – making passage difficult. Committee on Ways and Means Chairman Smith (R-MO) reiterated again this week that Republicans do not have the votes to enact another budget reconciliation bill, including for a measure to impose tariffs. Senate Majority Leader Thune (R-SD) has also expressed skepticism about pursuing another budget reconciliation bill.
In response to the tariff decision, Rep. Schweikert (R-AZ), Chairman of the Joint Economic Committee (and also Chairman of the Oversight Subcommittee of the Committee on Ways and Means) called for Congress to enact a border-adjusted destination-based cash flow tax. He said that the Joint Economic Committee would hold a hearing on the proposal in the next several weeks. In 2017, certain House Republicans advocated for this proposal, but it was not ultimately included in the Tax Cuts and Jobs Act.
Mayor Mamdani releases preliminary budget proposing property tax increases
On February 17, Mayor Mamdani released his preliminary proposed budget for fiscal year 2027. The proposal calls for property tax increases of $3.7 billion, $3.6 billion, $3.7 billion and $3.8 billion in fiscal years 2027 through 2030 respectively. The proposal would increase property taxes by 9.5%, raising the average property tax rate from 12.283 percent to 13.450 percent beginning in 2027. Mayor Mamdani said that the only alternative to the property tax increases is for New York State to raise the city’s income tax rates on corporations and millionaires.
Congressional Resolution blocking D.C. law to uncouple from OBBBA tax provisions
On February 18, President Trump signed into law the congressional resolutions (S.J. Res. 102 / H.J. Res. 142) to block a law enacted by Washington, D.C., Act A26-2014, decoupling the city’s tax law from some provisions in the OBBBA, including 100% bonus depreciation and expensing of research expenditures. As explained in this S&C memo, it is unclear whether the law met the statutory deadline by which to overturn the D.C. measure.
Treasury and IRS issue Notice 2026-7: Additional Interim Guidance Regarding the Application of the Corporate Alternative Minimum Tax
On February 18, Treasury and IRS issued Notice 2026-7: Additional Interim Guidance Regarding the Application of the Corporate Alternative Minimum Tax. The notice provides further guidance regarding the corporate alternative minimum tax (CAMT) on book income enacted in the 2022 Inflation Reduction Act. The notice is described in this S&C policy memo.
Treasury and IRS issue Notice 2026-16: Interim Guidance on Special Depreciation Allowance for Qualified Production Property
On February 20, 2026, the IRS released Notice 2026-16: Interim Guidance on Special Depreciation Allowance for Qualified Production Property. The notice provides interim guidance on the new 100% special depreciation allowance for “qualified production property” (QPP) under Tax Code § 168(n), enacted by the OBBBA. The notice states the intention of Treasury and the IRS to issue proposed regulations consistent with the rules provided in the notice.
Section 168(n) permits taxpayers to elect immediate expensing for certain nonresidential real property used as an integral part of a “qualified production activity” (QPA), if construction begins after January 19, 2025, and before January 1, 2029, and the property is placed in service after July 4, 2025, and before January 1, 2031. QPAs include manufacturing, agricultural production, chemical production, and refining that result in a “substantial transformation” of tangible personal property.
The notice provides detailed rules identifying eligible uses and eligible property, defining QPAs, and allocating basis of a single property between eligible and ineligible uses (e.g., office space and physical processing). The notice also provides guidance on leased property, consolidated groups and pass-through entities, and property whose usage changes. It also provides guidance on making elections, which must be on a timely filed return and are generally irrevocable absent IRS consent.
Importantly, QPP is subject to a 10-year recapture rule. If property ceases to be used in a QPA and is put to another productive use, § 1245 recapture applies, potentially triggering ordinary income equal to previously deducted amounts.
Taxpayers may rely on the notice for property meeting statutory timing and placed in service requirements before final regulations are issued. Comments are requested by April 20, 2026. The notice specifically requests comments regarding: (1) the allocation of basis between eligible and ineligible property; (2) on the definitions of manufacturing, chemical production, agricultural production and refining; and (3) examples of activities that are and are not manufacturing, production, or refining that result in substantial transformation of property comprising a qualified product.
Treasury says OECD’s Pillar 1 is Dead
Treasury officials discussed the status of the OECD negotiations at a program organized by the Australian National University’s Crawford School of Public Policy. Assistant Secretary for Tax Policy Ken Kies said that “Pillar 1 is dead.” He said that in light of the side-by-side agreement with regards to Pillar 2, it is realistic to believe that an agreement could also be reached with respect to the taxation of digital services, that is, in accordance with the U.S. position that there should be no change in which country has primary taxing jurisdiction. Deputy Assistant Secretary for Tax Policy Rebecca Burch said that the U.S. disagrees with the assumptions that had been behind the Pillar 1 until this point. Thus, although the U.S. is ready to discuss issues with respect to the taxation of the digital economy, the U.S. will not resume those negotiations with those same assumptions.