The Senate last week announced the new members of the tax-writing Finance Committee. The announcement followed several weeks of negotiations over committee ratios of Democrats to Republicans, in addition to a related fight over amending Senate rules. The fact that committee assignments were announced on the same day that the Senate voted on some of those reforms is no coincidence.

As to the Finance assignments themselves, the Committee is getting one new Democrat and two new Republicans, bringing the Committee’s overall membership up to 24– an increase of one from last Congress, with 13 Democrats and 11 Republicans. The new members are:

o Senator Ben Cardin (D-MD)

o Senator Tom Coburn (R-OK)

o Senator John Thune (R-SD)

Generally speaking, the additions are a positive for S corporations and flow-through employers. Senator Cardin is one of the more business-friendly Democrats in the Senate (he has been a cosponsor of our S Corporation Reform bill in the past,) while Senators Thune and Coburn are strong S-CORP advocates. The loss of Senator Blanche Lincoln (D-AR) and her leadership on our issues will be hard to make up, but these additions to the Committee will certainly help our cause.

On the House side, the Ways and Means Committee also added some strong advocates of private enterprise. As we noted back in November, the switch to Republican control of the House meant that the committee ratio would have to flip too, from 26-15 Democrats to 25-15 Republicans. Of the new Committee members, several stand out as active champions for private businesses, including Erik Paulsen (R-MN) and Vern Buchanan (R-FL).

  • Rick Berg (ND)
  • Diane Black (TN)
  • Vern Buchanan (FL)
  • Jim Gerlach (PA)
  • Lynn Jenkins (KS)
  • Chris Lee (NY)
  • Erik Paulsen (MN)
  • Tom Price (GA)
  • Aaron Schock (IL)
  • Adrian Smith (NE)

Then, of course, there is the new Chairman of the Committee, Representative Dave Camp of Michigan. Camp’s district covering north-central Michigan is heavily populated with small and medium-sized enterprises, and his policies reflect it. His leadership should be a big change from former Chairman Rangel’s tenure, as the recent hearing on tax reform (see below) demonstrates.

More on Tax Reform

Last week, the President used part of his State of the Union Address to call for reform of the corporate tax code. Based on recent conversations we’ve had, the Administration has set three overall objectives for its reform effort:

  1. Enhance economic growth;
  2. Increase investment in the United States; and
  3. Raise at least the same amount of revenue.

At its most basic level, tax reform (a la 1986) encompasses eliminating certain deductions and credits in exchange for lower overall rates. For example, one of the “expenditure” provisions often identified as something to be eliminated under the auspices of tax reform is the Section 199 manufacturing deduction (enacted in 2004) to help manufacturers survive and grow by lowering their taxes. A simple reform might be to eliminate Section 199 and use the resulting revenue savings to reduce the corporate rate slightly.

But not all C corporations use Section 199 — only manufacturers do. And most manufacturers are organized as something other than C corporations. Yet, in this corporate tax reform scenario, only C corporations would see lower rates, while all manufacturers would lose the use of Section 199. Therefore, this reform would have the effect of raising the effective tax burden on manufacturers — and particularly those organized as S corporations or LLCs as they would not see any benefit from a reduction in the corporate tax rate.

If we were just talking about eliminating Section 199, this would be a small challenge. But tax reform implies greater “base broadening” than just one provision — LIFO accounting, depreciation, the R&E tax credit and other provisions would all be on the chopping block. The net effect of such base broadening efforts would be significantly higher tax burdens on the very manufacturing sector we’re trying to preserve.

We support reforming the entire tax code to make it more efficient and family- and business-friendly. But reform that looks only at the corporate side while insisting on budget neutrality (or, worse, reform that increases tax revenue) should set off all sorts of alarm bells within the broader business community. It means higher taxes for somebody, and that somebody is us.

Thankfully, we have numerous allies on the Committee on Ways and Means who have highlighted this significant challenge. In his response to the State of the Union Address, Chairman Dave Camp (R-MI) said,

“While the President focused on the need for corporate tax reform to make our employers more competitive, 75 percent of America’s job creators are small businesses. Moving our economy forward and creating a climate for job growth requires a tax code that empowers all job creators – large and small. Tax reform should address the entire tax code and find ways to help America’s job creators and families deal with the complexity and cost burdens of the current code.”

This message was repeated by several members during the January 19th Ways and Means hearing on tax reform, particularly by S-CORP champions Reps. Ron Kind (D-WI) (at the 1:36:54mark) and Dave Reichert (R-WA) (at the :58 mark). The hearing discussion also revealed several other potential Committee allies. Rep. Vern Buchanan (R-FL) revealed that he is a former S corporation owner:

When you talk of in terms of business roundtable, the fact of the matter is — and I was a C corporation, I moved to an S, and now I’ve got a bunch of LLCs that my family runs. But the bottom line is, half the tax revenue I understand is through pass through entities. So when you look at lowering the tax rate or the discussion of tax rate for corporations, what are you going to do about all those employers that have 500, 100 employees, 50 employees that are LLCs? I hope that’s got to be taken into consideration. You can’t do one without the other because, otherwise, you end up with a competitive advantage over someone else that happens to be a large family-run business.

Meanwhile, Rep. Earl Blumenauer (D-OR) also weighed in on behalf of privately-held businesses:

I guess I just have one question that I would offer to Ms. Olson, Mr. McDonald, can we do this successfully if we disconnect the individual tax provisions from business or do they need to be done concurrently?

OLSON: Well, I think that although the business and the individual issue — they present different issues and different questions, but I do not think you can do them separately. In part, because so many businesses are pass-through entities and you still have to deal with the individual side.


McDONALD: Yes, sir, I agree with that as well. Many of those pass through entities are suppliers of ours. And they’re very critical to our business all over the world, so it has to be done together.

BLUMENAUER: Great. Thank you

All in all, a good start to the year. Our primary concern is that the push for corporate reform moves forward without policymakers fully understanding the implications for families and non-corporate firms. The Ways and Means hearing made clear several key policymakers, including the Chairman, understand this challenge. Our job now is to educate the rest.

A Brief Revisit to the Payroll Tax Fight

Washington Wire readers know that Team S-CORP was right in the middle of fighting efforts by the Congress to hike payroll taxes on S Corporations by $11 billion last year. We won that fight, but bad ideas never go away, and we expect this issue will rise again.

To keep everybody current, Laura Saunders at the Wall Street Journal Tax Report highlighted the recent case of an Iowa CPA who underpaid himself for a number of years and was caught by the IRS. You can read about the whole story here, but the lesson we take away is that the IRS can and does have the ability to go after taxpayers who use the S corporation to block payroll taxes.

Oh, and if you want to know why this issue is often referred to as the “John Edwards Shelter,” Laura has a really nice history of how this issue came to light and played a role in the 2004 Presidential election.