Internal Revenue Code books are are arranged by staff members. (Photographer: Andrew Harrer/Bloomberg)

Johnson Is First GOP Senator to Oppose Plan: Tax Debate Update

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(Bloomberg) -- House leaders cleared the way for a Thursday vote on their tax-overhaul bill as Senate tax writers released a late-night draft that would make many individual breaks temporary and repeal a key part of the Obamacare law. Here are the latest developments, updated throughout the day:

Senate’s Johnson Opposes Plan as Now Written (7:56 p.m.)

Senator Ron Johnson, a Wisconsin Republican, says he’s opposed to the revised Senate GOP tax plan because it doesn’t do enough to help partnerships, limited liability companies, S-corps and other pass-through businesses.

“It doesn’t really address the core problem as I understand it,” Johnson said. “We’re moving in the wrong direction.”

Johnson said his main concern is that the corporate rate will be slashed to 20 percent from 35 percent, while the top pass-through rate won’t fall as much. He said he’s frustrated that the Senate proposal doesn’t slash the top pass-through rate to 25 percent -- as was outlined in the framework released by the White House and congressional leaders in September -- and ultimately will make pass-throughs less competitive compared to corporations.

Currently, businesses organized as pass-throughs don’t pay income tax themselves, instead passing earnings to their owners, who pay at their individual rates. The top rate is currently 39.6 percent, but the Senate plan would cut it to 38.5 percent.

The original Senate proposal called for a 17.4 percent deduction for non-wage income for certain pass-throughs, with restrictions. It prevented pass-through businesses classified as S-corps or partnerships from taking full advantage of the 17.4 percent deduction. And it set caps -- such as $150,000 for married couples -- for businesses to get the deduction’s full benefit.

The latest plan removes those restrictions and allows all pass-through structures to deduct 17.4 percent from their business income -- up to $500,000 for married couples -- which would be taxed at ordinary income tax rates.

“The people who wrote the framework acknowledged that if you are going to lower corporate rates to 20 percent, we can’t leave pass-through businesses behind,” Johnson said. “Both the House and the Senate bill leave those pass-through businesses behind.”

“I plan to do everything I can to produce a better tax bill,” said Johnson.

The revised pass-through proposal is estimated to reduce revenue by $362 billion over a decade, so providing more generous terms would increase that cost. The Senate proposal would cost $1.41 trillion over a decade. Under budget rules that GOP leaders plan to use to fast-track their bill, it must stay under $1.5 trillion and it can’t add to the long-term deficit.

Senate Republicans have a slim majority and can afford to lose only two GOP members if they want to pass a bill without any Democratic support. A revised version of the Senate proposal released late Tuesday night calls for repealing the Obamacare individual mandate.

Reopening the politically painful Obamacare debate could cost the GOP crucial votes on a tax bill. A “skinny” repeal of Obamacare that scrapped the individual mandate failed in July to pass the Senate after defections by John McCain of Arizona, Susan Collins of Maine and Lisa Murkowski of Alaska.

When Collins was asked if it were a mistake to mix health care and taxes, she answered with an emphatic “yes.” -- Laura Davison, Kaustuv Basu and Sahil Kapur

Casey Calls Revised Plan ‘Thief in the Night’ (12:53 p.m.)

Tensions escalated Wednesday when the Senate Finance Committee resumed its tax markup 12 hours after Republican leaders released a revised tax proposal with major changes.

Democrats fumed over what they labeled a rushed process and the last-minute addition of the repeal of the Obamacare individual mandate. Senate Finance Chairman Orrin Hatch showed rare flashes of anger sparring with Democratic senators Michael Bennet and Sherrod Brown. He ripped into Bennet for complaining about possible entitlement cuts, saying it’s Democrats who refuse to cut spending.

Senator Bob Casey, an even-keeled Pennsylvania Democrat, shouted: “When I say this bill is a thief in the night, that’s exactly what it is! Ripping away people’s health care!”

In one notable exchange, Democratic Senator Claire McCaskill of Missouri sparred with Hatch by disputing his comment that ending the Obamacare mandate wouldn’t harm health-care coverage.

“Where do you think the $300 billion is coming from? Is there a fairy that’s dropping it on the Senate?” she said. “This is such a scam. So don’t trot out your righteous indignation saying you’re helping poor people by repealing this tax penalty.”

Repealing the Obamacare individual mandate would increase premiums in the individual insurance market by about 10 percent, which would amount to increases of hundreds of dollars per year for about 7 million mostly middle-income consumers -- and up to $1,000 per year for many older people -- according to an estimate Wednesday from the left-leaning Center on Budget and Policy Priorities.

Senator Pat Toomey, a Pennsylvania Republican, was taken aback by the tenor of the Democrats’ arguments, saying he’s heard "quite some extraordinary comments from the other side."

He said the mandate repeal merely ends the punishment for people who don’t buy insurance. “There are no cuts to Medicaid. There are no cuts to Medicare. Nobody is disqualified from insurance,” he said.

The pane is in recess until later this afternoon. -- Sahil Kapur

Senate Plan Expands Temporary Business Break (10:26 a.m.)

A change in the Senate plan that would expand a temporary income-tax break for partnerships, limited liability companies and other so-called “pass-through” businesses won the endorsement of a national small-business group Wednesday.

The change would raise the income thresholds for owners of firms that could take full advantage of a 17.4 percent deduction on their business income -- setting the levels at $250,000 for single individuals and $500,000 for joint filers. The owners would then pay income taxes at their individual rates.

The original Senate plan had set those thresholds at $75,000 and $150,000. The deduction would expire in 2026.

The National Federation of Independent Business “strongly supports” the measure as revised, according to an emailed statement from Juanita D. Duggan, the group’s president.

Generally, changes to the Senate bill would set a 2026 expiration date on a number of tax breaks for closely held businesses and individuals -- though it would make a corporate tax rate cut permanent, beginning in 2019.

Senate Minority Leader Chuck Schumer seized on the sunset provisions to criticize the revised Senate plan.

“Either tens of millions of taxpayers will pay significantly more the longer this plan is in effect, or a future Congress will extend the tax breaks, making the deficit hole they create massively deeper,” said Schumer, a New York Democrat, in an emailed statement. “Our Republican colleagues, particularly the deficit hawks, can’t have it both ways.”

Republicans have predicted that their tax cuts for businesses and individuals will result in economic growth that will help the cuts pay for themselves. But some analyses have found otherwise. The revised Senate plan would add $1.4 trillion in deficits over the next decade -- but it would reduce the deficit by $30 billion in 2027 by phasing out various tax cuts, according to an estimate from Congress’s Joint Committee on Taxation. -- Laura Davison, Erik Wasson

Senate Targets Obamacare, Sunsets Several Cuts (4:00 a.m.)

Revisions to the Senate Republican’s tax-overhaul plan would create heftier upfront tax breaks for the middle class and small businesses -- and then wipe them off the books by 2026.

But a proposal to cut the corporate tax rate to 20 percent from 35 percent in 2019 would be permanent. In all, the changes bring the plan in line with the Senate’s tight fiscal constraints, but may create complications for President Donald Trump and others who have pitched the plan as benefiting the middle class.

The revised Senate measure would also eliminate the Obamacare law’s requirement that individuals have health coverage -- a provision that would save the federal government more than $300 billion over 10 years but leave millions of Americans uninsured, according to the Congressional Budget Office.

The Senate measure will contain major departures from a House bill that GOP leaders have now prepared for a floor vote as early as Thursday. The chambers would have to reconcile differences in their bills before they could become law.

In the House, the Rules Committee decided in a late-night session to not accept any of the 139 amendments offered to the House tax bill. Amendments will also not be allowed on the House floor during debate, which will start Wednesday. 

The House will have a 1-hour debate on the rule for the tax bill, and then begin four hours of debate on the bill itself. The vote is still expected on Thursday, Rules Committee chairman Pete Sessions said.

In the Senate, the late-night changes that Finance Chairman Orrin Hatch made to his tax plan appear to have achieved a crucial feat: reducing its long-term costs. The new plan would add $1.4 trillion in deficits over the next decade -- but it would reduce the deficit by $30 billion in 2027. That’s key for adhering to the Senate’s “Byrd rule,’’ which requires that the tax bill can’t add to deficits after 10 years in order to benefit from fast-track budget procedures.

Repealing Obamacare’s so-called individual mandate would save the federal government $318 billion over 10 years, according to an estimate by Congress’s Joint Committee on Taxation. Senator John Thune of South Dakota, the chamber’s third-ranking GOP leader, said the benefit of those savings would go to middle-income taxpayers.

“It’ll be distributed in the form of middle-income tax relief,” he said, according to a statement distributed by Senate Majority Leader Mitch McConnell’s office.

However, after 2025, reductions in tax rates, a doubling of the standard deduction and a major tax break for small pass-through businesses would be set to expire under the changes revealed Tuesday night. A new proposal to double the child tax credit to $2,000 would also expire by then.

Meanwhile, Democrats responded to the Obamacare provision with derision, saying Senate Republicans were financing tax cuts for the rich by taking health coverage away from millions of people.

“This is a con job on the American people and proves that Republicans’ only agenda is putting an economic double standard into black letter law,’’ said Senator Ron Wyden, the top Democrat on the Senate Finance Committee.

Injecting the divisive Obamacare issue into the tax debate carries risks for Republicans, who were unable to forge workable repeal-and-replace legislation this year despite years of campaign promises.

But the revised tax plan appears to contain a strategy for smoothing over such differences. It contains numerous provisions targeted at particular industries or geographical areas -- a not uncommon method for attempting to shore up votes.

For example, there’s a provision aimed at helping Alaska Native Corporations. Alaska is home to key moderate Republican Lisa Murkowski. Other provisions were more broadly drawn and designed to appeal to the middle class, including the $2,000 tax credit for children -- earning plaudits from Senators Marco Rubio of Florida and Mike Lee of Utah.

Senators had tried to make at least the corporate rate cut permanent in hopes that would boost economic growth. That in turn is a key to justifying their near-unanimous belief that despite a score of more than $1.4 trillion in higher deficits the bill would ultimately pay for itself. Some economic analyses have taken issue with that view. -- John Voskuhl, Sahil Kapur, Steven T. Dennis, Anna Edgerton and Erik Wasson

What to Watch on Wednesday:

  • The Senate Finance Committee will begin its markup at 10 a.m. and is expected to debate Hatch’s modified proposal. The panel concluded its heated markup on Tuesday around 3:30 p.m. after Wyden said: “We’ve had it for the day.” The Oregon lawmaker told Hatch to expect “a lot of questions” from Democrats.
  • Reactions among GOP lawmakers to sunsetting tax changes for individuals.
  • Senate Democratic Leader Chuck Schumer and House Democratic Leader Nancy Pelosi are scheduled to hold a rally protesting the GOP tax bill.
  • The House will begin floor debate on the rule governing the House floor vote.

Here’s What Happened on Tuesday:

  • Senate Majority Whip John Cornyn expressed confidence he can secure 50 votes to pass a tax bill with the provision that includes the repeal of the Obamacare individual mandate.
  • Republican senators Rand Paul, Pat Toomey, Tim Scott and Ted Cruz expressed support for including the mandate repeal in a tax bill, while John McCain and Susan Collins said they needed to evaluate the total plan. Lisa Murkowksi said tax legislation was “complicated enough.”
  • A coalition of health-care groups urged congressional leaders to maintain the mandate “unless and until Congress can enact a package of reforms” to prevent “extraordinary premium increases.”
  • House Speaker Paul Ryan said temporary provisions in the GOP tax bill won’t really go away in a few years -- he predicted that future Congresses will preserve them, and he didn’t mention the impact that would have on the federal deficit.
  • Mark Walker introduced his amendment to repeal Obamacare’s individual mandate at 10:40 p.m. in the House Rules Committee, four hours after the hearing began. However, he told members of the panel to vote against his amendment if they thought including it would imperil the chances of the bill passing on the floor this week. The Rules Committee didn’t include it in the final version.

©2017 Bloomberg L.P.

With assistance from Sahil Kapur

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