Summary
- New York State Assembly and Senate pass separate proposed budgets as April 1 deadline approaches.
- IRS notes that Treasury Secretary Bessent’s tenure as IRS Acting Commissioner has ended.
- Treasury and IRS release proposed regulations on tax-exempt bonds.
The House and Senate will each be in session this week. Last week, House Republicans held discussions at a retreat in Florida on their legislative agenda for the year, but conclusions were not reached. House Budget Committee Chairman Jodey Arrington (R-TX) said that the Budget Committee will mark up a 10-year budget resolution within the next month that will call for limiting spending. However, he said it was not yet resolved whether the resolution would be largely declaratory in nature or would include the instructions to other congressional committees needed to start the process of enacting a budget reconciliation law.
Neither the Committee on Ways and Means nor the Senate Finance Committee currently has any tax activities on the official calendar. The Trade Subcommittee of the Ways and Means Trade Committee Hearing will hold a March 17 hearing on “Advancing America’s Interests at the World Trade Organization’s 14th Ministerial Conference.”
On March 12, the Senate took up bills to fund the Department of Homeland Security in full (offered by Republicans) and excluding certain functions (offered by Democrats), but none met the 60-vote threshold to proceed. About 90% of DHS employees are deemed essential and thus have been required to work without pay since the lapse in funding beginning February 14. Employees missed their first full paycheck on March 13.
New York State Legislature Passes “One-House” Budget Proposals
On March 12, the New York State Assembly and Senate separately passed “one-house” budget proposals, setting up negotiations with Governor Hochul. The statutory deadline for enacting a state budget is April 1, but the legislature and governor have not always met the deadline. For example, last year’s budget was not enacted until May 9, which was the latest the budget had been enacted in 15 years. The budget law often serves as a vehicle for changes to tax law.
The Senate budget would increase the state’s top individual income tax rate to 11.4% and the top corporate tax rate to 9%. The Assembly budget would take those rates to 12% and 9.25%. The Senate budget would reduce the tax credit for New York State Passthrough Entity Tax (PTET) to 90%, and the tax credit for the New York City PTET to 75%. The Assembly budget would reduce the tax credit for the New York City PTET to 75%. The proposals would also increase transfer tax rates on sales of one- to three-family homes above $5 million in New York City from 1.425% to as high as 5.325%. The proposals would also allow New York City to raise the financial sector corporate tax rate from 9% to 10.8% and the general corporate tax rate from 8.85% to 10.62%.
Last week, Mayor Mamdani also released proposed tax increases, expanding on his prior proposals. The priorities are: (1) a 2% rate increase in the NYC personal income tax rate for filers earning at least $1 million annually; (2) an increase in the NYC corporate income tax to 10.8% for financial sector firms and 10.62% for other firms; and (3) a reduction in the NYC Passthrough Entity Tax credit to 75%.
The Mayor’s other proposed tax increases are: (1) a 1% property tax surcharge on Class 1 and Class 2 residential properties with a market value of at least $5 million; (2) a 1% real property transfer tax on cash-only real property transactions over $1 million; (3) a city mansion and supplemental tax on residential properties with a value of at least $5 million; (4) remove the state and city sales tax exemption on sales of precious metal; (5) increase the state corporate income tax; (6) reduce the state tax credit for the Passthrough Entity Tax; (7) add a state surtax on capital gains income over $500,000 per year; (8) increase the estate tax top rate from 16% to 50%; and (9) lower the estate tax exemption from $7.1 million to $750,000.
IRS Notes that Secretary Bessent’s Tenure as Acting Commissioner has Ended
According to an IRS statement, Treasury Secretary Scott Bessent is no longer serving as Acting Commissioner of the IRS. The 210 days for which an official may serve in an acting capacity under the Federal Vacancies Reform Act ran out for Secretary Bessent’s acting position at the IRS on March 6. However, Secretary Bessent is now performing the functions and duties of the IRS Commissioner under the Federal Vacancies Reform Act provision providing that the Secretary of the Treasury has the authority and responsibility to perform the functions and duties of vacant Treasury positions that are not filled on an acting basis. The statement concluded: “The IRS continues to operate without interruption, with Chief Executive Officer Frank J. Bisignano successfully leading day-to-day operations and reporting directly to the Secretary.”
Treasury and IRS Release Proposed Regulations on Tax-Exempt Bonds
The Treasury and the IRS released a notice of proposed rulemaking (REG-117298-21), containing proposed regulations that would update certain arbitrage rules and definitions applicable to tax-exempt bonds. The proposed regulations would clarify the time and manner for requesting refunds of overpayment of rebate to the U.S. the special transition rule for transferred proceeds, the limitation on allocations of expenditures, and the IRS address for filing defeasance notices.
The proposal would remove Treas. Reg. § 1.148-2(f)(2)(iv), which implemented former Tax Code section 148(d)(3), repealed in 1997. The proposed regulations would also revise the rules governing recovery of arbitrage rebate overpayments by clarifying that issuers may claim a refund within two years after a payment made after the final computation date if that payment results in an overpayment.
The proposed regulations would clarify several arbitrage rules to prevent misinterpretation or unintended avoidance of rebate requirements. Specifically, they would clarify how transferred proceeds must be valued when bonds are refunded, confirming that the existing valuation rule applies to all arbitrage provisions under section 148, including rebate requirements, rather than only to yield restriction rules. The provisions would further clarify the rules governing the allocation of bond proceeds to expenditures. Although current regulations allow issuers up to 18 months to record allocations of proceeds to expenditures, the proposal makes clear that the funds being allocated must have been available on the date of the expenditure, thereby distinguishing the timing of the accounting allocation from the requirement that proceeds actually finance the expenditure.
The proposed regulations would modify the rules governing state perpetual trust funds that guarantee bonds, such as permanent school funds, by adjusting existing limitations so these funds can guarantee a larger volume of bonds in response to increasing demand for school bond guarantees while still preventing the creation of arbitrage-driven replacement proceeds. They would also revise key definitions, including expanding the definition of “tax-exempt bond” to include certain short-term Treasury certificates issued during Federal debt-limit contingencies and clarify the definition of “refunding issue” in connection with qualified student loan bonds and cross-calling practices. These definitional changes incorporate guidance previously issued in administrative notices and aim to prevent transactions from inadvertently being treated as impermissible advance refundings.
Comments must be received within 60 days after publication of the proposed regulations in the Federal Register, and requests to speak at any public hearing must be submitted by the same deadline.