Backdoor BOI
Yesterday’s final rule eliminating BOI reporting requirements for US persons or entities is a big win, but the fight over the Corporate Transparency Act is far from settled. Congress is considering legislation that would provide permanent relief for Main Street, while the Supreme Court will decide soon whether to hear a constitutional challenge to the law.
On the other hand, proponents of this unprecedented information grab have not abandoned their cause and appear to be pursuing beneficial ownership reporting one industry at a time. For now, they’ve turned their attention to health care.
The Senate HELP Committee recently advanced the Patients Deserve Price Tags Act, legislation intended to increase transparency in health care pricing. Buried within the bill, however, is a mandate that looks familiar to anybody who has followed the Corporate Transparency Act debate.
Under Section 6 of the committee-passed bill, every health insurer offering coverage in the individual or group market would be required to submit to federal and state regulators, and make available to the public, the following:
“the name and business address of each person or entity that, with respect to such plan or coverage… has an ownership or investment interest; has a controlling interest; is a management services organization; or is a significant equity investor.”
The disclosure would begin one year after enactment, be refreshed every quarter whenever the information changes, and be backed by civil monetary penalties of up to $300 per covered individual per day or $10 million, whichever is less.
Nor does the mandate appear to be limited to insurers. Identical disclosure language is sprinkled throughout the bill and applies to hospitals, clinical laboratories, imaging providers, and surgical centers, each of which would be required to post its ownership roster. So even as we make progress rolling back the CTA at the administration level, the Senate is attempting to recreate the law, industry by industry.
In one important respect this version goes further than the CTA ever did. Ownership information reported under the CTA at least sat in a government database subject to access restrictions. Here, the names and addresses of owners and investors would be published for anyone to see.
Supporters will argue this is simply another health care transparency measure. But requiring health care operators to publicly identify their owners, investors, and management goes well beyond helping consumers compare prices or understand their coverage. An ownership roster tells a patient nothing about what an MRI costs.
Fortunately this proposal still has a long way to go. The ownership disclosure language cleared the Senate HELP Committee, but the House version ditches the provision, meaning this issue is likely headed for a conference fight.
Main Street businesses have already made clear where they stand on the CTA. Congress should reject this latest attempt to revive beneficial ownership reporting through the back door.
Big Win on CTA!
Good news for the lazy days of summer! The Trump Treasury Department has finalized its revised beneficial ownership information (BOI) reporting rule and committed to permanently deleting the sensitive personal data prematurely collected from millions of U.S. business owners. This is a significant victory for Main Street and the latest chapter in our years-long fight against the Corporate Transparency Act.
Treasury estimates the rule will generate $9 billion in annual compliance savings. That’s a huge sum, but it doesn’t account for the funds Main Street businesses have already spent trying to decipher this unnecessary rule. This reply to S-Corp ally Carol Roth’s tweet summed up the frustration among business owners perfectly:
A big headline here is the database purge. FinCEN announced it will delete all BOI information previously collected from U.S. owners and entities – by our estimate that’s 15 million entities and who knows how many tens of millions of individuals. The move reflects a recognition of what we’ve argued from the start: requiring millions of law-abiding business owners to disclose their personal information serves no meaningful law enforcement purpose and exposes them to unnecessary costs and privacy risks.
Treasury’s action today is welcome news, but it’s not the end of the fight. The rule makes permanent the interim guidance issued last March, which narrowed reporting to foreign entities only. But that relief exists at the discretion of the White House and can be unwound by a future administration. That’s why the push for a permanent fix through a statutory repeal or a court order remains at the top of the to-do list.
For now, however, we’re celebrating the big “W.” Thanks to Treasury for getting the regs right, and we will continue to fight for permanent relief on behalf of the Main Street business community.
Who You Calling Progressive?
One of the of the more entertaining aspects of today’s election news is the insistence on branding Abdul El-Sayed, the hard-left winner of yesterday’s Michigan Democratic Senate primary, a mere “progressive.” Meanwhile, his more traditionally progressive opponent, Haley Stevens, has been recast as a “moderate.” More moderate than El-Sayed, certainly, but…
With that as a conversation starter, here are some take-aways from yesterday’s remarkable primary election.
The Goal Posts Have Shifted
The most obvious take-away is how the goal posts have shifted on what counts as “mainstream” these days. The New Republic published this eye-opening piece just yesterday about how Senator John Fetterman (D-PA) is now on the outside looking in if Democrats win the Senate:
Fetterman noted that he agrees with the Democrats on the vast majority of policy issues. But based on his public comments, the senator seems fixated on two particular matters: Israeli-Palestinian policy and the progressive-socialist left. And on those two matters, the divide between Fetterman and the Democratic Party is huge and growing. The Democratic left that Fetterman goes on Fox News to bash is surging in numbers and power—in no small part because of the status quo that Fetterman has done much to uphold. Antipathy toward Israel has expanded from progressive politicians to even average Democratic voters.
Senator Fetterman is no longer a Democrat in good standing because he isn’t a socialist and supports Israel?
The Polls are Still Wrong
Meanwhile, the polls continue to be unreliable. El-Sayed won yesterday, but not by nearly as much as predicted. Granted, polling in primaries is difficult because turnout varies significantly. That’s compounded by states with open primaries, like Michigan, where Independents and even Republicans can switch over and vote in the Democratic race. That said, this is ridiculous:
Republicans like to complain that polling is historically biased against them, but in the post-COVID world, polling seems to be wrong in all directions. The Red Wave predicted by nearly all the polls in 2022 never materialized even as Trump has consistently out-performed in his races.
Our friends at the Winston Group have a new video explaining what’s wrong with polling these days – worth a watch.
Count on Divided Government
El-Sayed’s victory yesterday all but assures Republicans will retain control of the Senate next year. The odds of Mike Rogers winning Michigan just shot up sharply and Susan Collins (remember that other progressive, Graham Platner?) is going to win Maine. That would force Democrats to run the table of remaining toss-up races — Alaska, Georgia, Iowa, New Hampshire, Ohio and Texas — to get to 51 votes. Not gonna happen. And if it does, as the New Republic frets, what do they do about Fetterman?
Implications for Tax Policy
Which brings us to tax policy. It’s hard to describe the future direction of tax policy without sounding like Chicken Little, but there you have it.
On the left, the focus used to be on raising revenue to finance an expanded vision of government. Now, they resemble a cudgel crafted to punish anybody they don’t like. That’s largely billionaires and public corporations for now, but the list is sure to grow. Anybody in the wrong industry or on the wrong side of a revolving number of political questions can expect to be targeted.
On the right, the battle is between old school supply-siders, a few remaining traditional deficits hawks, and a new breed of quasi-populists who think they invented mercantilism. Groups like American Compass support raising tax rates on wealthy individuals and corporations, imposing high tariffs that largely fall on the working class, and growing government so they can “invest” in new industries and technologies. How they have the expertise to successfully pick those industries and investments is not exactly clear.
Largely missing from the discussion are people who just want to fund necessary but limited government functions while doing as little harm to the economy as possible.
Conclusion
All this political and policy chaos comes at a moment when our fiscal house is in its worst shape ever. Annual deficits are huge and growing, our national debt is well over 100 percent of GDP, and Social Security is going broke in five years. That all these red flags are flying when the economy is robust and unemployment is low is even more worrisome. What happens with the next recession? Where’s the safety-net then?
Something has to give, and as yesterday’s results make clear, you only need a small minority of Americans to make a big difference. As Reason magazine has pointed out, every over-educated, downwardly mobile voter in Michigan showed up yesterday to support El-Sayed. Will Main Street show up in force this November to counteract them? It’s just our economic future we’re talking about here.
199A Trigger Warnings
Tax writers need to put a trigger warning on future 199A discussions, particularly for DC tax experts. It appears they are highly sensitive to the topic.
For example, in response to Ways and Means Chairman Jason Smith’s recent support for increasing the 199A deduction to 25 percent, AEI’s Kyle Pomerleau posted some thoughts that, on the surface, appear to make sense:
Pass-through businesses are already tax advantaged. Although C corporations face a 21 percent corporate tax rate, their profits are also subject to the individual income tax when distributed to shareholders. After considering various tax provisions that reduce the tax burden on C corporation shareholders, the Congressional Budget Office (CBO) finds that pass-through business investment faces a lower tax burden than C corporate investment.
Just one problem – the CBO analysis Kyle cites clearly shows pass-throughs pay higher effective rates than C corporations:
Whoops. Moreover, the CBO is not alone. A 2021 Treasury analysis found pass-throughs pay consistently higher rates, even on new investment.
This despite the fact that almost all C corporation income is earned by large public companies, whereas a large portion of pass-through income is earned by smaller businesses paying lower marginal rates. If the comparison were “Big vs. Big,” the advantage for C corporations would be larger.
So that’s an issue. Kyle also appears to confuse a benefit enjoyed by public corporations as one available to all C corporations. He writes:
An enhanced deduction would primarily make it even less attractive to use the C corporate form. This has economic implications because C corporations have better access to outside capital.
C corporations only have better access to outside capital if they are publicly owned. That’s the chief advantage of jumping through the hoops necessary to become a public company — you get access to the public equity and debt markets generally not available to private companies. An S corporation that converts to C with the same ownership does not magically see its cost of capital go down. That’s not how it works.
Kyle also argues that the expensing reduces the effective tax on new pass-through investments to zero, so what’s the problem?
Expanding the deduction would do little to enhance the competitive advantage of pass-through businesses. In fact, they would maintain a tax advantage even if 199A were repealed. This is because expensing already reduces the tax on new pass-through investment to roughly zero, while it only shields C corporations only against the 21 percent corporate rate. The shareholder-level tax on the return is untouched.
Notice the sleight of hand? This analysis only applies to new investment and it only applies to what economists refer to as “normal profits” – the minimum profit necessary to keep a business afloat. Older investments that don’t qualify for expensing and those investments that return greater than normal profits (in other words, just about every business investment worth making) bear the brunt of the statutory tax rate.
Moreover, Kyle’s line about the “shareholder-level tax on the return” ignores reality. As we have noted repeatedly, most C corporation income is never subject to a shareholder level tax. The Tax Policy Center has been writing about this for years, and it’s the principle challenge we face in trying to balance the tax treatment of public and private companies. Here’s the TPC:
Most Shareholders are Not Subject to a Second Layer of Tax
Often, however, there is not a second level of tax. Many shareholders of corporate stock, such as retirement accounts, educational institutions, and religious organizations, are exempt from income tax…. By some recent estimates, the share of U.S. corporate stock held in taxable accounts has fallen from over 80 percent in 1965 to about 25 percent today (Rosenthal and Austin 2016).
There’s more, but that’s enough for now. Every authority we are aware of in this space (here, here, here, here, here) has found that pass-throughs pay higher effective tax rates than C corporations, even with the 199A deduction in place. Jason Smith is right that the 199A deduction should be expanded, even if saying so throws the 199A sceptics into a tizzy.
The Reasonable American, Continued
A recent Real Clear Politics-Emerson poll shows Pennsylvania residents oppose capping the wealth of individuals but appear to support raising taxes on billionaires and corporations. As RCP reports:
We began by asking Pennsylvanians whether the law should cap how much wealth any one person may hold. The answer was a “no”: 62% oppose such a maximum, compared with 21% who support it, and 17% who aren’t sure. That might make Pennsylvania look comfortable with concentrated wealth, but the rest of the survey suggests otherwise. We also find that 64% of respondents support raising taxes on billionaires, wealthy corporations, and Big Tech to help pay for healthcare, food access, transit, and education.
So folks in Pennsylvania don’t like targeting wealth. That’s good news if you live in a market-based economy where capital accumulation raises living standards for everybody (which we do, by the way). But they also appear comfortable raising top rates on wealthy individuals and businesses, right?
Wrong.
Pennsylvanians and Americans more generally support raising tax rates on the wealthy and corporations only because they underestimate how much those groups pay. Our work with the Winston Group over the years has made this clear – when asked how much the wealthy pay, respondents generally cited rates well below their current tax rates. Moreover, when asked what’s the most those same taxpayers should pay, the responses were well within the range of what they already pay:
As our write-up from the 2022 poll summarized:
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A majority of voters do believe that corporations and wealthy individuals are not paying their fair share of taxes (61-26 believe-do not believe). Independents believe this 60-23, and Republicans believe it more than not, at 46-39.
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However, voters underestimate what the wealthy and individually/family-owned businesses actually pay. People believe that wealthy individuals pay an average 21% rate and that individually/family-owned businesses pay a 24% rate (they also estimated a 24% rate for small businesses). They correctly estimated that corporations pay a 21% rate.
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As for the maximum rate at which these entities should be taxed, voters believed that wealthy individuals should pay more (33%), but that perception still underestimates what they are currently paying. Voters thought small businesses (17.8%) and individually/family-owned businesses (17.5%) should pay less compared to what they thought these businesses actually pay.
It gets better. When voters learn that much of the proposed rate hike on the wealthy will fall on pass-through businesses, support for the policy collapses, even before they learn about who pays what.
As you can see, support for raising the top rate falls nearly in half – 53 to 29 percent – when voters learn that the new rate would apply to small and family-owned businesses.
So what did we learn here? Regarding wealth taxes, voters simply don’t support targeting wealth, despite a multi-year campaign to villainize it. On the income tax front, meanwhile, some policymakers want to tax billionaires at rates up to 60 or 70 percent but voters only support rates about half that level. As we’ve noted before, Americans are very reasonable about what they expect even the wealthiest individuals or corporations to pay. And finally, regarding private businesses, voters think they are overtaxed now and don’t support raising their rates further.
It’s not all good news. You can see the maximum rate voters support has risen slightly over the past seven years, suggesting the omnipresent campaign to paint the wealthy as tax cheats is having some effect. We need a counter campaign to educate voters and policymakers alike on how the tax system works, how it has become more progressive over the past forty years, and how taxpayers respond strongly and negatively to excessively high tax rates. We either begin educating folks on the realty of our tax code, or we’re going to end up with some really harmful policies getting enacted.