The Intrade Prediction Markets show Republicans have a 94 percent chance of taking the House today, but only a 42 percent chance of controlling the Senate. If Intrade is correct, what does that mean for the tax-writing committees?

House Ways and Means

Big changes in store here.Democrats maintain a 63 percent majority of the Committee (slightly better than their 59 percent majority in the House) -or 26 Democrats and 15 Republicans. If the House flips, we expect the committee ratios to flip as well, give or take a seat  – that means about 25 Republicans and 15 Democrats.

For Democrats, that means the six or seven most junior members will lose their seats. Representative John Tanner (TN) is retiring, and Representative Earl Pomeroy (ND) is in danger of losing his seat, so the cut-off will be somewhere around Representative Joe Crowley (NY).

On the Republican side, a new Republican majority would mean twelve or thirteen new members added to the Committee. They currently have fifteen seats, but two members – John Linder (GA) and Ginny Brown-Waite (FL) – are retiring, and current Minority Whip Eric Cantor (VA) is likely to surrender his seat to be the Majority Leader. In other words, half the Republican Ways and Means caucus will be new next year.

Some of the names being floated for those slots include Representatives Erik Paulsen (MN), Lynn Jenkins (KS), Vern Buchanan (FL), Tom Price (GA), Michele Bachmann (MN), Christopher Lee (NY), Connie Mack (FL), Aaron Schock (IL), Shelley Capito (WV), Mike Conaway (TX), Kevin McCarthy (CA), Kenny Marchant (TX), Cynthia Lummis (WY), and Virginia Foxx (NC).

Switching control of the House means new Committee leadership too, with Representative Dave Camp (R-MI) taking over for Representative Sander Levin (D-MI). They;re both from Michigan and both have reputations for working well with others, but the similarities end there. Representative Camp is conservative and pro-business; Levin is liberal and pro-union.

Senate Finance

Democrats are expected to hold the Senate today, so any changes to the Finance Committee makeup are going to be more subtle.

The current Committee ratio already is thirteen to ten, so even if Republicans net an additional six or seven seats today, there’s not much room to change the ratio, and it is unlikely the number of Democratic Finance Committee seats would fall below twelve. With S-Corp Champion Blanche (D-AR) Lincoln trailing in the polls, that would mean the current line-up stays the same, with Max Baucus (D-MT) retaining his position as Chairman.

On the Republican side of the aisle, the only real question is whether they have ten or eleven seats to fill next year. Senator Jim Bunning (R-KY) is retiring, leaving them with just nine standing members, and so Republicans will have at least one – and maybe two – seats to fill. Likely candidates include Senators John Thune (SD), Johnny Isakson (GA), and Bob Corker (TN).

The biggest change to the Committee will be in Republican leadership, where Ranking Member Chuck Grassley (R-IA) is term-limited and will have to step aside for Senator Orrin Hatch (R-UT). That means significant changes at the staff level, as well as an entirely new approach to governing the Committee. Senator Grassley and Chairman Max Baucus (D-MT) are close friends and have been trading the Ranking and Chairman slots on the Committee for a full decade. Replacing Grassley with Hatch introduces a new dynamic at the top which will be interesting to watch, especially with Hatch up for reelection in 2012.

Finally, there’s a leadership angle to all this that deserves notice. If Majority Leader Harry Reid (D-NV) loses today (he’s behind in the polls), it is likely Senator Chuck Schumer (D-NY) takes over as the Democratic Leader (its between Schumer and Dick Durbin (IL) and Schumer appears to have the edge). Senator Schumer is a long-time Finance Committee member, and the Senate tradition is for the party leaders to retain their committee posts. That suggests the role of the Committee will factor into any leadership plans for tax policy.

Policy Implications

What do these changes mean for tax policy and S corporations? A few thoughts:

  • Revenge of the Committees: The Finance Committee has been marginalized under Harry Reid’s leadership. As a long-time member, Schumer will be less likely to bypass the Committee. Moreover, he will be leading a diminished caucus – Reid had a filibuster-proof sixty votes at one point – so he’ll need to be more delicate in managing major bills. As a result, we expect a Leader Schumer to rely on his committees, and in particular the Finance Committee, to a greater degree than Reid did. That means fewer dark-of-the-night surprises like the Section 1099 provision and the S corporation payroll tax hike. That’s good for tax policy and good for S corporations.
  • Budgets and Reconciliation: Congress failed to adopt a budget this year. Given the fiscal state of the country, that’s fairly remarkable. It would be nice to say that the elections and new leadership increase the odds that Congress adopts a tough budget next year, but it may not happen. The House and Senate are split, and after this election, the Administration may represent yet a third point of view, so getting all three to come together on a budget plan would be a significant feat. Representative Paul Ryan (R-WI) will head the House Budget Committee, and Senator Kent Conrad (D-ND) will lead the Senate Budget Committee. They are both reasonable people, and both are senior tax-writers too, but sometimes even reasonable people cannot agree, especially if they’re representing differing groups. If a budget gets done this year, we expect it to outline the future of tax policy. If not, uncertainty will continue to rule.
  • House — Less Ad Hoc, More Comprehensive: A Camp-lead Ways and Means Committee will be loathe to propose ad hoc tax hikes on the business community like we have seen over the past four years, but they may pursue a corporate rate cut that includes base broadening — i.e. offsetting the lower rates by eliminating targeted tax provisions like the Section 199 deduction. We’re all for cutting the corporate rate, but we get worried when the accompanying base broadening affects S corporations as well as C corporations. That’s what has been proposed in the past (see the 2007 Treasury report), and it is a lose-lose situation for S corporations where our rates go up, and our base gets bigger, too.
  • Tax Hikes Originate in the Senate: To the extent we do see higher taxes put on the table, we expect it to occur in the Senate and not the House. That includes offsets to extenders and other ongoing tax relief, as well as hikes to pay for other priorities. Specific items like the S corporation payroll tax hike, in so far as they get proposed at all, will originate in the Senate. Washington Wire readers will note that that’s a complete turnaround from the past two Congresses, where tax hikes typically originated in the House. For 2011, we expect the Ways and Means Committee will be our friend.
  • Gridlock May Be Bad:B Under usual circumstances, gridlock can be the business community’s friend: it helped balance the budget in the late 1990s, and it can forestall changes to the tax code and other regulations that raise costs on investment and labor.  Today, however, gridlock is not our friend. Absent action, tax rates are going up, the regulatory provisions of the health care reform bill like the 1099 reporting requirement will take effect, the AMT will continue to gobble up the rest of the tax code, and deficits will continue to rise. To fix all this, Congress will need to take proactive action. With a divided government, that means compromise, which is never popular. Absent compromise, we’re in for a tough two years before the next time the taxpayers get to speak with their vote. Either way, it will not be attractive.

Finally, we should note the challenge faced by Senator Blanche Lincoln (D-AR). She has been a consistent champion of the S corporation community for the past several Congresses and, should she lose, she’ll be greatly missed, particularly for her leadership on small business tax issues. The polls are still open, and we wish her the best.