Last month we reported on our hopeful possibility of tax reform’s progress in Congress. We’re pleased to report its passage in the House and significant progress in the Senate. Although far from reaching the president’s desk, more progress has been made on this front than has been in a very long time.
As we reported previously, passing the House was relatively easy. We say relatively easy because not everything can pass the House, although it’s far less susceptible to the whims of one individual senator. While members of the House have the ability to form blocs in defeat of a bill or command changes, when the majority has 218 votes, there’s little stopping a bill from moving through the lower chamber.
In the Senate most bills require 60 votes in favor in order to overcome a filibuster. Though not the “Mr. Smith Goes to Washington” filibuster, today’s filibuster is still a way for the minority to shape legislation by preventing debate on legislation from beginning (or concluding). During this process, however, the Senate is using budget reconciliation, a tool in the majority’s arsenal that allows passage of legislation with only 51 votes. With 52 Republican senators, they can afford two defections, assuming Vice President Mike Pence provided that 51st vote.
When this was written (on Nov. 29), two GOP senators were expressing opposition, though trying to “get to yes.” Both are from the right-of-center wing of the party and often considered stalwarts of their party, Wisconsin’s Ron Johnson and Montana’s Steve Daines.
Some of the major divisions within the bill were predictable, as we’ve been working on tax reform for years. For those filing as a corporation, to receive such a low rate, something had to give. That something was in the form of how small businesses pay taxes, known commonly as pass-throughs.
Pass-throughs, also known as S Corps, are entities typically closely held either by partnerships, an LLC or members of a family rather than publically held by shareholders or institutions. And rather than suffer the double-taxation a corporation pays, the owners pay at the individual rate, like a household would. This is simplifying a complicated policy, but suffice it to say real concerns exist over small businesses perceived subsidizing of a corporate tax rate that’s being axed to 20%.
Pass-throughs have proven tricky on Capitol Hill. On the one hand, the majority of plumbing or mechanical contractor firms are organized as pass-throughs. But so too are law firms, financial advisory services and other high-earning entities. But should they really be taxed differently? Unfortunately, many tax writers in the House and Senate believe so.
The reason the pass-through rate is higher than the C corporation rate is the tax-writing committee chose to devote relatively more revenues to reducing the corporate rate (e.g., what’s referred to in Washington as tax expenditures the amount of money against revenues that a tax cut would result in). The JCT (Joint Committee on Taxation) reports the 20% corporate rate reduces revenues by $1,326 billion, while the pass-through deduction reduces revenues by only $460 billion, or 26% of the total revenue pool devoted to business-rate relief. As a comparison, pass-through businesses employ the majority of workers and earn the majority of business income. They represent about one-third of the American economy, not one-fourth.
Opposition in the Senate is not just over the disparity between C and S Corporate rates. Other Republicans have concerns over the bill’s impact on the deficit, while still others raised concerns over the prospect of rolling back provisions such as the individual mandate in the Affordable Care Act. The latter would make the bill cost less, while the former allows the bill to pass with only 51 votes.
Deficit hawks in the Senate have proposed items such as a trigger or “backstop” in the event that economic growth does not result from the cuts. In fact, Oklahoma Senator James Lankford said he would back a Republican tax-reform bill that includes a backstop to change tax rates if the measure fails to create as much revenue as projected. So while that may appease the fiscally conservative senator from Oklahoma, others have come out in strong opposition to such a plan, because, as you may guess, they’re opposed to the automatic tax hikes that the backstop could cause.
The World’s greatest deliberative body could prove once again to be the place where legislation goes to die. The number of bills that pass the House and languish in the United States Senate is hundreds and thousands over the span of a presidential term. But Republicans in 2017, and soon to be 2018, have an added incentive: they want to return to Washington.
Having failed at repealing and replacing the Affordable Care Act, most realize that failure to reform the tax code is not an option.
Assuming a government shutdown does not occur on Dec. 8, this should be fun to witness!