How One Republican Senator Could Kill Tax Reform

REUTERS/Aaron P. Bernstein

Robert Donachie Capitol Hill and Health Care Reporter

Sen. Ron Johnson of Wisconsin is picking a fight with his Republican colleagues that puts Senate leadership in a tough position, a fight that could ultimately derail the party’s effort to overhaul the U.S. tax code altogether.

Johnson’s underlying argument is that the Senate’s bill taxes “pass-through” businesses at unfair rate, while giving large multinational corporations a big break by lowering the top corporate tax rate from 35 to 20 percent.

Johnson does not believe the Senate’s bill does enough to ease the burden on American small businesses and other pass-through entities. Unless senators offer more concessions to ease the overall tax burden, he will vote against the Senate tax proposal when it comes up in committee.

The Wisconsin senator is one of two public “no” votes on the Senate bill, along with GOP Sen. Steve Daines of Montana who also believes the bill treats pass-through entities unfavorably.

Under the U.S. tax code, pass-through businesses are like limited-liability companies, partnerships and other entities whose earnings are passed on to owners and then taxed at a personal income tax rate.

A high-performing pass through, under the current Senate bill, would pay an effective tax rate of over 30 percent on its income. This is rate over 10 percent of what large multinationals would be forced to cough up.

If pass-throughs do not get a bigger break, Johnson argues, the federal government could stand to lose hundreds of millions in tax revenue because these entities would convert themselves into “C-corporations,” allowing themselves to be taxed separately from their owners (i.e. pay a lower tax rate).

Pass-throughs comprise over 90 percent of American businesses and employed over 50 percent of all private sector labor force in 2011.

Roughly eight other senators are on the fence. GOP Sens. Bob Corker of Tennessee, Jeff Flake and John McCain of Arizona are likely to vote against the bill if it raises the federal deficit, an outcome that is likely if Senate Majority Leader Mitch McConnell and leadership allow pass-throughs to write off more from tax liabilities.

The Senate proposal allows pass-through owners a 17.4 percent deduction on their overall income tax bill. Johnson wasn’t entirely sure he could support the bill even if the deduction level was raised to 20 percent, he said Monday, but noted he could get behind ending the ability of corporations to deduct state and local taxes.

The problem for McConnell and leadership is that any concessions given to Johnson could more than likely increase the federal deficit, giving fiscal policy wonks like Corker and Flake an easy reason to vote against the measure.

The White House, including President Donald Trump who is having lunch with Republican senators at the Capitol Tuesday, is throwing all of its weight behind getting a tax bill through Congress before lawmakers leave for the Christmas recess.

Corker, Flake and, especially, McCain have been no strangers to letting the president know their grievances. McCain has even voted against the administration on a number of occasions, most notably with his vote against an Obamacare repeal in late July.

Despite the ongoing battle, leadership is selling the pass-through breaks as a key reason the bill is great for the American economy.

McConnell, along with Senate Majority Whip John Cornyn, held a press conference with the Senate Committee on Finance and Entrepreneurship Tuesday morning touting the numerous benefits the tax bill will bring. For example, one Johnson’s family plastic company in Wisconsin would benefit under the Senate proposal.

“We need to make American more competitive locally so companies don’t feel the need to invest their money overseas, where jobs are created and investment escapes our economy,” Cornyn said.

“Unlike the debates and votes we had on health care, every single member of the Republican conference is working to get to ‘yes,'” Cornyn said. “As long as people are willing to work in good faith to come up with alternative solutions to try to address their concerns, I think we will have a great victory this week.”

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