(Bloomberg) Millionaires who avoid payroll taxes by claiming income as business profits are among those in Democrats’ sights as congressional budget negotiators seek a deal by next month.
Limiting the ability of some business owners to use the S corporation structure would save $12 billion over the next 10 years, according to a list of tax breaks obtained by Bloomberg News that Democrats are considering for elimination.
That provision allowed Newt Gingrich and John Edwards to avoid payroll levies, according to tax returns the two filed during their 2012 and 2004 campaigns for the White House.
“It shouldn’t be difficult for Republicans to agree to put just a few of the most egregious, wasteful loopholes and special-interest carve-outs on the table,” Patty Murray, chairwoman of the Senate Budget Committee and the lead Democratic negotiator, said on Nov. 5.
The clash with Republicans over revenue stands in the way of the lawmakers reaching a deal by a Dec. 13 deadline. Democrats have long urged Republicans to agree to scrap at least some of the tax preferences, while Republicans argue that doing so would undermine efforts for a broader tax-code revision.
In addition to closing what Democrats call the “John Edwards/Newt Gingrich loophole,” the party’s list of options includes carried-interest treatment that allows hedge-fund managers and private-equity advisers to pay a 20 percent tax rate on their income instead of the nation’s top income tax rate of 39.6 percent. Ending that break would save more than $17 billion over a decade, according to the Democrats’ estimates.
Another lets U.S. companies deduct their expenses when they send their plants overseas, which Democrats say encourages offshoring of American jobs. It would raise $200 million. Ending preferences for corporate jets and subsidies for yachts and vacation homes, combined, would bring in another $19 billion.
While budget aides say the two sides are finding some areas of compromise on spending cuts, such as farm subsidies, Republicans say ending tax preferences could hurt efforts by House and Senate tax-writing committees trying to strike a broader deal to revamp the code.
Representative Paul Ryan, the lead Republican negotiator and chairman of the House Budget Committee, is arguing against including any tax measures as part of a deal to establish an annual budget and to replace some of the $1 trillion in automatic spending cuts now in effect that are disliked by both parties. The 29-member panel, which first met on Oct. 30, will hold its next public meeting on Nov. 13.
Smaller Budget Package
Lawmakers on both sides of the aisle have played down prospects for a broader agreement to slow the growth of the U.S. national debt, which is now at $17 trillion.
They are instead looking at a package of no more than $70 billion to $100 billion to replace the automatic spending cuts for a year or two. Given the more limited nature of such a deal, revenue has no place in it, say Republicans, who also say Democrats are recycling “loopholes” they’ve unsuccessfully sought to use as bargaining chips in past budget negotiations.
“All these proposals the Democrats are putting out there are things there might be some support for if it were in the context of tax reform,” said Senator John Thune of South Dakota. “It’s going to be very hard for Republicans to vote for tax code-related revenue” as part of a budget conference, said Thune, the Senate’s No. 3 Republican. “Every time you close a loophole you’re raising taxes on somebody.”
Which Tax Breaks Will Be on the Table
Democrats say there must be at least some revenue as part of even a smaller-scale deal to replace the automatic budget cuts, known as sequestration, Murray said in an interview.
“What I want to know from Republicans is which ones they are willing to put on the table to help solve this?” Murray, of Washington state, said, urging the other party to come up with its own options for wiping out tax breaks.
“Revenues need to be part of the picture,” said Senator Angus King, a Maine independent who caucuses with Democrats and sits on the panel.
Democrats say allowing U.S. companies to deduct their expenses when they send their plants overseas hurts American workers.
“When somebody gets a write-off from moving their plant overseas, that’s the kind of spending in the tax code we ought to stop,” said Senator Debbie Stabenow, a Michigan Democrat on the committee.
Nuns on the Bus
Preparing for a showdown over revenue, Democrats are mobilizing groups such as Nuns on the Bus, a Catholic advocacy group that organized a tour in 2012 to protest Ryan’s budget blueprint on moral and religious grounds because of its cuts to programs like food stamps that feed the poor and children.
“We are urging reasonable revenue,” said Sister Simone Campbell while visiting the Capitol on Nov. 5. “It is wrong to just think you can cut.”
Republicans say they already voted for a tax increase, citing a law passed in January that let the top income tax rate rise to 39.6 percent. They also say the revenue collected from ending tax preferences is needed to help pay for lowering income tax rates for everyone as part of a broader tax overhaul.
“They’re pushing every little approach they can” to raise taxes, said Orrin Hatch, a Utah Republican and the top Republican on the tax-writing Senate Finance Committee. “They would like to snooker Republicans into just doing one part of tax reform. We can’t do that because you’re going to need all parts to come up with something that works.”
$1 Trillion at Stake
With an estimated $1 trillion in such revenue at stake, Murray and other Democrats say it isn’t a credible position. “I don’t buy it,” she said.
There is some truth to both arguments, according to Roberton Williams, a tax fellow at the Tax Policy Center in Washington. “It’s a matter of degree rather than black and white,” said Williams, a former Congressional Budget Office staff expert.
“If you get rid of some of the loopholes there will be less available to buy down tax rates. But will there still be a lot left? Yes,” he said. “But you’re taking away some of the easiest ones they can agree on.”
During the 2012 presidential campaign Gingrich, a Republican and former House speaker, released a tax return that showed income of about $3 million from an S corporation, Gingrich Productions, according to Tax Notes. He paid himself a salary of about $450,000, with the remainder treated as S corporation net income to him that wasn’t subject to payroll taxes. That cost the government $73,950 in employment taxes, Tax Notes said.
Edwards, who ran for the Democratic vice presidential nomination in 2004, disclosed that his S corporation paid him an annual salary of about $360,000, with more than $5 million per year that escaped payroll taxes.
“Some wealthy business owners knowingly mischaracterize their income as business profits instead of salary to avoid Medicare and Social Security payroll taxes,” the Democrats’ list of options says.
Gingrich didn’t respond to messages left on his phone asking for comment. Edwards also couldn’t be reached through his former campaign scheduler, Matthew Nelson.
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