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‘Pass-Through’ Changes Dog Senate GOP Tax Overhaul

Republican Ron Johson says plan not generous enough to pass-throughs

From left, Michigan Sen. Debbie Stabenow, Senate Finance ranking member Ron Wyden, Senate Finance Chairman Orrin G. Hatch and Iowa Sen. Charles E. Grassley participate in the committee markup of the Senate GOP’s tax bill Wednesday. (Bill Clark/CQ Roll Call)
From left, Michigan Sen. Debbie Stabenow, Senate Finance ranking member Ron Wyden, Senate Finance Chairman Orrin G. Hatch and Iowa Sen. Charles E. Grassley participate in the committee markup of the Senate GOP’s tax bill Wednesday. (Bill Clark/CQ Roll Call)

Trouble signs emerged Wednesday for the Republican tax overhaul effort, even as the Senate Finance Committee crept closer — slowly, and sometimes painfully — toward approving its bill later this week.

The top tax writers on each side forecast long hours still ahead. “Tomorrow, we are going to be here a while,” Sen. Ron Wyden, the Finance panel’s ranking member, said Wednesday.

Finance Chairman Orrin G. Hatch said he’d “like to finish by tomorrow, but if we can’t, we’ll go into Friday.”

The committee was set to reconvene at 10 a.m. Thursday.

As President Donald Trump prepares to visit Capitol Hill Thursday to rally the House GOP behind that chamber’s tax bill, which is expected to pass later in the day, the Senate tax plan encountered an unexpected headwind. Republican Sen. Ron Johnson announced he would oppose the tax plan in its current form, saying it was not generous enough to “pass-through” businesses whose owners pay taxes on their individual returns.

Johnson, a former executive of a Wisconsin plastics company structured as a limited liability company, said tax cuts for such pass-through entities were dwarfed by benefits for large publicly traded corporations, which would see their tax rate slashed from 35 percent to 20 percent.

Watch: Hatch Asks Finance Committee to ‘Talk Like Gentlemen’

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Senate Republican leaders can only afford to lose two votes on their side, as no Democrats are expected to support the measure. Other Republicans have expressed concerns, though Johnson is the first to publicly announce opposition.

Johnson indicated, however, that his vote was winnable if changes are made. “I look forward to working with my colleagues to address the disparity so I can support the final version,” he said in a statement.

Amendment flurry

After finally starting debate on amendments after 5 p.m. Wednesday, following a long day of partisan sniping, the Finance panel raced through and recessed for the night just before 7:45 p.m. Democrats complained about the rushed process throughout the evening, and the discussion often grew chippy as members talked over each other and raised their voices.

The first amendments Wednesday came from Wyden. The two proposals would have barred the committee from voting on the tax proposal until the panel held hearings with key stakeholders, and would have required nonpartisan analysis of whether the tax plan would raise taxes or health insurance premiums or cause anyone to lose insurance.

The Oregon Democrat accused Republicans of “legislative malpractice” for using a closed and partisan process to draft their tax plan and force it through with little debate, but GOP members countered that they had already been discussing a tax overhaul for years. Wyden’s amendments were each rejected by a party-line vote of 12-14.

Democrats offered a slew of other amendments to snap back many of the tax breaks if they led to raised deficits, to ensure the tax plan didn’t lead to higher health care costs for taxpayers and more. Each was either ruled out of order or defeated on a 12-14 party-line vote.

In an unusual exchange, Democrats pushed an amendment that would have swapped out the Senate proposal with the text of the House GOP’s tax bill, aiming to force Republican senators to go on record on the House plan. “This smells like a stunt,” Hatch said of the amendment. Every member voted “no,” and it was rejected, 0-26.

‘Pass-through’ problems

Hatch’s latest proposal on pass-through business income would allow a 17.4 percent deduction, creating a top effective tax rate of about 32 percent on such income, lower than the top marginal tax bracket of 38.5 percent on income above $1 million for joint filers in the underlying bill.

But that is still substantially higher than the 20 percent corporate rate in the underlying bill. And what’s more, the pass-through deduction would sunset at the end of 2025, like other provisions affecting individual taxpayers in the Senate GOP plan, while the corporate rate cut would be permanent.

Johnson’s opposition is striking considering Hatch won over the influential National Federation of Independent Business with modifications he released late Tuesday.

Those changes included expanding the income threshold under which services-related business owners — such as accountants, engineers and attorneys — could benefit from the deduction to $250,000 for individuals and $500,000 for joint filers. Another change would exempt income below those thresholds from a cap on deductible income equal to 50 percent of wages paid by the owner.

Johnson also said he could not support the House version — also endorsed by the NFIB — which based on Joint Committee on Taxation scores may be more generous to pass-through businesses than the Senate version is.

The House bill would create a maximum 25 percent rate on pass-through income, but generally only 30 percent of such income would be eligible for a reduced rate. (More capital-intensive manufacturing firms could potentially get the lower rate on a larger share of income.) Services businesses would be mostly ineligible, although they would benefit from a special 9 percent pass-through rate on the first $75,000 of business income, provided total taxable income from the business does not exceed $150,000, above which the benefit phases out.

The House version, which would be permanent, would provide about $450 billion in tax cuts to pass-through businesses through 2025, when the Senate measure sunsets. By contrast, the Senate bill would provide a little more than $200 billion in net pass-through tax cuts, according to the JCT, factoring in offsets that would limit the ability of active pass-through owners to deduct business losses of more than $500,000 for joint filers and $250,000 for individuals.

Johnson is not the only senator who has pushed for evening out the rate disparity between business structures. Maine Republican Susan Collins has authored a bill with Florida Democrat Bill Nelson to treat pass-through businesses the same as corporations under the tax code.

Collins is already seen as a potential swing vote on the overall tax plan, especially now that Senate GOP leaders have decided to include a repeal of the penalty for not purchasing health coverage under the 2010 health care law.

Insurance mandate debate

Day Three of the Finance markup began under a cloud of partisan discord after Hatch released a new version of the Senate GOP tax plan late Tuesday night, making broad changes that Democrats had not been consulted on.

Repeal of the individual mandate for health insurance took center stage in the early rounds of debate. “This is not just another garden-variety attack on the Affordable Care Act,” Wyden said. “This is repeal of that law.”

Hatch pointed out that repealing the mandate penalty would save $318 billion over 10 years and fund additional tax cuts. But Wyden insisted that the “eleventh-hour” decision by Republicans to insert the repeal was being done without proper debate or Congressional Budget Office experts on hand to answer questions.

Thomas Barthold, chief of staff for the Joint Committee on Taxation, said his office would work to provide an updated analysis including the mandate repeal’s impact on different income groups.

Substantial revisions

Hatch’s updated proposal would also lower certain individual tax rates and raise the proposed child tax credit to $2,000, among other changes released late Tuesday night.

Three of the seven proposed individual tax rates — 22.5 percent, 25 percent and 32.5 percent — would drop to 22 percent, 24 percent and 32 percent, respectively, benefiting individuals earning between $38,700 and $200,000, with those thresholds doubled for joint filers. The other individual tax rates — 10 percent, 12 percent, 35 percent and 38.5 percent — are unchanged from Hatch’s original proposal.

The expanded child tax credit would now only apply to households with up to $500,000 in annual income, down from $1 million for married couples filing jointly in the original version.

Those provisions, along with the expanded standard deduction and virtually every other tax break on the individual side, would expire at the end of 2025, as would the pass-through changes. So, too, would many of the offsets that Republicans included in the bill, such as scrapping personal exemptions and the deductions for state and local taxes.

Setting the provisions for individual taxpayers to expire in 2025 would keep Republicans from running afoul of complex Senate rules they are relying on to pass their tax code overhaul. The so-called Byrd rule limits legislation that would raise annual deficits after 10 years.

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