WASHINGTON—A bipartisan tax bill that sailed through the House six months ago reached a dead end as the Senate killed the once-promising deal Thursday and turned it into fodder for campaign-trail finger-pointing. 

The bill would have revived expired tax provisions that help businesses making capital investments or conducting research, and it would have expanded the low-income housing tax credit and the child tax credit for low-income families. The legislation also would have cut off the employee-retention tax credit, a pandemic-era program riddled with fraud and ineligible claims that has cost more than triple the original estimates. It attracted support from progressive antipoverty groups and the U.S. Chamber of Commerce. 

The nearly $80 billion tax bill had been on life support for months as lawmakers blew past self-imposed deadlines. With the Senate on the eve of its summer recess, Senate Majority Leader Chuck Schumer (D., N.Y.) scheduled a procedural vote to put lawmakers on the record. 

The bill, which passed the House 357-70 and is backed by President Biden, fell short of the 60 votes needed to move forward in the Senate. In all, 48 senators voted to advance the bill and 44 voted no. 

Almost all Senate Republicans opposed the measure, saying it leans too heavily toward Democrats’ priorities. On the Democratic side, some progressives saw the bill as too tilted toward businesses, but most backed it.

Among Republicans, Markwayne Mullin (R., Okla), Josh Hawley (R., Mo.) and Rick Scott (R., Fla.) voted yes. From the Democratic caucus, independent Sens. Joe Manchin of West Virginia and Bernie Sanders of Vermont voted no. Schumer voted no so that he can call another vote in the future.

“Senate Republicans have been giving all these flowery speeches about how much they care about kids and families, and then when it comes to actually doing something, they’re AWOL,” said Senate Finance Committee Chairman Ron Wyden (D., Ore.). 

Senate Republicans back the business changes, but they contend that the deal makes the child credit too generous, especially for some parents without earnings who would have a lower incentive to work. They argue that they could write a better version next year if they have more control of the government after November’s election.

“This is obviously an unserious effort,” said Sen. John Cornyn (R., Texas), citing the lack of time for amendments. “It’s obviously just a show vote. And I think we can do much better next year.”

Business owners warn of layoffs

The bill’s backers warn about the consequences of inaction. Many business owners harmed by the change to deductions for research expenses have been saying they would lay off workers or shut down entirely if Congress doesn’t pass the bill. Disaster victims, particularly in Florida and California, won’t get the more generous treatment of losses they had been seeking unless a separate House-passed bill can get through the Senate. 

The stalemate is a sign of how hard it is to pass meaningful legislation in a divided government. It is a potential warning about the difficulties Congress will face next year when much larger sections of the 2017 tax law are scheduled to expire. Anything that doesn’t get done now might be rolled into that bigger debate. 

For Democrats, the bill’s demise presents a political opportunity. Sen. Sherrod Brown (D., Ohio), a child-tax-credit supporter in a tough re-election race, is eagerly touting the legislation, calling it a win-win for families and manufacturers. And Democrats could use the vote to chide the GOP vice-presidential nominee, Sen. JD Vance (R., Ohio), who supports having the tax system aid parents. He missed the vote because of the campaign.

The bipartisan bill emerged from talks between the ideological opposites who run Congress’s tax-writing committees, Wyden and Rep. Jason Smith (R., Mo.). 

Smith and House Republicans were eager to alter certain business-tax provisions that were part of the 2017 tax law signed by President Donald Trump. 

In that law, to keep the net size of the tax cut below $1.5 trillion, Republicans scheduled several delayed tax increases, hoping that a future Congress would reverse them. 

Starting in 2022, businesses were required to spread their domestic research deductions over five years rather than deducting them immediately. That caused higher tax bills at large companies such as Lockheed Martin, and it created a crisis for smaller companies that lacked the cash to pay the Treasury. A new study by three accounting professors found that the tax change reduced R&D spending by the most research-intensive companies by $12.2 billion in its first year, a 12% drop from what it would have been. 

Businesses also faced tighter limits on deducting interest. And the full, immediate write-offs for capital investments began shrinking in 2023.

Democrats wanted something in return

Democrats favor those business-tax changes, particularly for research costs. But they didn’t want to help Republicans change their own law without getting something in exchange: expansions of the child tax credit and low-income housing tax credit. 

After months of talks, Smith and Wyden reached a deal that would revive the business provisions retroactively. The bill would make more of the credit refundable, or available to families without income-tax liability, and it would increase the credit for some lower-income families with multiple children. Starting in tax year 2024, the bill would also let parents use their current earnings or the prior year’s earnings to qualify for the credit. 

That would help people who dip in and out of the workforce, according to the progressive Center on Budget and Policy Priorities. Overall, 16 million low-income children would benefit from the legislation, the center said. 

Some child-credit changes would take effect for tax year 2023, so if the legislation passes, the Internal Revenue Service would start sending refunds to families immediately. For some Republicans, that is an argument against the bill, because families would be getting checks from the Biden administration as they are preparing to vote. 

The bill also wouldn’t increase the deficit because of the changes to the employee-retention tax credit. Congress created the ERC to keep workers attached to employers during the pandemic, but IRS officials say it led to spurious refund claims. 

Under current law, employers can still file amended 2021 tax returns through mid-April 2025 to claim as much as $21,000 per employee. The IRS declared a moratorium on paying claims filed since mid-September 2023 but has still been receiving 17,000 claims a week. The bill would deny all ERC claims filed after Jan. 31, 2024. 

Mullin, who backed the bill, expressed frustration with Schumer’s approach to scheduling the vote and with his own party’s rejection of the compromise.  

“It locks in a lot of Trump’s tax cuts. And it gets us ahead of what’s going to happen in 2025,” he said. “It’s hard to explain why we’re not for it, other than the fact we think we can negotiate something better.”