The stakes rarely have been higher as business leaders seek to manage operations and plan investments in an environment of uncertainty arising out of policy divisions among elected officials over the direction of US and global tax policy. At the same time, businesses have to respond to worldwide technological disruption, the lasting impacts of the COVID-19 pandemic on how people work, and an increased focus on environmental, social, and governance (ESG) concerns.
They are facing the challenge of managing employees, operations, and supply chains at a time when the United States and other countries are facing significant macroeconomic risks — possible recession, elevated inflation, rising interest rates, and geopolitical challenges. Business leaders need to be proactive in communicating to policymakers the potential impact of legislative and regulatory proposals on economic growth, employment, and investment. They also will want to seize opportunities to leverage recently enacted tax incentives that may help to advance a company’s business strategy.
In the United States, as a practical matter, divided government control — with one political party controlling the White House and Senate, and the other party controlling the House — and sharp partisanship will limit the scope of new tax and spending legislation. A Republican-controlled House and Democratic-led Senate means that any tax legislation will require bipartisan support to be signed by President Biden.
With the outlook for US economic growth in question, elected leaders of both parties are expected to advance legislative proposals and hold oversight hearings intended to highlight policy differences in advance of the 2024 elections for president and Congress. Issues expected to be debated over the next two years include the question of how to address individual and pass-through business tax provisions enacted in the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire at the end of 2025 and whether TCJA business tax provisions should be reconsidered.
An unsettled global tax policy landscape will continue to increase risks of higher tax costs and administrative challenges for multinational corporations. The outlook for action on Pillar One proposals is in doubt, leaving both the issue of digital services taxes unresolved and the future sustainability of traditional transfer pricing principles at risk. Meanwhile, there is a greater likelihood of new Pillar Two tax policy changes being adopted by a number of key jurisdictions following the adoption of a minimum tax directive by the EU Council in December 2022.
As countries review their geopolitical exposure, multinationals may consider more frequent and extensive risk assessments for their global footprint. The changing nature of globalization and supply chains is expected to put upward pressure on costs, as companies focus less on cost minimization and more on supply chain resiliency.
State governments in general continue to show budget surpluses, although some state legislatures are bracing for a potential shift in economic conditions that may require a renewed focus on closing budget gaps. That makes 2023 a pivotal year for state tax policy, as incoming administrations and legislatures look to enact and fund various priorities and, in some cases, find tax revenue sources that might weather a possible economic downturn.