TAX REFORM | Business Taxes

Sen. Orrin G. Hatch (R-Utah),
Chairman, Senate Finance Committee

The following is Update 205 from Dana Chasin, reposted by permission:

Sept. 19, 2017 – This morning, Senate Finance held its second hearing this week exploring tax policy. This time, the focus was on corporate taxes. 

The Committee heard testimony on topics such as pass-through rates, C-corp rates, territoriality, and options to raise revenue.

Chairman Hatch again asserted that a tax bill will be written by the Committee in a bipartisan way, insisting that the Secret Six will not force partisan changes since it doesn't legislate. 

Ranking Member Wyden took aim at the all-GOP Secret Six, whose tax-reform deliberations are the subject of intense lobbying and speculation, attacking purported GOP plans on pass-through taxation, and expressing outrage about the latest attempt to jam through health care repeal. 

What are the dividing issues here? Are these divides so great that Republicans will have to rely on reconciliation to move on a $1.5 trillion tax cut? Or does Hatch think bipartisan accord is possible? Best, Dana

1. Areas of Discord

Frequently, bipartisan differences on corporate tax proposals were aired, particularly regarding:

•  Pass-Throughs: Republicans defended pass-throughs as a way to support small businesses and spur economic growth by increasing investment.  Sens. McCaskill and Wyden were quick to refute these claims, arguing that the benefits of a pass-through rate cut would accrue mostly to the top one percent of earners, as pass-through income accrues to wealthy owners of larger businesses. 

•  Deficit Financing: Democrats emphasized the likelihood that tax cuts would be deficit financed. Precious few ideas have surfaced from Republicans about how to compensate for this revenue loss. Sen. Carper expressed concerns about deficit-financed tax cuts, particularly those disproportionately benefiting the affluent.

•  Dynamic Scoring:  Conservatives continue to cite this fiscal impact metric to mollify those concerned about adding trillions to the debt, saying that tax cuts will spur growth and in turn increase revenue. Not many serious economists think the government would get more than a dime out of the best designed tax cut dollar. Carper and others today called this trickle-down theory, recalling how similar corporate tax cuts of the past have increased deficits without generating growth to make up for them.

Sens. Brown and Stabenow excoriated trickle-down economic policies.   Stabenow suggested ending the tax subsidies that the five largest oil companies have enjoyed for over a century. She said eliminating the business interest deduction would harm workers, particularly in small businesses. Sen. Cantwell focused on the most vulnerable, highlighting the precarious situation of the Low Income Housing Tax Credit Program, a program with major implications for investment spending patterns of developers.

2. Areas of Potential Accord

The possibility of bipartisan accord is low, but a few isolated points emerged around which members may find bipartisan agreement, if and only if rate reductions are modest:

•  International Competition – Sens. Carper and Warner conceded that it may make sense to lower the corporate rate a few percentage points to increase competitiveness with other nations 

•  Pass-Throughs – Sen. Cardin noted that S-corps in his state plead for moderate reductions on pass through rates. 

•  The Interest Deduction – Two witnesses who did not agree on much else, Scott Hodge and  Donald Marron, concurred on the prudence of eliminating the business-interest deduction as a revenue source to bring in $1.2 trillion in revenue over the budget window. 

3. Reconciliation Process

If the GOP tax plan is so fiscally reckless and inequitable that no Democrats sign on, it will have a better shot if Republicans pass a budget resolution with reconciliation instructions providing for tax changes. No tax changes can add to the deficit outside of a 10-year budget window under reconciliation. A budget resolution that complies means the GOP would need only a 50 + 1 majority to pass the legislation; a filibuster requiring 60 votes to overcome, would not available to Democrats. 

There are a few obstacles to shepherding legislation by way of reconciliation.  Per the Byrd Rule, Senators can raise a points of order against an extraneous provision in a budget bill. A provision could be considered extraneous if it:

•  changes provisions for social security,

•  doesn't change the overall spending or revenue,

•  only incidentally changes spending or revenue,

•  is outside the jurisdiction of committee(s) reporting it.

4. Time Is of the Essence

Republicans must work with alacrity to create a product that overcomes the above obstacles to reconciliation. The window for using budget reconciliation will soon close. The Senate parliamentarian, who oversees the chamber’s arcane procedural rules, decided last week that the current budget reconciliation privileges would expire at the end of September, the last day of this fiscal year. 

The GOP badly wants to get a tax bill done this year, so as not to boot it to 2018, an election year. But it will be nearly impossible for Republicans to get this done by the end of the fiscal year.  

Just tonight, Sen. Corker, a senior Republican on Senate Budget, told reporters that the budget resolution that could unlock the process for reconciliation could be marked up in the coming week or two, depending on whether the Senate is focused on health care.

TAX REFORM | Hatching a Bipartisan Plan?

Senator Orrin Hatch, Finance Chair. 

The following is from Dana Chasin, reposted with permission from his Update 204 (September 14, 2017). The New York Times reports that Committee Chair Hatch has warned against expecting too much in the way of a detailed tax reform plan just yet.

Today’s Senate Finance Committee hearing on individual income taxes marked the first indication that we may be witnessing an administration-directed, or influenced, shift from partisanship to triangulation, this time on tax reform. 

The tectonic shift under the ground of American partisan politics was discernible at the hearing. 

At a Christian Science Monitor breakfast on Tuesday, President Trump’s legislative director expressed Trump's disappointment in the GOP after the failure to repeal Obamacare.  He said:

We don’t feel like we can assume that we can get tax reform done strictly on a partisan basis... so it is wise for us, not just from a policy perspective but from a vote-counting perspective, to try to reach out and earn the support of Democrats as well.

The witnesses' testimony, the opening statement by the Chair and the Q&A that followed called into question the hitherto presumed GOP legislative strategy to force tax changes through the reconciliation process. Is it possible Republicans may seek to forge bipartisan consensus and abjure reconciliation?

______________________________________________

Hatch: Senate Finance Legislates, not Secret 6

Senate Finance Chair Orrin Hatch dismissed the notion there is a secret cabal of tax planners seeking to re-write the code behind closed doors. He insisted his Committee would write legislation in a bipartisan way, he said, and that the GOP Secret Six that has met over the last few months would not write the new tax rules.  

Themes under Discussion

•  One Percent Factor

Democratic members and all but one panelist recommended that the top one percent not benefit from any tax changes. The administration has weighed in from every direction on this issue over the course of the year. Treasury Secretary Mnuchin articulated the rule named after him in his confirmation hearing promising that there will be no absolute tax cut for the wealthy. Earlier this summer, he said that he had walked that conviction back. Just yesterday, Trump walked it forward again out of nowhere. 

In today’s hearing, Sen. Casey said he was sure Republicans differed with him and his Democratic colleagues on this front. Chairman Hatch interrupted, saying there was no difference on the top one percent. This would be a signal change. 

•  Revenue Neutrality

A key point of concern for nearly every Democrat at today’s hearing was revenue neutrality. Democrats are right to worry that massive tax cuts for the rich will likely be financed (either in the short term or down the road) through cuts to the entitlements that low and middle income earners depend on. The GOP, usually happy to pay lip service to revenue neutrality without proposing it. Today's flawed but plausible feints toward neutrality from the GOP came in two identifiable proposals. Both got pushback. 

• Taxing 401(K) accounts – unlikely to go much further due to the obviously negative impact it would have on working Americans
• Eliminating state and local deductions – garnered immediate pushback from Democrats who claimed such measures would amount to double taxation and result in the blue states carrying too much the national tax burden. Some Republicans are opposed to eliminating the state and local deduction as well.

Remaining revenue ideas discussed today  include eliminating or reducing the mortgage interest deduction and eliminating the deductibility of interest on business expenses.  

Main Issues in Play at Hearing

•  The Standard Deduction

Hatch and Wyden found themselves in agreement and expected the same from their parties in terms of doubling the standard deduction. This method would lead to a simpler and more fair tax code. This could be a bipartisan feat for the committee moving forward as the elimination of State and Local Deductions ignites disagreement.

•  Mortgage Interest Deduction

Witness Iona Harrison of the National Association of Realtors highlighted in her testimony the importance of maintaining the Mortgage Interest Deduction. Harrison called for the simplification, and not the elimination, of particular elements of the tax code. The housing market is a primary tool for wealth attainment for a large portion of the population and therefore, is an undeniable influencer in the cycle of the economy.  As such, interests advocating for the mortgage interest deduction have a seat at the table. 

•  Child Tax Credit (CTC)

Republicans have previously rejected the Democrats efforts to establish federal leave for parents, but with Ivanka’s agenda of improving support for working parents, they may end up compromising with the Democrats and with the President by increasing the Child Tax Credit from $1,000 per child up to $2,500 per child. 

The Child Tax Credit has historically been something that some more conservative Republicans—like Paul Ryan—have affirmed, as it appeals to the down-home traditional family values crowd (who might also reject using birth control or having both parents working). Marco Rubio’s recent discussion of expanding the EITC included the CTC, and the Committee today discussed it at great length with surprising bipartisan agreement on the benefits of expanding the CTC. 

•  Earned Income Tax Credit (EITC) 

Chairman Hatch, Senator Wyden, and countless other members on the committee pressed constantly on the issue of using this moment in tax reform for good and relieving the tax burden of the middle and working classes. Senator Cantwell asked witness Batchelder for the best methods of boosting middle-class incomes. Her response was to increase the Earned Income Tax Credit. 

The EITC is a bipartisan issue that was pursued by Obama and Paul Ryan just over a year ago and has the potential of protecting low-income workers who are being “taxed into poverty” in Batchelder’s opinion. The benefits of this plan may be expensive to achieve when coupled with high expectations of increased Child Tax Credits.

•  Pass-Through Provision 

After his claim that there will be no tax breaks for the rich yesterday, the President’s policies for working class came under fire multiple times throughout the hearing.  Ranking Member Wyden and Prof. Batchelder criticized the administration’s tax policy agenda for its false attempt to put the masses at ease. The Pass-Through Business Income tax introduces a large loophole for corporations to use in order to dodge taxes.  With 95 percent of businesses qualifying as “pass-throughs”, businesses could see cuts from a 35 to 15 percent tax rate easily with proper taxation intel on hand.

•  State and Local Deduction

Throughout the hearing, Democrats and witnesses severely criticized the elimination of the State and Local deduction as a partisan proposal placing a disproportionate burden on taxpayers from blue states. The biggest concern voiced was elimination at the risk of double taxation. Senators Wyden and Cardin cried out in the name of protecting constituents’ incomes from excessive taxation at the federal level as the committee may consider throwing out State and Local deduction in the tax reform.

•  Retirement Security and "Rothification"

The panel of witnesses were weary of the idea of switching to a Roth, or after-tax, model that may impact savings and bring tax revenues into a 10-year budget window. Democratic members of the committee like Senator Brown found the switch from a pre-tax to an after-tax model unattractive. This was especially true when coupled with the probable cuts to entitlement programs and increased age qualification for Social Security.

Democratic Desiderata

Senator Wyden used a substantial part of his opening statement to make an appeal to bipartisanship, even going as far as to make Reagan-style tax reform a central motif in his appeal for sensible tax reform. Unsurprisingly, Wyden gave no indication that he is any more privy to the Secret Six’s policy details than the rest of us.

Wyden and other Democrats did make a coherent set of policy preferences quite clear including: 

•  proceeding by regular order with negotiations, i.e. not via reconciliation

•  revenue neutrality  

•  a commitment not to benefit disproportionately the one percent, as has generally been the practice over the last several decades. 

Senate Finance Endgame

Today’s consensus on the Child Tax Credit, the Earned Income Tax Credit, and vocal agreement on the trio of principles (regular order, revenue neutrality, and no changes for the top one percent) gives one pause. Is Chairman Hatch preserving the possibility of legislating a tax plan through regular order?  That would be a tall order.  

If Republicans surprise the town and open the process to Democratic input, rate reductions will not be as extreme as many thought. To win any Democratic votes, the final package would – it is now apparent – have to include extensions of the Child Tax Credit, the Earned Income Tax Credit, and more policies benefitting the middle class. Whether the GOP seeks to and can attract a few isolated Ds to get to reconciliation or the several more needed to get past a filibuster is actually a matter of national fiscal consequence.

Chasin Updates:
206 (Fed Succession, Janet Yellin)
205 (Business Taxes)
204 (Income Taxes)

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U.S. PRESIDENT | Line of Succession

The photos are as of August 2017. They omit #9, Sonny Perdue (R), Agricultue Secretary.
The wrong person is also listed as #11, Secretary of Labor; it should be Alex Acosta (R).

Acting officers whose prior appointment required Senate confirmation are considered eligible for the line of succession. 

No Democrats or women appear among the top 14 names on this list. The highest-ranking woman on the list would have been Elaine Chao (R), Secretary of Transportation, at  #14, except that she is a naturalized, not a natural-born, citizen.

Postscript, April 28, 2020: The first in line after Mike Pence would now be Nancy Pelosi. For more details, consult this post by election-law attorney Jerry Goldfeder: https://2hljrm13wpep1y93sv1m25vn-wpengine.netdna-ssl.com/wp-content/uploads/2020/04/NYLJ-JG-2020-Election-Sidebar-Can-the-Election-Be-Postponed-1.pdf
  

1 Vice President – Mike Pence (R)
2 Speaker of the House of Representatives – Paul Ryan (R)
3 President pro tempore of the Senate – Orrin Hatch (R)
4 Secretary of State – Rex Tillerson (R)
5 Secretary of the Treasury – Steven Mnuchin (R)
6 Secretary of Defense – James Mattis (I)
7 Attorney General – Jeff Sessions (R)
8 Secretary of the Interior – Ryan Zinke (R)
9 Secretary of Agriculture – Sonny Perdue (R)
10 Secretary of Commerce – Wilbur Ross (R)
11 Secretary of Labor – Alex Acosta (R)
12 Secretary of Health and Human Services – Tom Price (R)
13 Secretary of Housing and Urban Development – Ben Carson (R)
14 Secretary of Energy – Rick Perry (R)
15 Secretary of Education – Betsy DeVos (R)
16 Secretary of Veterans Affairs – David Shulkin (I)
17 Secretary of Homeland Security – Elaine Duke (I)